3.28.14: Consumer Discretionary Lagging – What do Sector Earnings Estimates Show ?

Consumer Discretionary has long been a market leadership sector, representing about 12% of the SP 500 by market cap.

The appeal for institutional investors is obvious: you get to own some of the world’s great brands (and growth stocks), like Amazon (AMZN), Starbuck’s (SBUX) and Whole Foods (WFM), granted at what reasonable investors can deem to be at pricey valuations.

The purpose of today’s blog post is to take a look at the sectors earnings growth, and compare it to last year’s as this time, just to see what the numbers tell us. (I have yet to look at any of the data yet, so what I write here for readers isn’t filtered or biased in any way, shape or form). In other words, q1 ’13 will be compared to q1 ’14’s progression as well as see how 2013 ended up relative to expectations for 2013 at this time last year.

First a bit of history: Here is the year-over-year earnings growth by quarter since q2 ’12 for Consumer Discretionary, as well as the comparative SP 500 earnings growth (first column is y/y Cons Disc earnings growth, and the 2nd column is y/y SP 500 earnings growth):

q4 ’14: +17.3%, +11% (est – with exception of q3 ’14, Cons Disc expected to outperform SP 500 in terms of y/y earnings growth all year)

q3 ’14: +3.7%, +11.4% (est – not sure what is expected in q3 ’14)

q2 ’14: +10.9%, +8.4% (est)

q4 ’13: +8.4%, +9.8% (this is an estimate, with just one week left in the qtr, so consider it solid enough)

q3 ’13: +22.6%, +6%

q2 ’13: +7.5%, +4.9%

q1 ’13: +8.4%, +5.4%

q4 ’12: +9.8%, +6.3%

q3 ’12: +12.3%, +0.01%

The reader can quickly see that for the first time in 6 quarters, Consumer Discretionary generated lower y/y earnings growth in q4 ’13, than the SP 500.

Since we are about to get q1 ’14 earnings reports, starting by April 10th, how does the q1 ’14 Consumer Discretionary estimate compare to q1 ’13’s change over the first 3 months of the year ?

Last year, on March 28, 2013, the expected earnings growth for q1 ’13 for Consumer Discretionary had fallen from an estimate of 13% on January 1, 2013 to +7.9% or a 40% decline in the first 3 months of last year.

Using March 21, 2014, data, Consumer Discretionary estimates for q1 ’14 have fallen from +14.5% to last Friday’s 6.4% or 55% erosion in the growth estimate in the first 3 months of this year.

(What I find interesting about this is that even with a normal year like 2013, Consumer Discretionary estimates eroded 40% from January 1 to roughly March 31, 2013. This year in a winter-plagued, ice-cold Midwest, a very atypical winter for most of the US, the sector growth estimate declined 55%.)

At this point in 2013, the consensus Thomson Reuters sector estimate was looking for +12.7% growth, while the actual number, with just one week left in q4 ’13 reporting indicates Consumer Discretionary grew 10% for 2013 as a whole last year.

For 2014, with 3 months nearly completed, Consumer Discretionary is expected to grow 10% for full-year ’14, still slightly better than the SP 500’s +8.6% as of last Friday, 3/21.

Performance:

Using the XLY, which is the SPDR Consumer Discretionary ETF, the XLY rose approximately 14.5% in 2013’s q1 ’13, and rose roughly 44% in calendar ’13 , not including the dividend,

Through q1 ’14, the XLY has fallen 3.5% year-to-date, also excluding the dividend.

Looking at the current holdings of the XLY, the ETF is “media heavy” with Comcast, and Walt Disney at 12% – 13% of the trust (top two names by weighting) and Amazon, with a 6% weighting as well, coming in at the 3rd highest weighting.

Starbuck’s is the 10th largest weighting at 2.78% of the XLY.

Analysis/Conclusion: Personally, I think the beat-down in Consumer Discretionary is too severe year-to-date. How you choose to play it is up to you. We were never big media investors, and instead own Amazon (AMZN) and Home Depot (HD) which are two more of the top 5 weightings in the XLY.  As a broad macro theme, the job market is likely to continue to improve, so “consumption” which is 2/3rds of GDP, should continue to grow nicely. The sector is battling not just the tough winter but AMZN’s crushing of EPS thanks to the distribution center buildout. (Long AMZN, HD, SBUX.)

One ammendation: Whole Foods (WFM) which we are long and bought more of this week, may actually be considered a Consumer Staple, although we’ve always thought of it as a Consumer Discretionary stock given the “whole paycheck” nickname. WFM is thought to be at the higher end of the retail grocery price range, although my own shopping is similar in total spend, whether at WFM or a more traditional retail grocer. (Long WFM and bought more this week.)

Stay with Consumer Discretionary. This too shall pass.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

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