U.S. EARNINGS: TAIL WIND TURNING?

S&P data to Feb. 15, covering 88% of S&P 500 companies, show that 60% beat Q4 earnings estimates and 29% missed. The beat rate is unchanged from the previous week but better than the 57% beat rate as of Feb. 2nd when 70% had reported.

image_thumb3Estimates keep declining. Q4 estimates are now 23.76, down 0.8% from $23.94 one week ago. Q1’12 estimates edged 0.3% lower to $23.94.

ISI reports encouragingly that, so far this earnings season, reported revenue has beaten expectations 73% of the time and missed 22% of the time.

AAPL TO APPLE EARNINGS

S&P’s Howard Silverblatt jumped into the raging debate on Apple’s earnings impact on total earnings with official numbers:image_thumb

  • Earnings growth stands at +8.9% YoY in Q4 but falls to +5.5% ex-Apple.
  • More significantly, ex-Apple, S&P 499 EPS dropped 8.6% QoQ in Q4 compared to the 5.5% decline in the S&P 500 EPS, underscoring the true weakness in Q4 earnings.

Other pundits (primarily of the bear specie) want to add AIG into the earnings picture but AIG is too tiny in the Index to have any lasting and meaningful impact. For the record, AIG could add $0.13 to the Index earnings in Q4 but that follows a $0.15 reduction in Q3, a $0.05 contribution in Q2 and a $0.08 reduction in Q1. On a 4Q trailing basis, AIG’s contribution will be -$0.02 after Q4. Meaningless.

What is far from being meaningless is this 8.6% QoQ decline in S&P 499 Q4’11 earnings. Remember: price = earnings x P/E. If “price” declines, “P/E” must rise just to stay even, even more so for “price” to rise.

I use trailing 4Q earnings to value equities. After Q4’11, trailing 4Q earnings remain up, although barely: +1.3% without AAPL vs +2.1% with AAPL. Any way one looks at it, this is a major slowdown given that trailing earnings have gained 15% during 2011.

This tail wind for equity markets has almost disappeared, just as the new bulls are arriving with their market forecasts deprived of much earnings analysis. True, analysts continue to see earnings rise, their Q4’12 estimate being $28.24, up 18.9% YoY. But they may be overseeing these facts:

  • profit margins are at an all-time high and appear to have peaked out;
  • productivity rose only 0.5% in Q3’11 and 0.2% in Q4’11 after reaching +6.2% in Q1’10. Unit labor costs were +1.5% in Q4’11. They had declined 0.8% in 2009 and 2.0% in 2010. The offset to rising employment is declining productivity and increasing labor costs.
  • the U.S. economy may have avoided the double dip but it remains on slow speed;
  • Europe is weak any which way we look at it;
  • China is slowing and Beijing could be misreading the situation or fail to re-stimulate on time or sufficiently;
  • inflation is also slowing, providing little fuel to revenue growth.

All this to say that trailing earnings have ceased to be supportive to equity markets unless the economy gets surprisingly stronger and/or inflation accelerates. In addition, analysts appear to be on the optimistic side for the rest of 2012 and investors should be prepared for negative earnings revisions in coming months, never a positive for equities.

As to “P/E”, please read my Feb. 14 post THE BULLS ARE BACK, RIGHT ON CUE.

EARNINGS BEAT. BEATS ME!

So, the beat rate this Q4 is 60%. Really?

Q4 EPS are now seen at $23.76. They were forecast at $24.34 at the end of December 2011, before companies began their quarterly PR dance. Earnings will thus come in 2.4% below the forecast at the end of the quarter. Now, let’s take Apple out of the equation since AAPL’s EPS beat consensus hand over fist.

Ex-consensus Apple estimates, S&P 499 EPS were seen at $23.32. They should end up at $22.45, 3.7% below consensus. If 60% of companies really beat estimates, it means that the 29% that missed really missed. That’s nearly 1 in 3.

-8.6% QoQ

How significant is this decline? For stat lovers, first quarterly declines of more than 8% have happened 4 times since 1988, only once leading to another decline the following quarter (Q3 2007). Not much of a trend setter, but -8.6% is big nonetheless when valuing equities on trailing earnings.

Guidance Gets Better As Earnings Season Enters the 9th Inning

Last week at this time, the spread this earnings season between the percentage of companies raising guidance minus the percentage of companies lowering guidance was at -3.3 percentage points.  The week before that, the spread was at -4.2 percentage points.  As shown below, the spread has increased to -2.6 this week, meaning more companies raised guidance than lowered over the last five trading days. 

Earnings season ends on Tuesday with Wal-Mart’s report, so it’s highly unlikely that the reading will turn positive by then, but at least guidance has gotten better as earnings season has progressed.

The chart below is more worrisome as the U.S. consumer ought to be the driving force in the continuing economic recovery. Companies in the two consumer sectors have been lowering guidance much more often than they have been raising guidance this season. Wal-Mart’s earnings report on Tuesday will be interesting even though WMT does not give official guidance. Still, many consumer related companies are reporting in the next few days as we close this earnings season.

 

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