For the remainder of the quarter, things will be likely quiet in terms of corporate earnings. Fed-Ex and Walgreen’s reported this morning, with FDX reversing higher on the day, and Walgreen’s down hard on heavy volume on what looks to be a puzzling acquisition of the UK’s Alliance Boots. (As a trade update, we took a 4% – 7% gain in Best Buy today (see earlier blog posts), and are now entirely out of the position.) We are still long WalMart.
As of last Friday, June 15th, the “forward 4-quarter” earnings estimate for the S&P 500 was $107.86, down $0.28 from the previous week (and leaving the S&P 500 trading at 12(x) earnings as of Monday’s open), and down about $1.11 for the past 4 weeks, all of which is pretty normal erosion as we approach the end of the quarter. Year over year growth has slowed to about 4% – 5%, consistent with the quarterly estimates at ThomsonReuters.
Corporate earnings are still at a record high, for the S&P 500, something not often mentioned in the financial press.
We hear from a homebuilder and Nike next week, both of which will give us a good look into their respective sectors.
In terms of revenue growth for the S&P 500, q1 ’12 growth is coming in around 5%, down from its peak of 7% – 8% in early ’11. Revenue growth doesn’t get near the press that S&P 500 earnings growth does, for obvious reasons, but it is still important.
The sectors with the best revenue growth for q1 ’12 have been technology (+9%), Industrials (+7%) and Consumer Staples (+7%). q1 ’12 earnings growth for the same sectors have been 15%, 18% and 5% respectively. The disconnect between revenue and earnings growth is still in financials: The Financial sector earnings growth is still expected to grow 25% for 2012, while revenue growth for the sector in q1 ’12 was just 1%.
The sectors with the best expected earnings growth for all of 2012: Financials (+25%), Consumer Discretionary (+11.9%), Industrials (+10%) and Techology (+7.4%).
As of last Friday, the S&P 500 as a whole is expecetd to grow earnings for calendar 2012 at 6.9%, which hasn’t changed much this past quarter, down from 8.5% on April 1.
Since Jan 1, and per ThomsonReuters, the sharpest downward revisions in earnings in terms of sectors have been in Utilities and Energy. Utilities continue to be a puzzle – we wouldnt own them here for clients given their overbought status on the charts, and the sector has had negative earnings for two years now, but the “ute’s” have been a sector and market leader the last two years.
To conclude, when July 1 rolls around, we would expect the “forward 4-quarter estimate” for the S&P 500 earnings to pop back near $110 per share, a new record. My friend Jeff Miller at “A Dash of Insight” is worried about earnings pre-announcements, but i dont think we will see them to any great degree. Managements have had absolutely no incentive to get aggressive on guidance off the ’08 – ’09 recession lows, and what’s more, have plenty of cash to repurchase stock, which may or may not be in current estimates anyway. (Some analysts include the repurchase plan in forward estimates and some don’t.) Also i do think the quality of corporate earnings is quite high, especially relative to the late 1990’s.
As a final point on earnings pre-announcements, given the mid single digit growth in q1, q2 and q3, expectations for earnings have been pulled way back. Earnings preannouncements if negative, are never a good thing but valuations are so temperate today, there isnt the downside risk like we saw in the 1990’s.
Here is how 2012 looks in terms of y/y expected earnings growth per ThomsonReuters:
q1 ’12 – +8.1% (closer to 5% if Apple is excluded)
q2 ’12 – +6.5% (down from 9% on April 1 but i think when mid August rolls around, q2 will wind up closer to 9%)
q3 ’12 – +3.7% (down from 5.3% as of April 1)
q4 ’12 – +14.5% (down from 16% on April 1 – bodes well for the typical q4 rally that we have seen the last 3 years)
We’ll update corporate earnings again after the July quarter starts and we get the new estimates to review.
Something occurred to me as this was being written: if we exclude Apple (AAPL) and financials for 2012 estimates, we are probably flat to little growth for the rest of the S&P 500. q1 ’12 eps growth for the S&P 500 was 8.1%, ex Apple was 5.7%.
Long NKE, (small long-term position), TOL and LEN, FDX