10.19.14: Drilling Down into the Energy Sector

October 19, 2014 at 3:28 pm | Posted in BHI, CVX, Energy sector, Integrated Oil Co's, Oil Services Co's, Sector Earnings Growth Estimates, XOM | Leave a comment

Thanks to Greg Harrison, of ThomsonReuters, this is how the Energy Sector earnings are distributed amongst and between the various companies:

Exxon-Mobil (XOM): 25%

Chevron (CVX): 17%

Occidental (OXY): 4.5%

Hess (HES): 1%

Total Integrated Oil & Gas: 47.5%

Schlumberger (SLB): 6.7%

Halliburton (HAL): 3.25%

NOV and BHI: 3.5%

Total Oil & Gas Equipment & Services: 13.5%

Oil & Gas Exploration & Production: 15.5%

Oil & Gas Refining & Marketing: 10%

 Remainder: 14.5%

Here is the Excel spreadsheet created from the Thomson Reuter’s data, created for your viewing pleasure: FC – Energy Sector (again, data courtesy of Thomson Reuter’s Greg Harrison)

When we have invested in Energy for clients, it has typically been the international, integrated oils, such as Exxon-Mobil (XOM) and Chevron (CVX), or the so-called “oil services” companies like Schlumberger (SLB), Halliburton (HAL) and Baker-Hughes (BHI).

Currently, we have no Energy positions for client accounts, and haven’t had for some time.

However, here are some thought we’ll leave you with as we do more fundamental homework on the sub-sectors in the next few months:

Exxon (XOM) and Chevron (CVX), are 42% of the Energy sector by earnings weight. If you want a low-risk way to play the sector and don’t want to try and time the sector too finely, you can buy either stock or the XLE (SPDR ETF), for which XOM and CVX are 39% of the XLE by market cap. Both these names should be less volatile than the rest of the Energy sector.

Chevron is currently testing its 200-week moving average, on our charts. Well off its $135 high from late July ’14, we often use the 200-week moving average as a low-risk entry point for stocks or sectors where we have been waiting to build positions. XOM’s 200-week moving average is $87 per share;

Our preferred oil services names like Schlumberger (SLB), Halliburton (HAL) and Baker-Hughes (BHI) are more levered to crude oil prices, and have fallen with the price. SLB and BHI reported earnings last week, and both stabilized with the reports, but I suspect that q4 ’14 and q1 ’15 earnings estimates for the group will continue to drop. If you look at our Weekly Earnings Update from yesterday, from the change in the forward estimates, I’m guessing that Energy sector estimates will not bottom until q1 ’15 results started to get reported in mid-April ’15. Given the levered nature of this sector to crude oil and nat gas, I will wait to re-purchase these names;

In the last correction for this group in 2012, BHI bottomed around $40, HAL around $30 and SLB between $60 – $70. North American margins have been driving the recovery in these stocks since then, but I don’t see how they remain unscathed from the 20% drop in crude oil in the last 3 months, particularly if OPEC is serious about curbing new supply. I thought I read on a Twitter post this week that Chevron has already curtailed one project announced last week, given the drop in crude;

No question the Energy sector is a “return to global growth play” which has been a theme of ours for some time. However, given what is happening in Developed Europe and South America, synchronized global growth seems to get delayed more and more;

Sector earnings estimates are not a timing tool: the forecasts I’ve seen for crude oil prices have been $75 per barrel, $80 per barrel, $63 per barrel and I even heard one forecast for $35. What I will be looking for over the next few months is for crude oil to stabilize for a period of time, and then I’ll be periodically updating readers on the Energy sector estimates, as I start to do more homework on the Exploration and Production names, which is one Energy sub-sector for which we have no coverage;

It is strictly my own opinion, but I think this drop in crude and Energy stocks will take some time to play out. Earnings estimates are NOT a timing tool, but there is no question we will be alert for stabilization in sub-sectors and individual companies. Look for divergences in sectors and sub-sectors and companies (sector estimates declining, company estimates improving) to drive fundamental homework.

Thanks for reading and stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager







10.18.14: SP 500 Earnings Update: Forward Growth Rate Nears 2014 High, Despite Energy Drag on Earnings

October 18, 2014 at 3:29 pm | Posted in Energy sector, Fwd 4-qtr growth rate (SP 500), Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

Per Thomson Reuter’s “This Week in Earnings”, the forward 4-quarter estimate for the SP 500 slipped to $129.34 this week, from last week’s $130.02.

The p.e ratio on the forward estimate 14.5(x), as of Friday’s market close.

The PEG ratio is now 1.54(x), the lowest PEG ratio of 2014, and below the August 1 ’14 PEG of 1.58(x).

The “earnings yield” on the SP 500 after this week’s -1.02% drop in the SP 500 is 6.86%, higher than August 1st’s yield of 6.60% and the highest yield since exactly 52 weeks ago or mid-October ’13’s, 6.81%.

More importantly, the year-over-year (y/y) growth rate of the forward estimate rose for the 2nd week in a row to 9.49%, from last week’s 9.32% and the highest since the early August ’14 peak of 9.58%.

