Earnings update: January 19th, 2013: Earnings Remain a Fundamental Positive – Financials See Revenue Growth

After what was a pretty decent week of corporate earnings reports, the “forward 4-quarter” estimate for the SP 500 rose to $113.29 this past week, down just $0.02 from last week’s $113.31.

With the SP 500’s close on Friday at 1,485.98, the S&P 500 is trading at 13(x) the forward estimate, for expected 10% earnings growth in 2013 per the latest ThomsonReuter’s consensus estimate.

The “earnings yield” on the SP 500 is still elevated at 7.62%.

The “forward 4-quarter estimate” grew 5.96% year-over-year.

4th quarter, 2012 SP 500 earnings are now expected to grow 2.3% year-over-year, with revenue growth at 2.1%.

We’ll repeat earlier predictions and say that the 3rd quarter, 2012, will be the bottom for earnings growth for this cycle, and we expect each quarter to get progressively stronger as we move through 2013, and that q4 ’12 will increase about 5% once the majority of the earnings reports are in by mid-February.

Our recent observation about corporate managements utilizing the 4th quarter conference call to give their first pass at 2013 guidance still is borne out in the 2013 sector estimates. For several sectors, expected earnings growth for 2013 has already been revised upward since Jan 1, 2013. (The first column is the 2013 expected year-over-year earnings growth rate as of Friday, January 18, 2013, and the second column is the estimate as of Jan 1, 2013:)

How full-year 2013 earnings estimates have changed since January 1, 2013:

Consumer Discretionary: +15%, +14% (1% upward revision in the last three weeks);

Consumer staples: +9.8%, +9.8% (no change, but a number of staples report this week);

Energy: +4.6%, +3.9%; (surprised a little by the bump);

Financials: +16.7%, +16.2% (upward revisions even with the Bank of America charge, which whacked the sector, pre-release);

Health Care: +1.7%, +7% (sharp downward revisions continue);

Industrials: +8.9%, +8.5% (not surprising with China growing again and Western Europe somewhat stable – expect this to continue)

Materials: +21.2%, +21.8% ( from “worst to first” in 2013);

Technology: +12.5%, +12.5% (surprised that it is stable given INTC, PC sector and Apple worries);

Telecom: +21.5%, +21.1% (VZ and T report this week);

Utilities: +0.8%, +0.9% ( not material)

SP 500 +10.5%, +10.9%

5 sectors have increased since 1/1/13, or roughly 53% of the SP 500 by market cap.  2 sectors have remained flat (staples and technology), or 28% of the SP 500, and 3 sectors have been revised lower, or 19% of the SP 500 market cap.

Per ThomsonReuters, 84 of the SP 500 companies report in the coming week, bringing the total to about 30% of the index. By the end of the month, about 75% of the benchmark will have reported.


Asset Class / Sector / Security updates/commentary:

  •  All eyes on Apple this week, as they report Wednesday night after the close. Has there ever been a more anticipated earnings report ? The drama is ridiculous. The headlines have turned uniformly negative, and this is still just a normal correction in the stock, per Bespoke, if you look at the last 12 years trading history, or since the stock started its run. We are going to devote the blog to Apple on Tuesday, for a special pre-earnings issue. (long AAPL)


  • Lennar (LEN) reported great earnings this week, and the stock could not definitively make headway. I thought Lennar management said on the call that housing starts averaged – over a 50-year period – 1.25 million starts per year. Using one graph, it looks like housing starts peaked at 1.75 million in 2006. That is a guesstimate on my part. Didn’t have time to research it thoroughly. I still think that housing-related stocks have completed their first major move and will consolidate as the comp’s get harder from here forward. Even with December’s Housing Starts blow-out number of 958,000 (annualized) this week, we are still below 1 million. (long LEN, TOL, HD)


  • Although the SP 500 is overbought, it made a new multi-year high this week, led by the financials and industrials. We are still working through the individual earnings reports. Financial sector earnings look great. Even financial sector revenues look good at +6.9% for q4 ’12 per the ThomsonReuters data. This has been the problem with the financial sector since ’09 market low, i.e the lack of meaningful revenue growth. However,  q4 ’12 financial sector revenues look very strong.


  • Verizon is expected to get the telco sector earnings season kicked-off Tuesday morning with consensus expecting $0.52 in eps on $29.73 bl per Briefing.com. Earnings are expected to be flat y/y, on 4.5% revenue growth. Everyone will likely focus on smartphone activations given the AAPL report Wednesday night. Interesting that telco at just 3% – 4% of the S&P 500 is expecting 20% earnings growth in 2013, the highest expected growth of all SP 500 sectors. Verizon (VZ) and AT&T are oversold but not dramatically so – would love to see them correct another 10%. (none)


  •  IBM is a key earnings report after the bell Tuesday night. The stock was pounded after the October earnings report even though estimates changed little. Big Blue was up just 6% in 2012, underperforming the SP 500 by a wide margin. (Long IBM).


