Q1 Earnings Season Off to a Weak Start - Earnings Outlook
April 16 2014 - 4:19AM
Zacks
The following is an excerpt from this week's Earnings Trends
article. To see the full article, please click here.
Q1 Earnings Season Off to a Weak Start
The 2014 Q1 earnings season has gotten off to a relatively soft
start. Low expectations essentially guarantee that we are unlikely
to get any major negative surprises. But as with economic data, the
market has likely moved past the Q1 numbers and is looking ahead to
the coming periods when earnings growth is expected to
accelerate.
A big part of the reports thus far have been from the Finance
sector, with results from more than one-third the sector’s total
market capitalization are already out. Most of the Finance sector
results have been from the major banks, which alone account for
more than 40% of the Finance sector’s total earnings.
Estimates for bank earnings had fallen ahead of the start of the
earnings season as it became clear that weakness in the capital
markets business will compound the existing mortgage banking woes.
The capital markets business, particularly on the fixed income side
has been weak for a while and we will likely see a continuation of
that trend in Q1, with fixed income revenues offsetting gains on
the advisory sides. We saw this with J.P. Morgan
(JPM), Bank of America (BAC) and even
Citigroup’s (C) otherwise better-looking report
couldn’t hide this issue. The ever present legal/compliance costs
also don’t seem to be going away either and have effectively become
a recurring part of the business model.
The table below shows the Q1 earnings scorecard for the component
(medium level) industries in the Finance sector. As you can see,
the earnings season is almost over for the Major Banks industry,
with 86.7% of the industry’s total market capitalization already
reported Q1 results.
The table below compares the results thus far for Finance sector
industries with what we saw from the same industries in the
preceding quarter and the 4-quarter average.
The weak results at Bank of America are a big reason for the Q1
earnings decline for the Major Banks industry. But even excluding
the company, the industry’s Q1 results are weaker than what we have
been seeing in recent quarters. Even the beat ratios, both earnings
as well as revenues, are weaker than in other recent quarters.
Overall Q1 expectations remain low, with total earnings for the
S&P 500 expected to be down -4.0% from the same period last
year on +1.3% 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 -4.0% decline in total
Q1 earnings is down from +2.1% growth expected at the start of the
quarter in January.
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 47 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 47 S&P 500 companies that have
reported results are down -4.7%, with 63.8% beating earnings
expectations. Revenues for these companies are up +0.7%, with a
revenue ‘beat ratio’ of 42.6%. 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 -4.0% from the same period last year, on +1.3%
higher revenues and 51 basis points in lower margins. Sequentially,
total earnings for the S&P 500 are expected to be down
-7.6%.
- Estimates fell sharply as the quarter unfolded, with the
current -4.0% 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 -7.3% in Finance, -6.9% in
Technology, -9.0% in Energy, and -14.4% 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 +4.4%,
followed by growth rates of +6.4% in Q3 and +8.8% in Q4. For the
full year, total earnings are expected to be up +6.9% in 2014 and
+11.9% in 2015.
- The bottom-up ‘EPS’ estimate for the S&P 500 for 2014
currently stands at $115.66, while the top-down estimate for the
same is currently at $117.80. For 2015, the bottom-up estimate
remains $130.57, with the top-down estimate from Wall Street
strategists currently at $125.
To see the full Earnings Trends report, please click
here.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
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