I think there is a real chance we get to a “y/y growth rate” of the forward estimate that hits a new multi-year high in the next few weeks, particularly as Industrial and Technology sectors report their third quarters.

Analysis / Commentary: The bottom callers were out in force this week, which is a pastime I prefer not to practice, but this week’s relative valuation metrics for the SP 500 as denoted by the p.e ratio, the PEG, the earnings yield, and more importantly the resumption  of the forward estimate growth rate to close to 2014 highs, tells me that Wednesday’s low could be the end of this somewhat-different correction. Since 2011, SP 500 corrections have typically lasted 4 – 5 weeks, and have been less than 5% in terms of intensity, while this correction is longer in both duration and severity. There was real, tangible fear in the US stock and Treasury markets Wednesday morning, for the first time in many moons.

We really don’t know though until the SP 500 makes a new high, or exceeds the September ’14 high at the Alibaba IPO of 2,109.26.

A separate post is being prepared on the Energy sector to be published tonight or tomorrow, which I think readers will enjoy, but here is the change in the Energy sector estimates by forward quarter, over the last three weeks: (First column is the week ended October 17th, the 2nd column is the week ended October 10th, and the 3rd column is as of October 1).

Full-year 2015: +4.5%, +5.9%, +6.9%;

Full-year 2014: +5.4%, +6.8%, +7.3%

q3 ’15: +11.3%, +12.0%, +12.7%;

q2 ’15: -2.4%, +1.8%, +2.9%;

q1 ’15: -3.7%, +1.3%, +2.3%

q4 ’14: +0.1%, +4.6%. +6.6%

q3 ’14:  +2.4%, +5.3%, +6.0%

Source: Thomson Reuters “TWIE” weekly missive

What readers should draw from this is the absolute level of the estimate relative to the SP 500, and the rate of change up or down. This is the first time I’ve marked out the data so I am looking at this along with readers, and q1 ’15 has had a 500 basis point (bp) negative swing in its growth rate, and I’m guess the downward revisions will continue through the calendar 4th quarter, particularly as we hear from management’s on q3 ’14 earnings.

We’ve been underweight Energy for two years, but now is the time to do the fundamental homework and prepare for the sector’s outperformance. As John Wooden used to say, “Be quick, but Don’t Hurry”.

Here is one company example: Baker-Hughes (BHI), reported q3 ’14 earnings on Thursday, missing on both the consensus revenue and EPS estimates for q3 ’14 materially, for the first time since the 3rd quarter, 2012. BHI’s full year 2015 consensus EPS estimate as of the July ’14 earnings report was $5.55, after Thursday’s report the full-year 2015 consensus EPS estimate was reduced to $5.10, or a 10% reduction in just the last 3 months.

I actually like BHI as well as HAL and SLB, but the oil service companies are “leveraged” plays on crude. We’ll have more on a separate post on Energy coming tonight or tomorrow.

To conclude this Weekly Earnings Update, while the mainstream financial media loves to talk Ebola, the bigger issue could be Europe. John Butters of Factset, published a very interesting table this week, with Factset’s weekly earnings analysis: of the 68 SP 500 companies that reported q3 ’14 earnings this week, 44 of the 68 cited “Europe” as an issue during the quarterly conference calls. 38 of the 68 cited “forex” or likely US dollar strength, while 25 companies cited “China” as an issue this quarter, just 7 were specifically negative, and only 6 companies cited Ebola.

The point for Fundamentalis readers is that despite what is in the headlines, it is “attribution” that is more important. I would also add that what management’s say in terms of “color” on the conference calls, isn’t necessarily what the analyst’s “attribute” upside and misses to, when gauging how individual companies performed relative to their models. E.g. a individual company misses on consensus revenues but beats on consensus EPS, and the analyst reports that are published post-conference call, note that “currency” drove the 2% revenue miss, but a lower-than-expected tax rate, or a higher than expected operating margin thanks to SG&A reductions drove the EPS upside.

Greg Harrison of Thomson Reuters and John Butters of Factset (John used to do Greg’s job at Thomson Reuters, and now does the same work at Factset) do great work in providing readers with earnings commentary. These reports are free too by the way. All readers have to do is sign up. The work that I do is to model the data over long periods of time that T/R and Factset provide and try to provide additional color and analysis. Doing this work, keeps me focused on earnings for clients and ultimately has an impact on investing decisions. You have to roll up your sleeves and do the work, though.

125 – 130 more companies report q3 ’14 earnings this week. I am staying with our original forecast that outside of Energy, I think the SP 500 earnings will come in at a high-single-digit, possibly 10% growth rate on an operating basis, and be a positive catalyst for the stock market.

Q4 ’14 expected earnings growth for the SP 500 is 10% as of Friday, 10/17. There is always downward pressure on the current quarter’s estimate, but this week will give us a better feel for non-Energy sector guidance.

Thanks for reading and stopping by. We’ll be out with more articles tonight or tomorrow.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




10.16.14: Energy Sector: A Look Ahead Before Weekend Revisions

October 16, 2014 at 11:13 pm | Posted in Energy sector | Leave a comment

Well, the thesis that we started the week with, i.e. that some of the large-cap Financial’s earnings reports for q3 ’14 would help stabilize the market, wasn’t such a great prognostication.

