Earnings Guidance Remains Weak - Earnings Trends
February 20 2014 - 3:49AM
Zacks
The following is an excerpt from this week's Earnings Trends
article. To see the full report, please click here.
Earnings Guidance Remains Weak
Our overall verdict on the Q4 earnings season is that it is no
better or worse than what we have been seeing in the last few
quarters. In some respects, the Q4 earnings season is an
improvement over the recent past. Specifically, total earnings for
the S&P 500 are on track to reach a new all-time quarterly
record and even earnings growth for the quarter is in on track to
be the highest of the year (even after accounting for easy
comparisons). Positive surprises started off on the weak side, but
even those are running at the best pace of the year.
Revenue growth has been a challenge for companies for quite some
time and we don’t see any improvement on that front in Q4 either.
If anything, the aggregate revenue growth rate at this stage is
even weaker than what we have been seeing in recent quarters,
though the bulk of the revenue weakness is due the Finance and
Energy sectors.
The most notable thing that hasn’t changed at all from other recent
quarters is guidance – it was weak before and it’s still weak, as
the guidance from Wal-Mart (WMT), Whole
Foods (WFM), Deere & Company (DE),
and Boeing (BA), just to name a few, shows. Part
of the guidance weakness is likely a function of management’s need
for expectations management. The need for conservatism aside, one
has to be extremely cynical to believe that management teams would
guide lower while knowing that their business outlook was stable,
if not improving. The chart below shows how estimates for the
current quarter have fallen in response to weak company
guidance.
With the Retail sector heavily represented in the still-to-come
reports, it is reasonable to expect that estimates still have room
to go down.
Companies have been guiding lower quarter after quarter, prompting
earnings estimates to keep coming down for almost two years. The
market didn’t care much about this, with an ever helpful Fed not
letting earnings-related worries coming in the way of the market’s
upward thrust. But the Fed has started getting out of the QE
business just as these other issues have taken center stage.
The popular narrative connects the Fed Taper with what is happening
in the emerging markets. The Fed doesn’t appear in any mood, for
obvious reasons, to adjust its Taper plans to accommodate the
emerging economies. In fact, it is reasonable to assume that they
don’t mind the safe-haven trade keeping bond yields in check.
The 2013 Q4 Scorecard
With respect to the Scorecard for 2013 Q4, we have seen results
from 430 S&P 500 members accounting for 91.3% of the index’s
total market capitalization. Total earnings for these companies are
up +10.4% from the same period last year, with 68.6% beating
earnings expectations with a median surprise of +2.4%. Total
revenues for these companies are barely in the positive, up only
+0.8%, with 59.8% beating revenue expectations with a median
surprise of 0.7%.
The +10.4% ‘headline’ total earnings growth rate definitely looks
fairly robust, particularly when compared to the growth rate for
this same group of 430 companies in the last few quarters. Easy
comparisons for three companies – Bank of America
(BAC), Verizon (VZ), and
Travelers (TRV) – account for a big part of the
strong Q4 earnings growth. Exclude these three and total earnings
growth for the S&P 500 companies that have reported drops by
almost half. Performance on the revenue front is notably sub-par
relative to recent quarters, dragged down by weakness in the
Finance and Energy sectors.
The composite picture for Q4 – combining the results for the 430
companies that have reported already with the 70 still to come – is
for earnings growth of +9.1%. This will be the highest quarterly
growth pace of 2013, with easy comparisons playing a non-trivial
role propping up the growth rate. But it’s not all easy
comparisons, as total earnings for the index are on track to reach
a new all-time quarterly record.
Trends on the estimate revision front have been negative for a
while, but we could afford to overlook such details in the
Fed-inspired rally. It will be interesting to see if investors will
continue to shrug estimate cuts in the post-QE world.
Key Points
- Total earnings for the 430 S&P 500 companies that have
reported results are up +10.4%, with 68.6% beating earnings
expectations. Revenues for these companies are up +0.8%, with a
revenue ‘beat ratio’ of 59.8%.
- Easy comparisons for Bank of America, Verizon and Travelers
account for most of the growth thus far. Excluding these three
companies, the earnings growth rate drops to +6.4%, which is
comparable to what this same group of companies have achieved in
recent quarters.
- Revenue growth at this stage is lower than what we have seen
from this same group of companies in Q3 and other recent quarters,
dragged down by weak top-line growth numbers from the Energy and
Finance sectors. Excluding these two sectors, the revenue growth
picture is still weak, but not so starkly.
- Total earnings in Q4 are on track to reach a new all-time
quarterly record, surpassing the record reached just the preceding
quarter.
- Easy comparisons, particularly for the Finance sector, account
for a big part of the Q4 growth. Total earnings for the Finance
sector are expected to be up +23.2%. Excluding Finance, total
earnings growth for the S&P 500 drops to +6.3%.
- Guidance has overwhelmingly been negative in recent quarters
and the trend has largely remained in place in the Q4 reporting
season as well. As a result, estimates for 2014 Q1 and beyond have
been coming down as the earnings season has unfolded.
- The bottom-up ‘EPS’ estimate for the S&P 500 for 2014
currently stands at $117.16, while the top-down estimate for the
same is currently at $117.25. For 2015, the bottom-up estimate
remains $130.24.
To see the full Earnings Trends PDF, please click
here.
BOEING CO (BA): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
DEERE & CO (DE): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Whole Foods Market, Inc. (NASDAQ:WFM)
Historical Stock Chart
From Mar 2024 to Apr 2024
Whole Foods Market, Inc. (NASDAQ:WFM)
Historical Stock Chart
From Apr 2023 to Apr 2024