8.3.14: SP 500 Earnings Update: Q3 and Q4 ’14 Earnings Estimates Continue to Impress


Per Thomson Reuters’s, “This Week in Earnings” the forward 4-quarter EPS estimate fell $.07 this week to $127.00 even, from $127.07 the past two weeks.

The forward p.e ratio as of Friday, August 1, 2014 is 15.2(x).

The PEG ratio this week fell to 1.58(x) from last week’s 1.65(x). (We recently upgraded our desktop PC and converted all our Microsoft applications to Office 365. The conversion, which occurred around July 11th, altered some of our formula’s in the spreadsheet (and i’m not sure if it was my error, or something about the conversion itself that altered the formula’s), but one of our calculations ended up picking up the next column over as the numerator on eth PEG calculation since July 11th. Here are the correct PEG ratio’s for the last 4 weeks in the first column, and this is what we initially reported on the blog, until the error was caught:)

Week of 8/1: 1.58 vs 1.58 (correct formula)

Week of 7/25: 1.65 vs 1.76

Week of 7/18: 1.76 vs 1.82

Week of 7/11: 1.82 vs 1.82

Thanks to the 2.70% decline in the SP 500 this week, the earnings yield on the SP 500 rose to 6.6%, versus last week’s 6.42%.

Here is the very pleasant surprise: the year-over-year growth rate of forward earnings has started to accelerate: this past week’s y/y growth rate was 9.58%. Because we had formulaic errors with the growth rate calculation, our previous calculation was actually understating the improvement in the y/y growth rate. Here is the last 4 week’s actual y/y growth rate versus what we originally reported:

Week of 8/1/14: 9.58% vs 9.58% (correct formula and calculation)

Week of 7/25/14: 9.41% vs 8.85%

Week of 7/18/14: 8.57% vs 8.85% (of all the metrics recalculated, only the week of July 18th was lower with correct formula)

Week of 7/11/14: 8.53% vs 8.51%

The point being that the y/y growth rate has actually been understated the last few weeks.

The actual y/y growth rate in the forward 4-quarter estimate as of 8/1/14 (as measured against 8/2/13’s forward estimate of $115.96) is now 9.5%, and more importantly, keeps growing. (Whether we carry out the calculation to 1, 2 or 3 decimal places is subject to debate. I prefer two decimal points if only to get the illusion of precision. Remember too, earnings can be restated historically. )

Analysis / commentary: The high yield bond market really took a beating this week, which we gave a heads up on last week here. The auto’s like Ford (F) and GM (GM) look toppy, crude oil is getting hammered, and the Energy complex took a beating this week. The Industrial’s also took a beating this week and despite reporting good earnings, the stocks have gotten hammered, so the cyclical, “return to global growth” sectors are correcting for sure. (Long F, GM, underweight Energy, and thinking about lifting our neutral weight in Industrial’s to an overweight.)

However, given the earnings we are seeing and the trends in that forward growth rate, we don’t think this is a “recession, earnings-related” longer-term issue. Whatever the problem with this market in other words, it isn’t earnings-related.

We are keeping an eye on q3 and ‘q4 ’14 earnings estimates and neither quarter is seeing the negative revisions that have been typical the last 2 -3 years. That is a very good sign. With roughly 378 of the SP 500 having reported q2 ’14 results already, revenue growth has crept up to 4.3% for q2 ’14 and the y/y SP 500 earnings growth (per ThomsonReuters) ex Citigroup is now 9.4%. Good news for sure.

Bottom-line in terms of a short and sweet summary, as of the earnings data and trends today, the earnings picture is improving.

We think this stock market correction was badly needed and expect it to be temporary, but will adjust quickly if the duration or severity is worse than expected.

I have a 2-hour ride before a client meeting in Rockford, Illinois so this weekend’s update has to be cut short.

Thanks for reading and stopping by. There are a lot of blogs and tweets competing for your eyeballs, and I’m grateful you are taking the time to read ours and hope you find www.fundamentalis.com insightful.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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