We’ve been underweight the Energy for several years, which helped our outperformance in 2013 (the Energy sector underperformed the 32% return of the SP 500 in calendar 2013) and it REALLY helped our numbers in q3 ’14. We are preparing performance reports for clients for the 3rd quarter presently, and the numbers look good. (We waffled on Energy during the 2nd quarter, 2014 here, but we never wound up adding any positions, outside of being long HAL, which we sold at $69 – $70.)

That being said, with Baker Hughes (BHI) reporting this morning and Schlumberger (SLB) reporting after the bell tonight, I wanted to show readers how the sector has performed in terms of earnings growth historically, and how the forward estimates look prospectively.

The international, integrated’s like Exxon and Chevron typically report near month end. By Monday morning, October 20th, the big three oil service companies of BHI, SLB and HAL will have reported.

As of last Friday, October 10th, the full-year 2014 expected earnings growth for the energy sector was +6.8%, down from 7.3% as of October 1, despite the drop in crude oil in the 3rd quarter.

For 2015, the full-year 2015 expected earnings growth for the Energy sector was +5.9%, vs 6.9% as of October 1, so it looks like analysts had pulled in their sails / numbers a little for 2015 already.

Here is the detail by quarter: (first column is as of October 10, 2nd column is the earnings growth estimate as of October 1)

Forward estimates:

q3 ’15: +12%, +12.7%

q2 ’15: +1.8%, +2.9%

q1 ’15: +1.3%, +2.3%

q4 ’14: +4.6%, +6.6%

q3 ’14: +5.3%, +6%

Actual Historical:

q2 ’14: +17%

q1 ’14: -0.1%

q4 ’13: -8.8%

q3 ’13: -7.5%

q2 ’13: -.85%

q1 ’13: 0.5%

q4 ’12: +6.4%

q3 ’12: -16.4%

q2 ’12: -18.1%

Our bearish take on Energy has been based more on perceived ultimately, slowing demand thanks to the growth in electric cars and hybrid vehicles, than growing supply. The point is, it truly is better to be born lucky than smart.

Either way, we’ll take it.

What is puzzling is that if you look at the years of negative earnings and revenue growth, the Energy sector didn’t perform that badly.

Maybe the incredible carnage we’re seeing in the energy sector today is prelude to a material slashing of numbers. According to one source, Schlumberger, the large-cap oil service company, lifted their 5-year capex program in June ’14, just as crude oil was peaking. The oil service companies all reported strong q2 ’14 earnings.

One thing we will focus on is the degree of revisions to the Energy sector estimates as we move through October and early November ’14.

Stay tuned: we will update the Energy estimates at the end of the month.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


10.13.14: SP 500 Weekly Earnings Update: Financials Should Help Market This Week

October 13, 2014 at 6:59 pm | Posted in AA, BAC, Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), GE, Weekend Link Fest | Leave a comment

We are late reporting the latest our SP 500 earnings update since I spent 2 days last week (Friday and Saturday) fishing one of a handful of lakes where “they” expect the next world record musky to be caught. Unfortunately, I didn’t catch it, and had to settle for 2 days in the Great Cold North (two hours north of Duluth, in the wonderful state of Minnesota), and two days of driving from there and back to Chicago, enjoying some of the most beautiful fall scenery on God’s Green Earth.

Oh well, back to reality.

Per Thomson Reuters, the “forward 4-quarter” estimate remained steady this past week, at $103.02, exactly the same as last week’s forward 4-quarter estimate.

The p.e ratio on the forward estimate after last week’s market drubbing is 14.6(x), while the PEG ratio fell back to 1.57(x) and you’ll see why in a minute.

The earnings yield on the SP 500 rose to 6.82%, its highest print since the August 1, 6.60% (and the date of the recent low for the SP 500 at 1,904).

More importantly, the year-over-year growth rate on the forward estimate jumped back to 9.32% its highest print since mid-August, 2014 and a very good sign for q3 ’14 earnings.

Analysis / commentary: Alcoa (AA) had strong earnings last week, and more importantly strong upward revisions to forward EPS and revenue estimates. With JP Morgan (JPM), Bank of America (BAC)  set to kick off the big banks on Tuesday morning, followed by Wells Fargo (WFC), and then Citigroup (C) this week, and also the investment banks Morgan Stanley (MS) and Goldman Sachs (GS), by Friday morning we will have a very good look at the good chunk of the large-cap Financial sector, and expect decent, but not “lights-out” results from the sector. (Long all of the above except C, MS, and GS.) Technically an Industrial stock, GE reports on Friday, October 17th, 2014, but it is still very much a Financial, with GE Capital labeled a SIFI, so don’t kid yourself, Financial sector conditions still impact GE’s financial results.

