So far in absolute numbers this earnings season could be called somewhat disappointing. About 50% of the 10% of Standard & Poor’s 500 companies that have reported earnings have beaten Wall Street estimates. That’s below the long-term average of 63% and well below the four-year average of 74%.
But I think the earnings season so far is actually more disappointing than that absolute underperformance suggests. Too many of the earnings beats are by just a penny or so and too many earnings surprising are coupled with misses on revenue. Others combine an earnings beat with a cut to guidance for the first quarter or all of 2014. And other companies are managing to report an earnings beat only thanks to a clearly one-time factor or a bit of financial engineering using, frequently, share buybacks.
With U.S. stocks ending 2013 at historical highs, investors just aren’t impressed with that kind of earnings beat.
Want some examples?
Johnson & Johnson (JNJ) reported earnings per share 4 cents above the analyst consensus. But the company forecast that 2014 earnings would be $5.75 to $5.85 a share. That’s below the Wall Street consensus estimate of $5.86 a share.
Abbott Laboratories (ABT), a Jubak’s Pick portfolio member http://jubakpicks.com/the-jubak-picks/, reported earnings per share in line with estimates but revenue climbed just 0.4% and missed analyst estimates by $64 million.
US Bancorp (USB) managed to beat on earnings by a penny a share but revenue fell by 4.4% year over year and was just in line with estimates.
McDonald’s (MCD) beat on earnings by a penny, but revenue grew year over year by just 2% and came in $15 million short of Wall Street projections.
Verizon (VZ) beat analyst estimates by 4 cents a share but reported revenue $29 million below expectations.
Of course, this earnings season is also reporting the usual share of just plain bad results such as the 5 cents a share earnings and the $66 million revenue miss at Coach (COH.)
But truly positive reports, like the 11 cents a share earnings surprise at ASML Holding (ASML) with revenue growth of 81% year over year that put revenue $22 million above Wall Street estimates, have been light on the ground so far this quarter.
Which has put investors in such a funk about earnings and revenue—and the prospects of future earnings and revenue—that even an ASML falls on its news.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
It wasn’t much of a hurdle, but it looks like companies jumped it in the third quarter.
With 90% of the Standard & Poor’s 500 reporting, earnings are up 3.7% year over year for the quarter, according to FactSet. Taking into account estimated earnings at companies that haven’t yet reported, earnings are projected to show 3.5% growth in the quarter.
Going into the third quarter, companies were projected by Wall Street analysts to show 1% earnings growth. Among companies that have reported, 69% have exceeded consensus earnings estimates. That’s at the high end of the average historical range. Earnings grew by 2.6% year over year in the second quarter
Third quarter revenues are up 2.9% with 52% of companies beating analyst projections on revenue. Sales grew 1.7% year over year in the second quarter.
The end of the third quarter shifts attention to projections for the fourth quarter. Estimates now call for fourth quarter earnings growth of 7% on sales growth of 0.6%. Estimates almost always come down as earnings reporting season gets closer so I’d expect fourth quarter estimates to decline as we move through January and February and into March. Three months ago projections for the fourth quarter called for 10% earnings growth.
Projections now see earnings growth of 5% for the full 2013 year on 1.9% sales growth. If those projections were accurate 2013 would turn out to be slightly better than the 4% earnings growth in 2012.
Projections for 2014 are now looking at 11% earnings growth and 4.3% revenue growth.
If 2014 earnings come in on those projections, the S&P 500 trades at 14.8 times 2014 earnings.
The likelihood of 2014 projections being too optimistic, however, is extremely high.
We’re in week two of third quarter earnings season—although you’d never know it with the way that the mess in Washington has dominated headlines and markets.
Even before the government shutdown and the battle over the debt ceiling, this quarter was shaping up as especially challenging.
First, we went into the quarter with Wall Street analysts expecting only very modest growth in third quarter earnings. At the end of the second quarter three months ago, analysts were expecting third quarter earnings to advance 7% year over year. Expectations right now are for just 1% year over year growth. That would be a significant drop from the 2.4% year over year growth recorded in the last quarter.
Second, the problem is expected to be on the top line where analysts are expecting just 2% year over year sales growth. That’s down from the 3% growth expected three months ago. And it would be essentially flat with the 1.7% year over year growth in the second quarter.
Third, analysts are expecting a meaningful rotation in leadership away from financials toward consumer discretionary stocks.
In the second quarter financials led the way on earnings with 28% year over year growth. This quarter Wall Street is looking for a 3% drop in earnings from this sector
Leadership this quarter is projected to come from the consumer discretionary sector with 6.5% year over year earnings growth.
Last quarter investors saw analysts cut earnings estimates to levels so low that companies managed to report earnings beats with very little trouble despite very modest earnings growth.
Given the low expectations for this quarter, it’s reasonable to expect the same story this quarter—which could provide fuel for a fourth quarter rally
And speaking of the fourth quarter Wall Street is projecting fourth quarter year over year earnings growth of 10% on what would be, for me, shockingly low sales growth of just 0.8%.
Earnings season for the second quarter starts officially today when Alcoa (AA) reports after the close of the New York markets.
The quarter has shaped up as a major test for U.S. stocks. Analyst estimates call for earnings growth of just 1.8% this quarter for the stocks in the Standard & Poor’s 500 stock index, according to Bloomberg. Far and away the highest expectations are for the financial sector where earnings are projected to grow by 17%. Take away that performance by financials and the picture for the rest of the S&P 500 turns negative with earnings projected to drop by 1% for the non-financial stocks in the index.
With expectations for the current quarter so low guidance for the third quarter and the rest of 2013 will be crucial for setting market direction. Right now analysts are projecting 5.5% earnings growth for the third quarter and 11.2% for the fourth quarter. Typically earnings projections fall as the quarter in question approaches so everyone is expecting that these growth rates will get trimmed.
The question, though, is by how much?
Earnings in the first quarter grew by just 1.8%. Six months before the quarter closed analysts had projected 8.7% growth for the quarter.
Earnings from Alcoa won’t move the market. The company is expected to show a continued struggle with slow demand for aluminum and global over capacity in the industry.
But Alcoa’s read on global demand for aluminum will set the tone for earnings reports to come from other commodity producers. When it reported first quarter results back in April, the company held its forecast for global demand growth in aluminum at 7% and reduced its projections for aluminum supply surplus from 535,000 metric tons in the fourth quarter of 2013 to 155,000 metric tons in the second quarter as some producers closed capacity. A reduction in either that 7% demand projection or in the gradual reduction in surplus supply in the industry would start earnings season badly for commodity stocks.
However, given the high expectations for earnings growth at financial companies, Friday’s earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC)—both before the market opens in New York—are far and away the big earnings events of the week. Read more
I wouldn’t make too much of today’s move to the upside in U.S. markets. It’s not unusual for the Friday of a down week to show a slight bounce.
And I certainly wouldn’t want to pin any move to the upside on better than expected earnings reports after the close in New York yesterday from Google (GOOG) and Microsoft (MSFT.) I think Google’s results continue a worrying trend of falling ad prices thanks to the growth of mobile traffic (with mobile’s lower ad prices) and Microsoft’s results are only better than expected because Wall Street had been aggressively cutting projections in the weeks before the company’s report.
Certainly today’s earnings results from market bellwethers McDonald’s (MCD) and General Electric (GE) won’t relieve market worries about revenue and earnings growth for U.S. companies. Read more