7.26.14: SP 500 Weekly Earnings Update: Solid q2 ’14 Earnings So Far, Stock Price Reaction Less So…

Per Thomson Reuters, the “forward 4-quarter” estimate for the SP 500 this past week was $127.07, exactly the same as past week.

The p.e on the forward estimate remained at 15.5(x), given the flat SP 500, which closed this week at 1,978.34 versus last week’s 1978.22.

The PEG ratio remains at 1.76(x).

The SP 500 “earnings yield” also remained flat at 6.42% versus last week’s 6.42%.

But, the year-over-year (y/y) growth rate on the forward estimate rose to 8.85% versus last week’s 8.51%.

Good news – that forward growth rate is so key (in my opinion).

Analysis / commentary: with a little less than half the SP 500 having reported q2 ’14 earnings, (229 companies per Thomson), the y/y growth rate in q2 ’14 earnings is +6.5%, or excluding the Citigroup charge, +8.2%. Personally, I would have been surprised with 10% earnings growth for q2 ’14, but I’m surprised we are at 8.2% with half the SP 500 having reported to date. The bulk of earnings will have been reported by mid-August ’14 or another 3 weeks from now.

By sector, here is how the actual earnings growth has evolved by sector, from what was estimated July 1, 2014. (The first column is the q2 ’14 earnings growth rate as of Friday, July 25th, the 2nd column is what was estimated for q2 ’14 on July 1, ’14):

Cons Disc: +4.4%, +6.2%

Cons Spls: +6.8%, +5.1%

Energy: +9.4%, +10.8%

Fincl’s: -8%, -2.6% (Citigroup charge was huge – a 1.7% reduction to the SP 500 per Thomson)

Hlth Care: +15.8%, +8.2%

Industrials: +11.3%, +8.3%

Basic Mat: +10.9%, +9%

Technology: +14.6%, +12.3%

Telco: +6.5%, +9.2%

Ute’s: -0.9%, -0.4%

SP 500: +6.5%, +6.2% (+8.2% currently if Citi’s 98% earnings decline is excluded)

Ranking from highest y/y earnings growth to lowest for q2 ’14:

Health Care: +15.8%

Technology: +14.6%

Industrials: +11.3%

Basic Mat: +10.9%

Energy: +9.4%

SP 500: +8.2%

Cons Spls: +6.8%

Telco: +6.5%

Cons Disc: +4.4%

Ute’s: -0.9%

Fincl’s: -8%

Consumer Discretionary (i.e. retail and auto’s) has been lagging all year. Financials are likely bottoming from an earnings perspective.

Health Care is still the king though, in terms of earnings growth. Expected full year 2014 earnings growth is still the tops in the SP 500 at +14.5%, and it has only improved as the calendar has unfolded, while full-year 2014 for the SP 500 is still expected in the 8.8% – 9% range. Pfizer (PFE) and Merck (MRK) report this week, along with Amgen (AMGN). We sold Merck and Amgen earlier in 2014. Still long PFE and Johnson & Johnson (JNJ). We would need to see a decent correction to biotech to add to the sector via an ETF. Amgen is the most reasonably-valued biotech name, but it is more “pharma-like” at this point. AMGN is trying to make the transition from a value company to a growth company. The huge run in AMGN from $50 in late 2011, to over $100 was driven by mediocre operating results and a huge share buyback plan. The Onyx acquisition was done for the pipeline. Share repo’s and the dividend increases will be more modest going forward. It isn’t as easy as it looks, to change a company from a capital-return driven theme to a growth company driven by revenue growth.

A number of Dow 30 stocks were down 3% – 5% this week, per our technical software provider, Worden.

Given the stock’s reaction to earnings reports this week, a lot of this news could be discounted in current prices already. Facebook (FB) reported a stellar quarter on just about every metric, and while the stock made a new all-time high, the reaction was tepid given the magnitude of the upside surprise. (Long FB)

Thanks for reading. We’ll have more before the weekend is out.

Trinity Asset management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




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