Here is why I think Financials are a low-risk, low-reward sector:

  • With the advent of Dodd-Frank and the rabid regulators, I don’t think the banks want to report strong results and instead want to fly under the radar and produce stable, low-volatility, results to avoid attracting attention;
  • The big banks are shedding the higher risk businesses like the trading desks and scaling down the capital allocated to these businesses;
  • Goldman and Morgan are PROBABLY still doing proprietary trading but not bragging about it, for the same reasons as above;
  • The banks and major Financials, those labeled SIFI’s or Strategically Important Financial Institutions, have to really watch their P’s and Q’s. They have been neutered to a large degree and the shareholders wont likely see the EPS and revenue “upside surprises” that were important in the late 1990’s and mid 2000’s;
  • I do think the major Financials have become as much “cost reduction” or cost containment stories to help leverage EPS growth; If the big banks do manage to generate more than mid-single-digit revenue growth going forward, I would be surprised;
  • Both Goldman and Morgan Stanley have committed themselves whole heartedly to the asset management business which means more stable revenues, fees and less risky volatility;   While the mid-term elections and a pro-business Senate might help to some degree, I don’t think we’ll ever return to the late 1990’s type financial environment, where the numerous regulators were completely vacuous, there was a “home-on-every-balance sheet” mentality, and the repeal of Graham-Leach-Bliley (GLB) was a disaster, all of which led to the 2008 Financial Crisis, which should have never happened.
  • Unfortunately, the only entity left standing is the regulators;
  • Basically the big banks and Financial’s are required to hold more capital, take less risk, which results in lower ROE’s, and have to ask the Fed and regulators for permission to pay dividends and make share repurchases. That is like asking your Mom or Dad for more allowance.

We are overweight Financial stocks in client accounts, but not by much. Financials comprise about 16% of the SP 500 by market cap. Our favorite Financial remains Charles Schwab, which we think is a huge beneficiary of “asset aggregation” and has a huge start on GS and MS, and does no trading with its balance sheet.

It is truly hard to say if easier regulatory standards makes for a safer Financial system. I still think the near-apocalyptic events that unfolded in late 2008, were a confluence of many events, not the least of which was a 60 – 70 year bull market in housing ending, Alan Greenspan said it best in the mid 1990’s in one of his many Humphrey-Hawkins testimonies when he said that “you can’t have a banking system where profits accrue to private shareholders, but losses are absorbed by the public domain (i.e. read taxpayer).

One of the reasons that the US economic growth slope or glide path off the 2009 low has been so tepid is partly due to the constraints on the Financial System, in my opinion. Some is demographics for sure, but the eternal question remains how do you allow what is a homogenous industry to foster growth and not be tempted to run the US economy into the ground ? We are still looking for a healthy earnings season for q3 ’14. Financials should show good numbers, too, but expect high single digit EPS and mid single digit revenue growth in the New, Post-2008 World we remain.

Financials might not be huge outperformers, but after the post-2008, regulatory world, I don’t think there is much risk to their results either. Credit is stable, revenues are stable, the risky businesses are being repelled and the dividends are decent.

Trinity Asset Management, Inc. by:

Brian Gilmartin,

CFA Portfolio manager

10.8.14: Final Look at Q3 ’14 Earnings. Financial Sector Adjustments on Operating Basis

October 8, 2014 at 5:06 pm | Posted in AA, BAC, Earnings, Earnings estimate revisions, Financial sector, JPM, S&P 500, Sector Earnings Growth Estimates | Leave a comment

By the time most readers might get to reading this, the Fed’s September meeting minutes will be released (due in 75 minutes) and Alcoa will have released its q3 ’14 financial results, due after the bell tonight.

The market sentiment seems to think that q3 ’14 will be quite bad thanks to the US dollar and a weak European economy.

Industrial numbers have been taken down probably thanks as much to Europe as currency. However the Thomson Reuters data has shown little overall change in the expected q3 ’14 Industrial sector growth since Jan 1 ’14. At that time Industrial’s were expected to grow +9.2% and as of Friday, 10/3, that expected growth was +8.3%, i.e. not even a full 100 bp’s reduction. Revenue growth has been firm as well. That being said, let’s see what the Industrial numbers look like.

Financials: here is where the story gets interesting: Greg Harrison of Thomson Reuters noted this past weekend that if we mutually exclude, JP Morgan’s q3 ’13 charge and Bank of America’s expected q3 ’14 charge individually, we get different growth rates for the Financial’s and the SP 500. My question to Greg was, “what if exclude both charges and look at just the operating earnings for JPM’s q3 ’13 and BAC’s q3 ’14, where does that leave the numbers for the Financial sector as a whole and how does that change the SP 500’s expected q3 ’14 earnings growth rate ?”

The answer is that if look at operating numbers for Financials (excluding both JPM and BAC’s charges), the sector is expected to grow 4.5% for q3 ’14 and the SP 500 is expected to grow +5.3%. (Long JPM and BAC)

Further complicating q3 ’14 estimates (per Factset) Consumer Discretionary is being impacted by the Pulte EPS compare ($0.36 this quarter vs the $5.42 in last year’s same quarter) so if the Pulte compare was excluded, Consumer Discretionary’s year-over-year earnings growth would be +1.9%.

Typically when the quarter starts getting reported and analysts see results, numbers get lifted. My experience over the last two years is that the average quarterly increase in the earnings growth number from the start of the reporting period to the end, is usually 3% or more.

While Alcoa will set the tone in 3 hours, I still think q3 ’14 SP 500 earnings growth will come in at a pretty healthy rate, at least 8% – maybe as high as 10%.

Nothing has changed that much in the last 3 months, of a material nature.

