Taking Stock of the Q1 Earnings Season - Earnings Trends
April 03 2014 - 3:28AM
Zacks
The following is an excerpt from this week's Earnings Trends
article. To see the full report, please click here.
Taking Stock of the Q1 Earnings Season
The 2014 Q1 earnings season takes center stage from next week
onwards even though the reporting cycle has actually been underway
for a couple of weeks. The reports thus far (19 S&P 500
companies have reported results) are from companies with fiscal
quarters ending in February, which we count as part of the Q1
tally. Results for companies with March ending quarter will start
next week with Alcoa’s (AA) release on April
8th.
Many of these early February quarter-ending companies aren’t
obscure players as the list includes industry leaders like
FedEx (FDX), Nike (NKE),
Oracle (ORCL), and others. These initial reports
don’t inspire much confidence and appear to be pointing towards
another underwhelming reporting season ahead. But it’s perhaps
premature to draw any firm conclusions based on such an
unrepresentative sample of reports.
The chart below shows weekly schedule for how Q1 results will come
out.
Expectations for the Q1 earnings season as whole remain low, with
total earnings expected to be down -2.6% from the same period last
year on +1.0% higher revenues and modestly lower margins. As has
been the trend for more than a year now, estimates for Q1 came down
sharply as the quarter unfolded. The current -2.6% decline in total
earnings in Q1 is down from +2.1% growth expected at the start of
the quarter in January.
Current estimates for total S&P 500 earnings in Q1 are down
-2.9% from what was expected at the start of the quarter in early
January. This magnitude of negative revision to Q1 earnings over
the last three months is greater than what we witnessed in the
comparable period in 2013 Q4, but is broadly in-line with the
magnitude of the 4-quarter average of negative revision.
The chart below shows the magnitude of negative earnings revision
for 2014 Q1 and each of the preceding four quarters over the course
of each quarter.
Estimates for Q1 have fallen across the board, but the trend is
particularly notable for the Retail, Basic Materials, Autos,
Consumer Staples, and the Energy sectors, as the chart below
shows.
With two-thirds of S&P 500 members typically beating earnings
estimates in any reporting cycle, actual Q1 results will almost
certainly be better than these pre-season expectations. But Q1 is
unlikely to repeat the performance of the last few quarters when we
would witness new all-time records for total earnings each
quarter.
Guidance has been overwhelmingly weak for more than a year now,
keeping the revisions trend firmly in the negative direction. Odds
are that we wouldn’t see any change on that front this earnings
season either, bringing down estimates for the rest of the year.
Investors haven’t cared about negative estimate revisions thus far,
but it will be interesting that behavior will remain in place going
forward as well.
Key Points
- The 2014 Q1 earnings season has gotten underway with results
from 19 S&P 500 members (with fiscal quarters ending in
February) already out. The reporting cycle gets into high gear from
next week onwards.
- Total earnings for the 19 S&P 500 companies that have
reported results are up +0.5%, with 57.9% beating earnings
expectations. Revenues for these companies are up +4.3%, with a
revenue ‘beat ratio’ of 47.4%. The performance from these companies
is weaker than what we have seen from this same group of companies
in recent quarters.
- For the S&P 500 companies as whole, total Q1 earnings are
expected to be down -2.6% from the same period last year, on +1%
higher revenues and 35 basis points in lower margins. Sequentially,
total earnings for the S&P 500 are expected to be down
-6.3%.
- Estimates fell sharply as the quarter unfolded, with the
current -2.6% decline in total earnings down from expectations of
+2.1% positive growth in early January.
- The growth weakness is broad-based and not concentrated in any
one sector, with 10 of the 16 Zacks sectors expected to show
earnings declines in Q1. Among the major sectors, earnings are
expected at this stage to be down -3.9% in Finance, -4.2% in
Technology, -6.9% in Energy, and -13.5% in Autos. Business Services
and Utilities are the only sectors expected to show double-digit
earnings growth.
- The Q1 earnings season is expected to be the low point of this
year’s earnings picture, both in terms of total earnings as well as
the growth rate. Total quarterly earnings reached an all-time
record in 2013 Q4, but are expected to fall short of that level in
2014 Q1. Expectations for the coming quarters reflect a strong ramp
up, with each of the following three quarters a new all-time
record.
- Guidance has overwhelmingly been negative in recent quarters
and we saw the same trend in place with the initial Q1 reports.
Continuation of that trend through the rest of this earnings season
will result in the by-now all-too-familiar negative revisions to
estimates for 2014 Q2.
- Total earnings in Q2 are currently expected to be up +5.4%,
followed by growth rates of +7.2% in Q3 and +9.4% in Q4. For the
full year, total earnings are expected to be up +7.8% in 2014 and
+11.7% in 2015.
- The bottom-up ‘EPS’ estimate for the S&P 500 for 2014
currently stands at $116.60, while the top-down estimate for the
same is currently at $117.25. For 2015, the bottom-up estimate
remains $130.19.
To see the full Earnings Trends report, please click
here.
ALCOA INC (AA): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
NIKE INC-B (NKE): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
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