It’s still relatively early in the Q4 earnings season, with about 20% of S&P; 500 companies reporting. We’ll have a better view on Q4 earnings after next week as 130 S&P; companies and 12 Dow companies report.

Outside financials, which are bungee jumping off a super-depressed base of a year ago earnings, eps are tracking 9% YoY.

So far, nearly 80% of companies that have reported have beat expectations, which is significantly above the long-run average of 60%. On average, companies have beat analyst expectations by about 21% (long-term average is 2%).

While earnings have been strong, revenue results have lagged. On this basis, the blended rate is 5% year-over-year, which is lower than last week’s rate of 7%. Once Financials are stripped out, revenue growth is sitting at the grand total of 0% — down a percentage point from a week ago even as bottom-lines improved. The question going forward is how much more companies can cut costs – at some point sales need to increase in order to increase earnings. (on that, see the “profit” section of US EQUITIES VALUATION ANALYSIS: DUCK, YOU (HAPPY) SUCKERS!)

David Rosenberg


Jobs ahoy !

National Bank Financial Economics and Strategy Group is particularly happy of today’s US employment report since this group of fine economists correctly anticipated the turn several months ago. The same group had also forecasted the turn in housing earlier this year.

U.S. labour markets are finally showing tangible signs of stabilization. As today’s Hot Chart shows, payroll employment was essentially unchanged in November (-11,000). This development was all the more encouraging as it comes on the heel of an upward revision to employment level totalling
159,000 over the last two months. For our part, we were particularly encouraged by the first increase in service-producing jobs since the onset of the recession coupled with the first notable rise in the workweek in a very long time (you actually have to go back to March 2003 to see a 0.2 increase in hours worked). Increased worker intensity coupled with continued growth in hourly earnings means that the economy-wide wage bill surged 0.64% in November, the largest increase since May 2007 (see Chart). This is important as it means that households are already in a position to sustain spending as to make this recovery sustainable. The November jobs report should reassure investors about the outlook for U.S. profits.



U.S. Earnings Are Strong, But Not Sales

(…) With nearly all of the companies in the Standard & Poor’s 500-stock index reporting their numbers, 80% did better than Wall Street analysts anticipated, according to Thomson Reuters. That’s up from 73% last quarter, which tied the previous record.

Actually, Standard & Poors calculates that 48.7% of companies beat their operating profit estimate (which is what analysts try to forecast). Only 44.7% beat last year’s operating profits.

Revenue is on track to fall 10%, but that is what analysts were expecting. The worry is that without a meaningful upturn in U.S. sales, cost-cutting can only boost profits for so long.(…)

Trailing 12 months sales are down 15.5%.

No one doubts that profits will look good next quarter, if only because last year’s fourth quarter was so terrible. After nine straight quarters of earnings declines, analysts expect fourth-quarter earnings to more than triple.(…)

This last statement looks impressive but is totally meaningless since Q4 profits simply evaporated last year.

[                    ABREAST                ]

With 93% of S&P; 500 companies reporting, third-quarter operating profits are on pace to have fallen nearly 14% from the third quarter of 2008, just before the recession peaked. Analysts had expected profits to fall by 25%.

Official S&P; data shows that Q309 operating profits should be around $15.76, down only 1.3% from the Q308 of $15.96. Q307 operating profits were $20.87 and the peak quarterly rate was $24.06 in Q207

Revenue growth doesn’t compare. According to Goldman Sachs, 32% of the companies in the S&P; 500, excluding financials and utilities, beat revenue estimates by a significant margin in the third quarter, below the long-term average of 40%. Goldman’s Mr. Kostin called that overall performance "weak."

In addition, Mr. Kostin noted that the positive revenue surprises were heavily concentrated among health-care and technology companies, and more broadly among "intermediary" companies that make products, such as semiconductors, rather than companies that sell finished goods or services to consumers.

"Inventory restocking was definitely a big theme," Mr. Kostin said. "Revenues from end-demand-facing companies were very weak."(…)

Full WSJ article

It is interesting to note that top-down and bottom-up estimates for 2010 are nearly identical at $75-77. Bottom-up estimates are almost always much higher than top-down 12-15 months out and generally prove 15% too high.





Charts from Goldman Sachs


Economic Conditions Snapshot, Nov. 09: McKinsey Global Survey

Executives’ optimism about the economy continues to climb, especially in emerging markets and in developed economies in Asia. Executives are a little less sure about their companies’ prospects and say low consumer demand is the biggest barrier to growth.