Thanks for reading. Given consensus EPS and revenue estimates, we expect a good quarter from Alcoa (AA) tonight.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



10.6.14: Expected q3 ’14 SP 500 Revenue Growth by Sector

October 6, 2014 at 3:30 pm | Posted in Consumer Discretionary, Consumer Staples, Industrials, SP 500 Revenue Growth | Leave a comment


Here is the latest expected revenue growth rates by sector for the SP 500 for q3 ’14.

A couple of items caught my eye:

  • Consumer Discretionary, which is retail, auto’s, housing, is returning to a mid-single digit quarterly revenue growth rate;
  • Consumer Staples, which should be heavily influenced by the US dollar volatility, given the low to mid single digit secular growth rates and the degree to which the Staples revenues are non-US, actually has seen revenue growth accelerate for the 4th consecutive quarter, despite significant dollar strength in q3 ’14;
  • Industrials: one notable CNBC commentator did comment that Industrial numbers were being cut a few times in the last few weeks, but Industrial revenue growth is expected to report its strongest revenue growth as a sector, in q3 ’14, since we’ve been tracking the data from q4 ’12.  Not sure how much of the Industrial sector is GE, which should really be split between Industrial’s and Financials. (Truthfully, if GE would follow Hewlett-Packard’s (HPQ) model and split the company in two, you would think GE would unlock a lot of Industrial/Energy value. Long GE and HPQ.)

Brian Langenburg, lead analyst at Langenburg & Company, and a former Industrial analyst, does also note that estimates are being cut in the Industrial sector.   Revenue growth doesn’t look too bad despite the strong dollar and global worries. (Tried to attach Langenburg & Company’s report released at this am, but couldn’t get it attached.)

The conclusion is that Industrial revenue estimates have been relatively stable, while the Industrial’s earnings (EPS) estimates have seen some pressure.

No question the dollar is going to be an issue this quarter: whether it has been fully discounted and the results come in better-than-expected, or the dollar strength’s impact has been under-estimated, and guidance for q4 ’14 is reduced further, remains to be seen.

My own opinion is that, after January 1, 2000 noting that domestic US growth was slowing, more US companies moved their manufacturing and cost-of-goods-sold abroad, and aligned their revenue generation with their expense structures (the natural currency hedge) than the last period we saw prolonged dollar strength, which was the late 1990’s.

Thus a prolonged period of dollar strength, could be less onerous than in previous decades, given the shift in US manufacturing and services into other geographies.

This is all navel gazing right now. We’ll know more in the next few weeks.

We’ll update the actual revenue growth spreadsheet at the end of October ’14.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

10.5.14: More on SP 500 Earnings and a Look at Revenue Estimates by Sector

October 5, 2014 at 9:00 pm | Posted in Biotech, Financial sector, Financials, Gilead, MSFT, S&P 500, SP 500 Revenue Growth | Leave a comment

Our primary source of earnings data is Thomson Reuters, both the weekly “This Week in Earnings” and the intermittent emails, as well as Factset’s “Earnings Insight”. “This Week in Earnings” is typically published by Thomson Reuters after the market closes on Friday afternoon each week, while Factset’s “Earnings Insight” is published typically before the market closes each Friday.

The great thing about these publications is that both are free to readers.

A third and developing source of earnings data is Bespoke, which does require a subscription. From looking at Bespoke’s data, it looks as if they are reading the weekly Factset report, since Factset typically (at least in my experience of comparing the two) has lower growth rates when looking at SP 500 and sector earnings growth rates, and slightly different dollar estimates.

Many on Wall Street make fun of CNBC and the mainstream financial media, and I do think the mainstream media is as vacuous an enterprise as there is, but I also think there is always an endeavor to “get it right” even in a 30-second or 1-minute sound bite.

For analyzing macro and micro earnings data, a discerning investor needs to consider:

1.) Are the macro estimates top-down or bottom-up ? (Bottom-up estimates for the SP 500 are usually higher, but the top-down is what is typically reported.)

2.) Are the estimates GAAP or non-GAAP (i.e. operating) ? (My impression is Thomson uses “operating” or whatever the analyst’s use which is typically operating, while Factset uses reported since Factset estimates typically come in lower than T/R.)

3.) For company-specific estimates, how many analysts have submitted an EPS or revenue estimate ? ( I typically don’t like to use a company EPS or revenue estimate until 5 – 7 analysts have modeled the company.)

4.) For company or sector growth rates are the revisions upward or downward and to what degree, and how do the sector revisions fit with the direction of the overall SP 500 growth rate ? (Starting in late q3 ’12 and early q4 ’12, even though EPS estimates were falling overall for the SP 500 for expected 2013 EPS growth, Financial sectors estimates were stable to higher. It isn’t just absolute revisions that matter, but severity and stability.)

5.) Although much is often heard about SP 500 earnings, what about revenue trends by sector ?

These issues are never vetted by the financial media anchors, and instead, a complex and opaque topic is often left to quick sound bites that fit the market view of those being interviewed.

Here is our latest update on q2 ’14 revenues by sector using Thomson Reuters data. The spreadsheet is my own.