  • We were clearly wrong on Intel Thursday night. Thought the stock was washed out from a sentiment perspective. Shorts jumped it like an oasis in the desert shortly after earnings. INTC is struggling to hold its 50-day m/a and its longer-term 200-week m/a. Down 6.5% on Friday alone. GE was better. (Long more INTC than GE.)


  • Goldman Sachs (GS) had a big week and a nice breakout. Bob Lang over at www.explosiveoptions.net was featured on Cramer’s “Mad Money” three weeks ago, and Bob called GS near $127. Nice call by Bob and Jim both. We’ve been long it forever, and averaged our cost basis down between $100 – $120. (Long GS)


  •  Our sleeper stock this week is Sandisk (SNDK) – they report Wednesday night with Apple. Here is our earnings preview. SNDK could see a number of tailwinds, particularly in the first half of 2013. Earnings really collapsed in the 2nd and 3rd quarters of 2012, thus the 2013 comparisons are very easy. (Long SNDK)


  • Jeff Miller of “A Dash of Insight” – great blogger: we are stealing a page from his playbook and telling readers to watch the 10-year Treasury yield. That is our key market tell. The 10-year Treasury closed at 1.87% 0n 12/31/11 and at 1.75% on 12/31/12. Treasuries are due for a negative year in terms of return. Although I dont have the data, I can only assume the rolling 10-year return on the longer end of the Treasury yield curve is similar to what the Nasdaq looked like in the late 1990’s.


  • Housing and auto’s were two sectors that led the US of our most recessions in the 20th Century. It is interesting that they have lagged this recovery. One educated guess is that housing cycles for the post WW II period were driven by interest rates, rather than credit, and supply / demand, which we can assume was the primary driver of the 2008 collapse. Banks are a tangential way to play the housing recovery in our opinion.


  • A Barron’s Rountable particpant noted this week that the “earnings yield” on the SP 500 is now higher than the yield on the junk bond market, which is a historical first. No question high-yield is overheated, but will it meaningfully correct with the economy improving ? It seems that the “forecasting error” this year would be to see a stronger-than-expected economic recovery and faster economic growth, which would help credit spreads in corporate high yield.


  •  The credit rating agency Moody’s (MCO) still has a lot of talent at the firm, even though SRO’s were villified after the 2008 Great Recession. Christine Padgett publishes or edits a “Leveraged Finance” monthly for Moodys that is a good read, and which talks about covenant quality in the high yield market, in its latest January 7th issue. In November, 2012, “covenant quality” reached a “record low” for the index, although said index is just under 2 years old. This means more issuance is becoming “issuer-friendly” and is less secure for the lender. Granted, everyone is selling “the sky is falling” these days, but this bears watching


  • The high yield bond market returned 15% – 16% in 2012, and per the Moody’s piece, is expected to return 8% in 2013, which is still a pretty good return, although credit spreads have narrowed to under 500 bp’s in Jan, ’13. We remain overweight high yield but have gradually started to trim exposure to the asset class, with the emphasis on gradual. Moody’s “Liquidity Stress Index” is at very low levels, indicating there is ample liquidity in the high yield market. Moody’s expects the corporate default rate to remain below 3% through 2013.


  •  The stock market pattern in 2010, 2011 and 2012, was to rally into March – April, and then sell off hard. 2012’s was the smallest correction. 2010 and 2011 corrections were Greece and European / Sovereign debt driven. When “everyone” recognizes the pattern, it tends to change. Will 2013 be the same as the last 3 years ?


  • To conclude, the SP 500 remains overbought short-term, but Q4 ’12 earnings are not the issue. We remain overweight financials, technology and industrials.  The action in financials remains pretty healthy. Hard to think we correct too much with Goldman Sachs (GS) and Morgan Stanley (MS) trading through technical resistance as they have.  JP Morgan earned $5.20 in 2012 despite the London Whale issues, so the stock is still trading at 9(x) last year’s earnings for expected growth of just 3% this year and 8% in 2014. If you think JPM will grow earnings better than 3% in 2013, the stock is still cheap.


  • If you get anything from this blog, shoot me an email at brianglm@trinityasset.com and let me know. I’m thinking about a career change – buying a bar. (kidding… maybe not.)

All eyes on Apple this week. We think SNDK could be a pleasant surprise (although the stock’s bounce could have already discounted some of this) and IBM has more reward than risk here.

Thanks for reading and stopping by.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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