10.5.14: More on SP 500 Earnings and a Look at Revenue Estimates by Sector

Our primary source of earnings data is Thomson Reuters, both the weekly “This Week in Earnings” and the intermittent emails, as well as Factset’s “Earnings Insight”. “This Week in Earnings” is typically published by Thomson Reuters after the market closes on Friday afternoon each week, while Factset’s “Earnings Insight” is published typically before the market closes each Friday.

The great thing about these publications is that both are free to readers.

A third and developing source of earnings data is Bespoke, which does require a subscription. From looking at Bespoke’s data, it looks as if they are reading the weekly Factset report, since Factset typically (at least in my experience of comparing the two) has lower growth rates when looking at SP 500 and sector earnings growth rates, and slightly different dollar estimates.

Many on Wall Street make fun of CNBC and the mainstream financial media, and I do think the mainstream media is as vacuous an enterprise as there is, but I also think there is always an endeavor to “get it right” even in a 30-second or 1-minute sound bite.

For analyzing macro and micro earnings data, a discerning investor needs to consider:

1.) Are the macro estimates top-down or bottom-up ? (Bottom-up estimates for the SP 500 are usually higher, but the top-down is what is typically reported.)

2.) Are the estimates GAAP or non-GAAP (i.e. operating) ? (My impression is Thomson uses “operating” or whatever the analyst’s use which is typically operating, while Factset uses reported since Factset estimates typically come in lower than T/R.)

3.) For company-specific estimates, how many analysts have submitted an EPS or revenue estimate ? ( I typically don’t like to use a company EPS or revenue estimate until 5 – 7 analysts have modeled the company.)

4.) For company or sector growth rates are the revisions upward or downward and to what degree, and how do the sector revisions fit with the direction of the overall SP 500 growth rate ? (Starting in late q3 ’12 and early q4 ’12, even though EPS estimates were falling overall for the SP 500 for expected 2013 EPS growth, Financial sectors estimates were stable to higher. It isn’t just absolute revisions that matter, but severity and stability.)

5.) Although much is often heard about SP 500 earnings, what about revenue trends by sector ?

These issues are never vetted by the financial media anchors, and instead, a complex and opaque topic is often left to quick sound bites that fit the market view of those being interviewed.

Here is our latest update on q2 ’14 revenues by sector using Thomson Reuters data. The spreadsheet is my own.


Note the change in revenue growth by sector from q1 ’14 to q2 ’14. Did weather in q1 ’14 make that much of a difference ?

Also note that q2 ’14 revenues didn’t change much within the quarter, as SP 500 companies reported results. (Readers will see a q3 ’14 SP 500 expected revenue growth estimate on Monday, 10/6/14.)

It isn’t surprising that biotech is doing so well. Gilead is smoking, and biotech, mainly Gilead is driving a lot of Healthcare revenue growth. (Not long any biotech.)


Finally, Thomson Reuters notes the impact the Financial sector charges by Bank of America in q3 ’14 and JP Morgan’s easy compare from q3 ’13 are having on both the Financial sector and the SP 500 in general. If Bank of America’s expected q3 ’14 charge is eliminated and and the old estimate of $0.32 is used, expected SP 500 earnings growth for Financials would be +20% and the SP 500 expected growth rate for q3 ’14 would be +8.1%. However if JP Morgan’s charge from q3 ’14 is reinstated to an operating basis, then y/y growth for Financials falls to -2.9% and the SP 500 expected growth falls to +4.1%. (Long BAC and JPM.)

My point is if both JP Morgan and BAC 2008-mortgage related charges are excluded and the Financial sector is looked at on an “operating EPS basis” then I think the SP 500 starts the quarter at closer to a 6% expected y/y earnings grow rate, which is typically revised upward as analysts start to get results.

Factset notes that the q3 ’14 “bottom-up” SP 500 EPS estimated growth rate dropped 4.2% from July 1 to September 30th, more than the 4-quarter average of 3.2%.

Thomson Reuters notes that with the closing of the Nokia acquisition, Microsoft’s q3 ’14 (fiscal q1 ’15) estimate fell from $0.64 to $0.49 per share. Without the MSFT drop, Tech is expected to show a +9.9% q3 ’14 earnings growth rate. (Long MSFT)

The point being that discussing earnings can be a complex topic.

I like to look at SP 500 earnings estimates over a quarter, and note the changes amongst and between the sectors, and then look at the full year expected earnings growth and see if those estimates are being revised as well.

I particularly like to look at the change in the expected growth in the SP 500 earnings as a whole, and then compare the sector changes, to get a feel for relative strength and weakness.

My impression is that over the last few years (since 2011), while there has been short-term volatility, the longer-term growth has been steadily inching higher from mid to high-single-digits.

More to come early this week, before the earnings season kicks off for good.

Thanks for reading. Hope this sheds some light on an involved subject.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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