Note the change in revenue growth by sector from q1 ’14 to q2 ’14. Did weather in q1 ’14 make that much of a difference ?

Also note that q2 ’14 revenues didn’t change much within the quarter, as SP 500 companies reported results. (Readers will see a q3 ’14 SP 500 expected revenue growth estimate on Monday, 10/6/14.)

It isn’t surprising that biotech is doing so well. Gilead is smoking, and biotech, mainly Gilead is driving a lot of Healthcare revenue growth. (Not long any biotech.)


Finally, Thomson Reuters notes the impact the Financial sector charges by Bank of America in q3 ’14 and JP Morgan’s easy compare from q3 ’13 are having on both the Financial sector and the SP 500 in general. If Bank of America’s expected q3 ’14 charge is eliminated and and the old estimate of $0.32 is used, expected SP 500 earnings growth for Financials would be +20% and the SP 500 expected growth rate for q3 ’14 would be +8.1%. However if JP Morgan’s charge from q3 ’14 is reinstated to an operating basis, then y/y growth for Financials falls to -2.9% and the SP 500 expected growth falls to +4.1%. (Long BAC and JPM.)

My point is if both JP Morgan and BAC 2008-mortgage related charges are excluded and the Financial sector is looked at on an “operating EPS basis” then I think the SP 500 starts the quarter at closer to a 6% expected y/y earnings grow rate, which is typically revised upward as analysts start to get results.

Factset notes that the q3 ’14 “bottom-up” SP 500 EPS estimated growth rate dropped 4.2% from July 1 to September 30th, more than the 4-quarter average of 3.2%.

Thomson Reuters notes that with the closing of the Nokia acquisition, Microsoft’s q3 ’14 (fiscal q1 ’15) estimate fell from $0.64 to $0.49 per share. Without the MSFT drop, Tech is expected to show a +9.9% q3 ’14 earnings growth rate. (Long MSFT)

The point being that discussing earnings can be a complex topic.

I like to look at SP 500 earnings estimates over a quarter, and note the changes amongst and between the sectors, and then look at the full year expected earnings growth and see if those estimates are being revised as well.

I particularly like to look at the change in the expected growth in the SP 500 earnings as a whole, and then compare the sector changes, to get a feel for relative strength and weakness.

My impression is that over the last few years (since 2011), while there has been short-term volatility, the longer-term growth has been steadily inching higher from mid to high-single-digits.

More to come early this week, before the earnings season kicks off for good.

Thanks for reading. Hope this sheds some light on an involved subject.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


10.4.14: SP 500 Weekly Earnings Update: The Pessimism Around Q3 and Q4 ’14 Earnings Seems Unwarranted

October 4, 2014 at 7:51 pm | Posted in AA, BAC, Basic Materials, Earnings, Earnings estimate revisions, Energy sector, F, Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), Russell 2000, S&P 500, Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

As we noted in last week’s Earnings Update, rolling into the new October ’14 quarter this week, saw the typical jump in the forward-estimate from last week’s $125.56 to this week’s $130.02.

Given the traditional “roll”, last week we wrote that the new estimate would be somewhere between $129 – $130, and that in fact was the case. (If you’ve been reading this blog for a while, the bump shouldn’t have come as a surprise.)

The forward estimate p.e is now 15(x), and the PEG ratio is 2.72(x), which is a big increase from last week’s 1.76(x) and the consistent 1.6(x) – 1.8(x) PEG we’ve seen the last 8 – 12 weeks. (You’ll see why in a minute.)

The “earnings yield” on the SP 500 jumped to 6.61% this week, an increase from last week’s 6.34%, and is understandable given the -0.75% decline in the SP 500 for the week ended October 3, ’14.

What is puzzling and what can’t go unheeded is the sharp drop in the “forward 4-quarter” growth rate of the SP 500 from last week’s 8.95% to this week’s 5.57%.

We saw a similar circumstance from the last week of June ’14 to the first week of July ’14 when the forward 4-quarter growth rate fell from 8.75% to 5.40% and them immediately popped higher the following week to 8.53% as of July 11 ’14. Thus, I hate to trumpet the drop as a harbinger or warning sign of an impending 20% correction, until another week’s data is published. (Last week, I was hesitant to publish the jump in the forward 4-quarter growth rate for the same reason, since it was just one week’s data. However the annual 2014 full-year estimate hasn’t changed much and the data continues to indicate 9% – 10% full year EPS growth for the SP 500. )

Next week, Wednesday, October 8th, per the Thomson Reuters table, we get earnings from Alcoa (AA) and Costco (COST). Normally, we see JP Morgan (JPM), Wells Fargo (WFC) and GE (GE) in the first week Alcoa reports, but these companies are reporting the following week. (Long all of the above in varying weights.)

There is a lot of skepticism around q3 and q4 ’14 earnings right now.

