10.25.14: SP 500 Weekly Earnings Update: Energy’s Drag Offset by Industrials, Technology, Health Care Earnings

Thomson Reuters’s TWIE data as of October 24, 2014:

New Forward 4-quarter estimate: $127.54 vs last week’s $129.34

Forward P.E ratio: 15.49(x)

PEG ratio: 1.69(x)

SP 500 Earnings yield: 6.49%

Forward 4-quarter growth rate: +9.11% versus last week’s 9.49%;

Analysis / commentary: the critical question this week to me seems to be how much of a drag is Energy having on the SP 500 earnings growth rate, versus the strength being seen in Industrial’s and Basic Materials ? Greg Harrison of Thomson Reuters notes the strength in Industrial earnings with this week’s missive. The data shows that of the Industrial’s that have reported, 86% of the companies have been above consensus estimates in terms of the EPS, while 5% have matched, and 8% (per T/R) have been below consensus.

Those are good numbers. However, a little less than half the SP 500 companies have reported q3 ’14 earnings, so we get a full slate again this week. Per Thomson’s data 37 of the total of 64 “Industrial” companies within the benchmark have reported q3 ’14 earnings.

For the Energy sector, 12 of the 43 total Energy companies have reported q3 ’14 earnings, and as you can imagine the estimates are coming down sharply.

Here is the change or trend in Energy sector earnings growth for the 3rd quarter and forward, per Thomson, as of Friday, Oct. 24th, and as of October 1:

q3 ’15: +7.9%, +12.7% (480 bp decline)

q2 ’15: -5.6%, +2.9% (850 basis point decline)

q1 ’15: -7.4%, +2.3% (970 basis point decline)

q4 ’14: -4.3%, +6.6% (1090 basis point decline in just 3 weeks)

q3 ’14: +1.7%, +6% (430 basis point decline)

As the reader should quickly discern, it LOOKS like, given the data from this week, Energy sector estimates will start to bottom with the q4 ’14 earnings reports to be released late Jan ’15.

I know how we are going to play the sector for clients over the next months, but for now, we aren’t buying any new Energy positions, and haven’t had any weighting for a few years.

Give this a little time to play out. OPEC plays the long game. You should too.

Now back to Industrials. Here is the change in Industrial sector earnings growth since October 1 ’14:

q3 ’15: +8.8%, +12.1%

q2 ’15: +8.7%, +9.5%

q1 ’15: +12.2%, +13.4%

q4 ’14: +11.6%, +12.4%

q3 ’14: +11.4%, +8.4%

While I’m a little worried about that sharp drop in q3 ’15 sector estimates, Industrial’s are expected to show better relative earnings growth than the SP 500 through q1 ’15.

Here is how the SP 500 as a whole has changed since 10/1/14 for q3 ’14, or the current quarter that is being reported:

Cons Disc: -4.5%, -3.2%

Cons Spls: +3.5%, +2.8%

Energy: +1.7%, +6%

Financials: +15.9%, +10.1%

Health Care: +13.1%, +11.4%

Industrials: +11.4%, +8.4%

Basic Mat: +17.3%, +14.7%

Technology: +8.6%, +6.5%

Telco: +4.1%, +7.5%

Utilities: -1.3%, +1%

SP 500: +7.6%, +6.4%

Here is the change in q4 ’14 sector growth estimates:

Cons Disc: +11.6%, +13.9%

Cons Spls: +2.6%, +4.5%

Energy: -4.3%, +6.6%

Financials: +8.7%, +10.4%

Health Care: +18.6%, +19.4%

Industrials: +11.6%, +12.4%

Basic Mat: +5.6%, +10%

Technology: +9.9%, +10.5%

Telco: +18.8%, +23.8%

Utilities: +8.8%, +7.7% (the only sector to show upward revisions since Oct 1 ’14)

SP 500: +8.8%, +11.2%

Our sector overweights remain Technology, Financials and Industrials, and Basic Mat. As a percentage of the SP 500 by market cap, Tech and Financials is about 35% of the index. Our underweights for some time have been Utilities, Energy, Telco. Im mixed on the Consumer Discretionary and Staples sectors.

This is a critical week for the SP 500. The SP 500 closed Friday at 1,964, while the 50-day moving average is at 1,966.

Listening to some good technicians, this 1,965 to 1,970 is critical to punch through. By the end of this coming week, another 160 of the SP 500 will have reported, for a total of 365, or roughly 73% of the index will have reported q3 ’14 earnings by Halloween morning.

Energy will be a drag on forward earnings, but strength will come from other sectors.

Despite Energy’s drag, I still think the SP 500 will show roughly 9% overall operating EPS growth for q3 ’14, when the q3 ’14 reporting season ends by the end of November ’14.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




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