For the first time in a year, a majority of respondents—51 percent—say economic conditions in their countries are better now than they were in September 2008, according to a survey in the field during the last week of October, a volatile week for stock markets. A larger share of executives also expects the good news to continue, with 47 percent expecting GDP growth to return to pre–September 2008 levels in 2010 or 2011, compared with 40 percent six weeks ago. Although the global news is good, there are marked regional differences; executives in the developed countries of Asia are generally the most optimistic, and those in Europe are the least.(…)

Looking ahead, respondents’ views on company profits and workforce size haven’t meaningfully changed in the past six weeks. (…)

Although 51 percent of all respondents say economic conditions are better than they were last September (Exhibit 1), only 19 percent say an upturn has begun. This figure rises to a remarkable 33 percent, however, among respondents in Asia’s developed countries.(…)




Looking ahead through the next 12 months, more than half of respondents expect their companies to continue cutting costs (although this percentage is far lower than the share of companies that have already done so). Half of all respondents expect their companies to focus on productivity growth and the introduction of new products or services—far more than have done so over the past year. However, executives are  worried about customer spending: 52 percent cite low demand as the biggest barrier to their companies’ growth, and a third fear losing business to lower-cost competitors (Exhibit 5).(…)


Full survey pdf



With everyone worried about the top line revenue numbers this earnings season, we’ve been tracking this data closely.  As shown below, 59% of US companies have beaten revenue estimates this quarter, which is the highest reading over the last 5 earnings seasons.  While it’s not in the 70%-80% range we saw during the last bull market, the direction of the revenue "beat" rate is trending higher, which is a positive for the market.


Bespoke Investment

Standard & Poors says that 61% of companies beat sales estimates, but only 27.2% beat last year’s sales. In total, with 87% of S&P; 500 companies having reported, Q3 sales are down 11.9% YoY.



More than 1,800 US companies have now reported third quarter numbers, and as shown below, the percentage of them that beat earnings estimates has dropped below 70% to 69%.  Based on the first half of earnings season, it looked like this quarter might register the highest "beat" rate in at least a decade, but if the trend continues, this quarter might not even beat the 68% reading seen in Q2 ’09.  Earnings season ends next Thursday when Wal-Mart reports.


Bespoke Investment

Standard and Poors says that 50.7% of companies having reported Nov. 4 beat operating estimates, which is a better gauge of the reality. Importantly, 61% beat sales estimates, although sales remain 15.5% below last year.

Q4 2009 and 2010 estimates are being raised again. With 87% of companies having reported, Q3 operating eps could reach $16.00 for a $64 annualized rate. Q4 estimates are now $16.73 (bottom-up). 2010 estimates are now $74.98 which would be a 33% jump from the $56.20 estimate for 2009.

Top-down estimates for 2010 are only $52.10, as unrealistic as the bottom-up estimate.



Productivity continues to surprise on the upside. According to just-released data, output per worker in the non-farm business sector
surged 9.5% in Q3 2009, the strongest showing in six years. This increase more than offset the rise in hourly compensation granted to workers,
leading to the third consecutive decline in unit labour costs (compensation adjusted for productivity). In other words, corporations
continue to pocket the bulk of the efficiency gains.

As today’s Hot Chart shows, the ratio of industry selling price to unit labour costs surged to a record level in the third quarter. This heralds a hefty increase in profit margins. In light of this development, we are comfortable with our current forecast calling for a 30% increase in S&P; 500 profits over the next year.



Look at the hours worked! Good for profits since output holds but how about final demand as salary income keeps declining, forcing consumers to dip into their meager savings to sustain consumption (see US CONSUMER SPENDING: SAVINGS GRACE!)

Above chart from Econompicdata


Finaly, I wonder how Congress would react seeing corporate profit margins inflate significantly owing to cost cutting measures that created record employment losses.

Chart from The Economist.


Dollar Breakdown = “Go-Global” Theme Breakout?

Following the recent consolidation phase, factors are falling into place for a breakout in the relative performance of global versus domestic focused stocks.
While domestic demand is slowly reviving, global growth is already rebounding much faster, underpinned by the sharp recovery in emerging market economies (especially China). This trend should persist, as the deleveraging process continues in the U.S., while fully functioning financial systems in the emerging world foster renewed credit extension.

The depreciating dollar represents another boon for globally-geared companies. A weakening U.S dollar is bullish for globally-sourced revenues as it cheapens prices for foreign buyers and boosts currency translation effects. Indeed, the trade-weighted dollar has a decent track record in leading relative corporate profitability, and the current message is positive. Bottom line: Continue to favor global over domestic stocks, given that relative profit drivers and valuations remain overwhelmingly in favor of globally-geared equities.

BCA Research