Having done this for a few years now, analyzing earnings data is a bit reminiscent of the old fable about “The Three Blind Men and the Elephant”: depending upon which part of the elephant is being examined, each blind man has significantly different conclusions about what it is they have a hold of:

  • If you’ve watched the drop in the SP 500’s q3 ’14 expected earnings growth just this quarter, from June 30 / July 1’s +11% to Friday October’s 3rd’s +6.4% you would conclude that there is some concern on the part of analyst consensus about upcoming earnings;
  • If you watched the analyst estimate revisions during the prime reporting periods from the 2nd week of the first month of the quarter (January, April, July, and October), over the last few years, you’d think analysts in general remain positive about the future of the US equity market as upward revisions during the prime reporting periods continue to outweigh downward revisions to forward estimates;
  •  If you look at “bottoms-up” versus “top-down” earnings data, you’d get a different picture of SP 500 earnings, or you’d get an argument about forward valuation of the SP 500 and the “real” growth rate of earnings;
  • If you simply looked at full-year annual EPS estimates, you could only conclude that the last three years the SP 500 has shown pretty consistent and stable mid-to-high-single-digit earnings growth every year;
  • If you looked at earnings estimates by market cap, i.e. the Russell 2000 versus the SP 500, I think the two benchmarks would tell substantially different earnings stories;
  • If you only looked at the SP 500 earnings growth for robust years like 1994 (+19%), 2011 (+15%) and 2013 (+6%) you’d be shocked to see SP 500 returns of 1%, 2% and 32% respectively. (Granted, I’m data-mining a little bit but the reader should quickly get the point);

For q3 ’14 SP 500 earnings, which are expected to start this week with Alcoa (AA), the drop from 11% to 6.4% is pretty normal, and per Thomson Reuters if the expected Bank of America charge is excluded, which is already in BAC’s q3 ’14 estimate, the expected q3 ’14 growth rate increases to 7.7%, which means that coming into q3 ’14 earnings season, a 7.7% growth rate is actually pretty decent (in my opinion).

The numbers tell me that q3 ’14 wont be that bad, even though there is a lot of concern about the dollar impact, Europe (look at Ford), South America, and such. (Long F, and BAC)

The most heavily oversold sectors today are Basic Materials and Energy. Here is the change in the expected earnings growth of these two sectors since July 1 ’14:

Energy: +6% (as of 10/3/14), vs. +13.8% as of July 1 ’14;

Basic Mat: +14.6% as of 10/3/14, +18.7% as of July 1 ’14.

If the SP 500 is expected to grow earnings 6% – 7% in q3 ’14 and both these sectors, particularly Basic Mat, are showing impressive relative strength in terms of earnings growth at a point during the quarter when expected sector growth is usually at its lowest, wouldn’t you think the sectors are oversold to the downside ? My own impression given the sentiment around these sectors is that the downward revisions, should have been much worse.

We’re underweight Energy and overweight Basic Mat in client accounts. (We have been underweight Energy for 2 years, which did hurt performance in calendar q2 ’14 but otherwise being underweight has been the right side of the trade. Energy underperformed in 2013.)

More to come on this topic tomorrow.

Thanks for reading. We seem to be a particularly uncertain time for the SP 500 and yet I think SP 500 earnings will continue to tell a positive story into year-end.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


9.26.14: SP 500 Earnings Update: Finally, A Jump In the Forward Estimate Growth Rate

September 26, 2014 at 11:14 pm | Posted in Financial sector, Financials, Fwd 4-qtr growth rate (SP 500), Sector Earnings Growth Estimates, Weekly Earnings Update | Leave a comment

By this time next week, we will have the September Jobs report in hand, (scheduled for release at 7:30 am central time, on October 3rd, 2014) and we will see a nice jump in the “forward 4-quarter” EPS estimate for the SP 500.

Given that this week’s estimate is $125.67, my guess for next week’s “forward 4-quarter” estimate is $129.50 to $130.00.

Each quarter, as we roll into the new quarter, as we will this week on October 1 ’14, we roll forward 1-quarter on our “forward 4-quarter” estimate.

This is one reason I think there is an upward bias to stocks in general and to the SP 500: the emphasis on growth and “return” is the silent catalyst that keeps the profit engine moving forward. The P.E the market assigns to that growth is always the $64,000 question. It is always the great unknown.

This week, the last full week of the quarter, the “forward 4-quarter” estimate fell slightly to $125.67, from last week’s $125.79.

The p.e ratio on the forward estimate is 15.78(x) and the PEG ratio as of Friday, September 26th, is 1.76(x).

The earnings yield after this week’s decline of 1.37% in the SP 500 is 6.34%, up from last week’s 6.25%.

More importantly after an 8-week slide in the year-over-year (y/y) forward 4-quarter growth rate, the growth rate jumped this week to 8.95% from last week’s 8.56%. Basically the growth rate fell every week from August 1st forward, which isn’t abnormal since the growth rate jumped sharply in July ’14 during the heart of earnings season.

Here is a quick detail of the change each of the past three month’s of the y/y forward 4-quarter growth rate:

July ’14: from 5.40% on July 4 to 9.58% on August 1:

Aug ’14: from 9.58% on Aug 1 to 9.18% on Aug 29:

Sept ’14: from 9.15% on Sept 5 to 8.95% on Sept 26;

Analysis / commentary: this could be navel-gazing at its finest but we watch closely the y/y change in the forward estimate growth rate. So far the end of September’s growth rate is higher than early July’s.

q3 ’14 earnings start in 2 weeks, and the current estimate per Thomson Reuters’s, “This Week in Earnings” is 6.6% growth for q3 ’14. Expect that to come in close to 10% again by the time we reach the end of December ’14.

