2016 Expected Energy Sector Earnings Growth Just 3%

Per Thomson Reuters data this week, with 172 companies having reported Q3 ’15 earnings, the EPS beat rate is strong at 70%, while the revenue beat rate remains tepid at 41%.

The stat that jumped out this week, despite all the positive earnings news from large-cap Technology and Consumer Discretionary, was the continued deceleration in Energy sector estimates for 2016.

Utilizing the full-year 2016 earnings table provided by Thomson-Reuters as of Friday, October 23rd, 2015, the Energy sector is expected to grow earnings just 2.7% for full-year 2016, and down from the expected growth rate of 9.8% as of October 1, 2015.

Factset is estimating 2016’s Energy sector earnings growth at a slightly higher rate of 4.1% as of October 23rd, down from an expected 9% as of September 30, 2015.

Moving through Q4 ’15, I would like to see the Energy sector growth rate for 2016 start to stabilize.

Crude oil remains above its Summer ’15 low of $38, although WTI and Brent were both weak this past week, and Energy as a sector was down 1% this past five days.

Exxon-Mobil (XOM) and Chevron (CVX) both report on Friday morning, October 30, 2015. Both of the integrated, international oil giants comprise the lion’s share of the Energy ETF’s, XLE, at 36%, and IYE, at 40%.

By the numbers: 

The “forward 4-quarter” estimate this week was $124.39, down from $125.14 last week.

The P.E ratio on the forward estimate as of Friday, October 23rd’s close was 16.7(x).

The PEG ratio remains negative.

The “SP 500 earnings yield” fell this week to 5.99%, down from last week’s 6.16%

The year-over-year growth rate on the forward estimate was -1.88%, versus last week’s -2.68%. ( I do think this y/y growth rate starts to improve over the next 3 – 4 weeks, and will eventually turn positive.)

Conclusion: Our blog post of October 11th, 2015, found here, which was mainly a rehash of Bespoke’s weekly Bespoke Report (at least the section relating to SP 500 earnings) was pretty accurate in terms of highlighting the market’s response to earnings pessimism. As long as the Street continues to be pessimistic heading into each earnings season, that should portend favorably for the market as a whole.

The goal of this blog is not to reinvent the wheel every week, but rather aggregate earnings-related commentary and pick out the most relevant and salient each week. Bespoke’s piece on “earnings pessimism” the week of October 11th, was perfectly timed in my opinion.

Our top 2 sector overweight’s remain Financials, and Technology. Amazon is thought to be “high-tech” and for good reason given the continued disclosure around Amazon Web Services (AWS), but Amazon (the stock) is part of the Consumer Discretionary sector. GM and Ford hurt client performance the last two years, but we continued to lower the cost basis in both names, and GM reported a fantastic quarter this week (also a component of the Consumer Discretionary sector). (Long AMZN, GM, F.) Ford reports this coming week.

The reason today’s blog post began with Energy sector comments and math, was that there is not ONE bullish individual around the Energy sector that I have heard on CNBC or Bloomie the past few weeks. When Schlumberger reported their 3rd quarter on Friday, October 16th, the 2016 EPS estimate was reduced from $3.86 in mid-July 2015 to last week’s post Q3 ’15 earnings report, estimate of $3.10, and 2017 EPS was cut just as harshly. More importantly, SLB generated $1.7 billion in free-cash-flow in each of the first two quarters in 2015, not too shabby given the decline in the business. More importantly the stock rose 5% this past week, even after EPS and revenue estimates were cut sharply. (Long, SLB, HAL, XOM, XLE, IYE)

Every client account now has an Energy ETF and an Emerging Markets ETF as part of their portfolio. There is simply too much negative sentiment around the sectors, but I would like to see the 2016 Energy sector earnings growth estimate start to stabilize.

Apple (AAPL) report this coming week. Factset has a good analysis on the tough compare AAPL is facing with their calendar q4 ’14 iPhone launch. Technically, I’d like to see the stock regain its 200-day moving average near $121, and then trade above the 2015 highs of $135. The nagging feeling is that Apple might be losing some of its “market leadership” cachet. Apple and biotech were the market leaders the last few years, and now both are notably lagging.

 

 

 

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