4.12.14: SP 500 Earnings Update: Q2 ’14 Earnings Looking Better

Per Thomson Reuter’s This Week in Earnings, the “forward 4-quarter” estimate for the SP 500 rose last week to $123.04, or $0.27 from last week’s $122.77.

The forward p.e is now 14.75(x) and the PEG ratio has slipped to 2.15(x).

The “earnings yield” on the SP 500 is 6.78%, the highest earnings yield on the SP 500 since 10/18/2013.

The year-over-year (y/y) growth rate on the SP 500 rose to 6.86%, also the highest since 12/27/13’s 7.45%.

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With the flood of q1 ’14 earnings expected to start this week, it is pretty clear that the slashing of earnings estimates for this quarter has followed the normal pattern and we should expect a pop in y/y growth for q1 ’14 as we roll through April and May ’14.

As of Friday, 4/11/14, the expected y/y growth for q1 ’14 earnings was expected at +0.9%, down from +6.5% as of January 1, 2014. Revenue growth is actually expected to come in a bit stronger at +2.7%. (Factset’s numbers are different, and lower. Factset is expecting an estimated earnings decline of -1.6% as of Friday, 4/11/14.)

It has been no surprise that q1 ’14 earnings growth for the SP 500 has been slashed to the bone, with consensus now expecting the lowest y/y growth since q3 ’12.

By the middle to end of May ’14, I expect actual q1 ’14 EPS growth to be in the 3% area.

Here is how q1 ’14 earnings growth look today, versus Jan 1 ’14:

Cons Disc: +5.6% +14.5%

Cons Spls: +3.2%, +9.3%

Energy: -6.1%, -0.4%

Fincl’s: -3%, +5.9%

Hlth Care: +3.8%, +5.8%

Industrials: -0.2%, +5%

Basic Mat: -0.8%, +9.8%

Technology: +2.4%, +7%

Telco: +13.4%, +14.2%

Utilities: +7.5%, +1.5%

SP 500: +0.9%, +6.5%

Ranked another way, from highest to lowest expected q1 ’14 earnings growth:

Telco: +13.4%

Ute’s: +7.5%

Consumer Disc: +5.6%

Hlth Care: +3.8%

Consumer Spls: +3.2%

Technology: +2.4%

SP 500 +0.9%

Industrials: -0.2%

Basic Mat: -0.8%

Fincl’s: -3%

Energy: -6%

q1 ’14 Revenue Growth estimates by Sector:

Hlth Care: +7.8%

Cons Disc: +4.5%

Ute’s: +3.5%

Telco: +3.2%

Tech: +2.8%

SP 500 +2.7%

Cons Spls: +2.5%

Basic Mat: +2.4%

Industrials: +1.5%

Energy: +0.6%

Financials: -1.2%

Q1 analysis / conclusions: it is little wonder Utilities and Telco were the best performing sectors in q1 ’14 given the numbers. Utilities saw sharp improvement (i.e. upward revisions to growth estimates) in expected earnings growth through q1 ’14, one of the only sectors to do so. The problem is Telco and Ute’s are just 3% of the SP 500 respectively. Financials and Technology are roughly 35% of the SP 500 respectively. I think the selling in Consumer Discretionary has been too severe. Basic Materials actually improved in terms of the y/y growth estimate between April 1, and Friday, April 11th, thanks to upward revisions in Alcoa’s EPS, post the April 8th earnings report. I do think Basic Mat is a safe-haven sector for this year.  We’d avoid the big banks, although we remain long BAC and JPM. JPM’s Friday, April 11th earnings report wasn’t pretty. We like the exchanges better than the big banks going forward.

So how is q2 ’14 looking today in terms of expected y/y earnings growth ? Here is the change between January 1 (2nd column), and April 11th (first column) for q2 ’14. Expect growth to be cut for the 2nd quarter as we move forward into the summer, but the important metrics are the change for each sector and the degree of upward / downward revisions in terms of the percentage change:

Basic Mat: +17.7%, +20% (Basic Mat bottomed in q2 ’13, with July ’13 earnings reports. Horrid numbers across the board)

Tech +12.9%, +12.8%

Telco: +12.7%, +12.9%

Energy: +12.7%, +19.1%

Cons Disc: +10%, +13%

SP 500: +8.2%, +9.7%

Industrials: +7.9%, +8.4%

Con Spls: +7.6%, +10.6%

Hlth Care: +6.2%, +5.2%

Utilities: +2.2%, +3.6%

Financials: +1.6%, +2.1%

Analysis/Conclusion: as q1 ’14 financial results get reported, all eyes will turn to q2 ’14, since SP 500 companies will guide to q2 ’14 and full-year 2014. I can tell already, q2 ’14’s absolute level of earnings growth today, will be at or above q1 ’14, given that we are starting q2 ’14 with a +8.2% expected growth rate. q2 ’14 earnings will get reduced as we move through the quarter, but I expect when we hit July 1, 2014, that we will see +3% – 4% growth rate to start the reporting season. Technology is a pleasant surprise as earnings growth estimates have been revised higher for q2 ’14 since Jan 1, as has Health Care. Technology, Health Care, Basic Materials, and Industrials, continue to look good through q2 ’14. We are staying away from Financials, at least in terms of new money, although we could be putting new money into exchanges.

Financial’s will have a tougher year in 2014, than they did in 2013.

Whatever happens to the major equity markets this year, it wont be earnings-related. Growth expectations are still pretty subdued: you have to remember, in the late 1990’s, Technology earnings were growing 40% quarter in and quarter out during the late 1990’s.

Expect some Consumer Discretionary stocks to pop with solid earnings reports and q2 guidance. That is the sector – which includes retail – that has the most upside to me.

This is a broad brush analysis of q1 and q2 ’14 earnings. We expect 54 SP 500 companies to report q1 ’14 earnings this week, at least 20 of which will be Financials.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

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