Q3 ’14 expected SP 500 earnings growth started the quarter at 11%. The Bank of America charge cost BAC and the SP 500 a bit in q3 ’14. We detailed that in our latest blog post on Financials here.

Bespoke had an interesting line in one of their reports this week: Financials and Utilities are the only sectors where positive revisions outnumber negative revisions.

One final interesting stat: q2 ’14 revenue growth is now +4.7%. That is up from +4.6% last week. Worries over the dollar might be overblown. Prior to Nike’s report, the worries over the quarter were currency related. (Long NKE, one low cost basis position.)

I don’t think anything has changed on the earnings front: expect q3 ’14 earnings to come in high single-digits at least.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


9.19.14: Warming up to the Financial Sector

September 19, 2014 at 2:24 pm | Posted in Financial sector, Financials, Sector Earnings Growth Estimates | Leave a comment

Coming into 2014, we thought the SP 500 could generate $120 in earnings per share (EPS) for the calendar year.

Today, the SP 500’s 2015 consensus estimate as it (they) stand right now:

2015 current bottoms-up consensus:$133.54

2015 current top-down consensus:$127.32

2015 current consensus “average”: $130.43


2014 current bottoms-up consensus : $118.76

2014 current top-down consensus: $117.49

2014 current consensus “average”: $118.13


With the average 2014 consensus estimate of $118.13, there is still a chance that we could see $120 by April 1, ’15 (remember, we don’t get the final 2014 number until all companies report their q4 ’14, which isn’t set in stone until the 4/1/15), but the Financial sector write-downs this year, are not helping.

The point of the above is that the SP 500 remains on track to generate 10% EPS growth in calendar 2014 (or close to it), and at least at this early stage, low teens growth in 2015.

This is normally a market environment where Financials outperform, but the stocks like JPM are underperforming the SP 500 this year, particularly JPM and C. BAC is performing in-line with the SP 500 year-to-date.

Bank write-downs

Citigroup reported $0.03 per share in EPS in the 2nd quarter, although after the mortgage settlement charge is removed, operating EPS was $1.27 per share.

Bank of America’s write-down has resulted in an EPS estimate of $($.09), i.e. a nine cent loss for the quarter, after an original estimate of roughly $0.31 per share.

Ignoring EPS for a minute, here are the total dollar write-downs for the Big Banks since JP Morgan last fall:

Bank of America: $16.6 billion;

JP Morgan: $13 billion;

Citigroup: $7 billion

This is the primary reason we are starting to warm up to the Financial Sector coming into late 2014, and in particular 2015. The books are getting cleaned (or cleared) of the overhang of the litigation mess left over from the 2008 Mortgage Crisis, and it is setting the Financials up, particularly the big banks, for a cleaner year and easier compares next year.

Per Greg Harrison of Thomson Reuters, “Currently, 2014 earnings growth for the S&P 500 is estimated at 8.2%, and the Financials sector is estimated to grow 3.2%.  If the $0.43 legal charge for BAC and the $1.24 charge for BAC are excluded, the overall growth estimate rises to 9.0% and the Financials estimate rises to 7.4%.”

Here is the progression of 2014 growth estimates for the Financial sector:

9/12/14: +3.2%;

7/1/14: +6.6%;

4/1/14: +9.3%;

1/1/14: +10.9%

Even if we exclude the write-downs in 2014, you can see that 2014 was a tougher year for Financials as there has been downward pressure on the growth estimates all year, despite the fact that the SP 500 is still on track for 9% – 10% growth in calendar ’14.

For calendar 2015, here is what Thomson Reuters consensus sector growth estimates for Financials and the SP 500 as of:

9/12/14: +16.6%, and +12.5% for SP 500;

7/1/14: +12.5% and +11.5% for SP 500

4/1/14: +11.3%, and 11.5% for SP 500

2015 consensus sector growth estimates as of right now (and it is still early) is that Financials will have faster earnings growth than the SP 500 in calendar 2015.

One last comment: as Taper ends, and the yield curve starts to steepen again, if only slightly, Financials have found a bid since the 10-year yield bottomed in mid-August ’14. Looking at the charts of JP Morgan (JPM), Goldman Sachs (GS), Bank of America (BAC), Morgan Stanley (MS), Charles (SCHW), all the stocks bottomed or ended their consolidation in early August ’14 and started to move higher at the same time. (Long JPM, WFC, BAC, SCHW)

2015 sector growth is setting up nicely for the Financials as of right now. We’ll be looking for revisions after the October ’14 earnings reports.

We spotted a similar pattern in late 2012, when looking ahead to 2013.

Financials are the market generals: although Dodd-Frank, tougher mortgage underwriting, and much tougher regulation has crimped earnings growth, the fact is that while banks EPS growth might be slower, it should be less volatile over time. The credit cycle hasn’t been repealed, but looking through 2015, we think next year will be a better year for the sector.

(If you are wondering why we started with 2014 and 2015 SP 500 EPS estimates and the various consensus prognostications, we wanted to lay the backdrop for why Financials can outperform next year. )

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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