10.8.14: Final Look at Q3 ’14 Earnings. Financial Sector Adjustments on Operating Basis

By the time most readers might get to reading this, the Fed’s September meeting minutes will be released (due in 75 minutes) and Alcoa will have released its q3 ’14 financial results, due after the bell tonight.

The market sentiment seems to think that q3 ’14 will be quite bad thanks to the US dollar and a weak European economy.

Industrial numbers have been taken down probably thanks as much to Europe as currency. However the Thomson Reuters data has shown little overall change in the expected q3 ’14 Industrial sector growth since Jan 1 ’14. At that time Industrial’s were expected to grow +9.2% and as of Friday, 10/3, that expected growth was +8.3%, i.e. not even a full 100 bp’s reduction. Revenue growth has been firm as well. That being said, let’s see what the Industrial numbers look like.

Financials: here is where the story gets interesting: Greg Harrison of Thomson Reuters noted this past weekend that if we mutually exclude, JP Morgan’s q3 ’13 charge and Bank of America’s expected q3 ’14 charge individually, we get different growth rates for the Financial’s and the SP 500. My question to Greg was, “what if exclude both charges and look at just the operating earnings for JPM’s q3 ’13 and BAC’s q3 ’14, where does that leave the numbers for the Financial sector as a whole and how does that change the SP 500’s expected q3 ’14 earnings growth rate ?”

The answer is that if look at operating numbers for Financials (excluding both JPM and BAC’s charges), the sector is expected to grow 4.5% for q3 ’14 and the SP 500 is expected to grow +5.3%. (Long JPM and BAC)

Further complicating q3 ’14 estimates (per Factset) Consumer Discretionary is being impacted by the Pulte EPS compare ($0.36 this quarter vs the $5.42 in last year’s same quarter) so if the Pulte compare was excluded, Consumer Discretionary’s year-over-year earnings growth would be +1.9%.

Typically when the quarter starts getting reported and analysts see results, numbers get lifted. My experience over the last two years is that the average quarterly increase in the earnings growth number from the start of the reporting period to the end, is usually 3% or more.

While Alcoa will set the tone in 3 hours, I still think q3 ’14 SP 500 earnings growth will come in at a pretty healthy rate, at least 8% – maybe as high as 10%.

Nothing has changed that much in the last 3 months, of a material nature.

Thanks for reading. Given consensus EPS and revenue estimates, we expect a good quarter from Alcoa (AA) tonight.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



Leave a Reply