With Wal-Mart’s quarterly earnings report this week, it is thought the “official” q4 ’14 earnings season is now concluded.
With retail being the prime sector reporting in February, with a January quarter end, investors start to get a feel for how 2015 has started.
By the numbers, the 4th quarter of 2014, in terms of SP 500 earnings was pretty strong: of the 440-odd companies that have reported, q4 ’14 earnings growth was 6.6% according to Thomson Reuters, and that includes the roughly 2% drag from the 21% y/y decline from the Energy sector.
q4 ’14 revenue growth was 1.9%, a little better than expected at the start of the quarter.
Healthcare led the SP 500 in terms of y/y earnings growth at 23%, while Energy was the worst at -21.7%. (No surprises there.)
Per Briefing.com’s late Friday night earnings commentary, excluding the Energy sector, SP 500 earnings rose +7.2% in q4 ’14 ( i thought it was closer to 8% – 8.5%) and if Apple is excluded, SP 500 earnings are up just 2%, since AAPL is accounting for half of the SP 500’s earnings growth per Briefing. (I suppose if both Energy and Apple were excluded from the q4 ’14 results, SP 500 earnings growth would be roughly 4% – 4.5%, a little less than the high single digit operating level we’ve seen.)
(Long WMT, AAPL and now a smidge of Energy exposure)
Here are the Sp 500 metrics for the week ending February 20, 2015:
Forward 4-quarter estimate: $120.52, down from last week’s $120.83
PE ratio: 17.5(x)
PEG ratio: 13.05(x) (adding back the 5.3% Energy drag for 2015, the adjusted PEG is just over 2(x).
SP 500 earnings yield: 5.71%
Year-over-year growth rate of forward estimate: +1.34%, down from last week’s +1.35%
Analysis / conclusion: The problem with selectively excluding companies or sectors from the SP 500 earnings growth analysis is that – well – the analysis becomes arbitrary and somewhat biased. In early 2012, Thomson Reuters started excluding AAPL’s earnings when it was growing revenues and earnings 70% y/y. I am giving readers expected growth “ex-Energy” since the Energy sector is having such a profound influence on the rest of the SP 500. For full-year 2015, per the current estimate, Energy earnings are expected to decline a whopping 53% and if we estimate Energy’s market cap and earnings weight at 10%, then that is a 5.3% drag on the SP 500, which can only be considered material.
From an earnings perspective, as of today, I am assuming the SP 500 will grow operating earnings 8% – 10% in 2015, with the wildcards being interest rates and tax reform. Some kind of a tax bill or tax reform that allows US companies to repatriate cash in a shareholder-friendly manner, and 2015 earnings could spike appreciably from share repurchases.
At present, I see little risk of the “earnings recession”, or an economic recession.
This isn’t an SP 500 that is all about P/E expansion either: I think the market action is driven by the slow, steady march higher of SP 500 earnings.
Thanks for reading and stopping by. I am constantly trying to broaden my sources for earnings-related info. Factset does a great job as does some other publishers, which I am going to start incorporating into the weekly analysis.
Our largest client overweight remains Technology, and then Financials as we move through the first quarter of 2015.
This coming week, we hear from Home Depot (HD) and Lowes (LOW), the two do-it-yourself home improvement retailers, Hewlett-Packard (HPQ) as they await the company split scheduled to happen later this summer, Toll Brothers (TOL), the high-end homebuilder, and JC Penney (JCP), a retail turnaround story. Our largest client position of the names mentioned is HPQ, which is trading at just 4.5(x) cash-flow, and smaller positions in HD, LOW, and TOL. I do think HD and LOW are overvalued on a cash-flow basis. (Check www.seekingalpha.com for my earnings previews.)