Zacks Earnings Trends Highlights: Fastenal, United Rentals, Caterpillar, Texas Instruments and Hasbro

For Immediate Release

Chicago, IL – October 24, 2019 – Zacks Director of Research Sheraz Mian says, “While earnings growth is below what we had seen for this group of companies in other recent periods, revenue growth is actually modestly above what this same group achieved in the preceding period.”

A Better-Than-Expected Earnings Picture

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • The market’s appreciation of the Q3 results thus far is likely a reflection of relief that has not taken as much of a hit as many appeared to fear following growing evidence of global economic slowdown.
  • Total earnings (or aggregate net income) for the 124 S&P 500 companies that have reported results already are down -2.4% on +3.1% higher revenues, with 82.3% beating EPS estimates and 63.7% beating revenue estimates.
  • While earnings growth is below what we had seen for this group of companies in other recent periods, revenue growth is actually modestly above what this same group achieved in the preceding period. The proportion of these companies beating EPS and revenue estimates is the highest since Q2 2018.
  • For the Finance sector, we now have Q3 results from 51.8% of the sector’s total market cap in the S&P 500 index. Total earnings for these Finance companies are down -1.4% on +3.7% higher revenues, with 83.8% beating EPS estimates and 75.7% beating revenue estimates. This is a notably better performance than we have seen from the group in the first half of the year.
  • For Q3 as a whole, combining the results from the 124 index members that have come out with estimates for the still-to-come companies, total earnings are expected to be down 4.3% on 3.9% higher revenues.
  • Q3 earnings growth is expected to be negative for 9 of the 16 Zacks sectors, with double-digit declines for the Energy (-34.8%), Basic Materials (-23.3%), Technology (-11%) and Aerospace (-12.8) sectors. Excluding the Technology sector, total Q3 earnings would be down -2.2%.
  • Sectors with positive earnings growth in Q3 include Business Services (+7.2%), Transportation (+7%), Utilities (+4.6%), Finance (+5%) and Construction (+4.3%). Q3 earnings for the index would be down -6.7% on an ex-Finance basis.
  • For the small-cap S&P 600 index, we now have Q3 results from 72 companies or 12% of the index’s total membership. Total earnings or aggregate net income for these companies are down 4.3% from the same period last year on 2.3% higher revenues, with 80.6% beating EPS estimates and 62.5% beating revenue estimates.
  • It is still early-going for the small-cap index, but the proportion of companies beating EPS and revenue estimates is notably higher relative to other recent periods.
  • Looking at Q3 as a whole for the small-cap index, total Q3 earnings are expected to be down 20.7% from the same period last year on 2.7% higher revenues. This would follow declines of 12.6% and 18% in 2019 Q2 and Q1, respectively.
  • Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down 1% on 2.5% higher revenues, which would follow the 23.1% earnings growth on 9.1% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +8.9% on +4.7% higher revenues.
  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.7X and index close, as of October 22nd, is $160.58. Using the same methodology, the index ‘EPS’ works out to $174.91 for2020 (P/E of 17.1X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
  • Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with the 2019 growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.

Q3 Earnings Season Scorecard (as of October 23rd, 2019)

We now have Q3 results from 124 S&P 500 members that combined account for 29.3% of the index’s total market capitalization. Total earnings, or aggregate net income, for these 124 index members are down 2.4% from the same period last year on 3.1% higher revenues, with 82.3% beating EPS estimates and 63.7% beating revenue estimates.

The earnings growth for these 124 index members (-2.4%) is weaker than what we saw from this same sample of results in other recent periods, but revenue growth is tracking modestly above what the same group of companies were able to produce in the preceding period.

We knew all along that earnings growth would be challenged in Q3, as it had been in the first half of the year, and that’s what these results show.

That said, a notably bigger proportion of companies are beating EPS estimates at this stage of the reporting cycle. In fact, the EPS and revenue beats percentages are the highest since 2018 Q2, likely reconfirming that Q3 estimates were on the low side.

This easy-to-beat aspect of Q3 estimates partly explains the market’s generally positive reaction to these releases. But the more significant explanation for the favorable stock market reception for these Q3 results is likely relief that the feared flood of negative guidance has not come to fruition.

This fear was more in market sentiment than actual estimates for 2019 Q4 and beyond. Driving this fear was the negative impact of the trade issue on business confidence and growing signs of economic weakness in key regions of the world, including the domestic factory space.

The market’s relieved response is likely the best explanation for the stock market performance of otherwise ordinary reports from the likes of Fastenal FAST, United Rentals URI and many others, including Caterpillar CAT. That said, the market hasn’t been forgiving of companies that guide lower, as we saw with Texas Instruments TXN, Hasbro HAS and others suggest.

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United Rentals, Inc. (URI): Free Stock Analysis Report
Fastenal Company (FAST): Free Stock Analysis Report
Caterpillar Inc. (CAT): Free Stock Analysis Report
Hasbro, Inc. (HAS): Free Stock Analysis Report
Texas Instruments Incorporated (TXN): Free Stock Analysis Report
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