Earnings update: January 27, 2013: Earnings Continue to Impress (except Apple) – stay with Financials

According to ThomsonReuters, the “foward 4-quarter” earnings this week stayed relatively stable at $113.16, versus $113.29 from last week, for year-over-year (y/y) growth of 6.24%.

The p.e ratio on this week’s earnings is 13.1(x).

By the end of this coming week, 2/3rd’s of the SP 500 will have reported Q4 ’12 financial results, with y/y growth in earnings so far coming in at 2.8%, and revenue growth coming in at 2.3%.

While these numbers don’t seem impressive, they are better than q3 ’12’s results, and at least according to our data, earnings growth will likely improve as we move through 2013.

Last week, we wrote briefly about the revenue growth the financial sector is seeing. I wanted to follow up with our “stat of the week” and show how financial sector revenues and earnings have progressed the last two years.

Stat of the Week

The first column is the y/y revenue growth for the financial sector, with the 2nd column y/y earnings growth. We used ThomsonReuters data as of the last week of each quarter to insure that all financials had reported their numbers. The exception is the 4th quarter of 2012, which we are in the process of hearing about currently. 4th quarter, ’12 financial results arent thought be materially concluded until mid-February ’13.

q4 ’12: +7%, +12.5%

q3 ’12: +0.5%, +7.4%

q2 ’12: +2%, +63% (influenced by BAC mortgage settlement lawsuit)

q1 ’12: +1%, +16.1% (again, BAC litltigation settlemet greatly boosted sector earnings growth)

q4 ’11: -4%, +4.9%

q3 ’11: +2%, +12.7%

q2 ’11: -1%, -28.7%

q1 ’11: +6%, +16%

q4 ’10: +4%, +100% (materially distorted SP 500 earnings growth for q4 ’10. Ex financials, SP 500 +11% for q4 ’10)

So what does this prove ? Q4 ’12 is showing the best revenue growth for financials since q1 ’11, and in my opinion is probably better quality growth and more “even” growth than we’ve seen since the March ’09 lows.

The other thing this proves is that Bank of America has a huge impact on the sector.

Here is how full-year 2013 earnings growth estimates have tracked for the financial sector over the last 4 months:

Jan 25 ’12: +16.6%

Jan 1 ’12: +16.2%

Oct 1’12: +12.6%

Financials could have a very good year in 2013, which likely means that the stock market is in for a decent year. The other aspect to this is that in my opinion, banks are a good proxy for the housing recovery: as housing improves, banks are a tangential way to play that improvement, at a lower p.e than homebuilders.

Our Apple and Intel calls weren’t very good in terms of q4 ’12 earnings. We remain long both. Amazon, Ford, Pfizer and Boeing report this week, and we remain long all 4 names in various weightings.

Here is where I think “intrinsic value” resides for the following names in our portfolios, based on a combination of our internal model, and Wall Street calculus:

* Ford (F) – low $20’s

* Amazon (AMZN) – $330 (wouldn’t touch the stock until $225)  http://seekingalpha.com/article/1135631-amazon-earnings-preview-revenue-momentum-continues-capex-growth-slowing?v=1359306227&source=tracking_notify. Here is our earnings preview. Like Herb Greenberg of CNBC used to say, the “hostile-o-meter” is running full tilt on AMZN.

* Apple (AAPL) – internal model values AAPL at $535. $425 is that huge bullish gap from Jan ’12.

* Intel (INTC) – think the stock trades to at least $27 as PC sales improve through 2013.

* Pfizer (PFE) – Zoetis IPO this week. Dr. Mark Schoenebaum of ISI says Merck has animal health unit too. Well-received Zoetis IPO could see MRK get a bid;

* Boeing (BA) – our sleeper stock of the week. Headline risk hasn’t really dented stock at all. Good sign…

* Sandisk (SNDK) – our best call last week. Stock getting fully valued. Think it is worth $50 conservatively.

* Another article on how overvalued high-yield is getting. Amazing the level of bears in credit and interest rates. Has not worked for 10 years. Still, we are always nervous about credit. (Overweight high yield.)

* 10-year Treasury ended week at 1.947%. The Spring ’12 high was a 2.4% yield on the 10-year. Over 2% and we could re-test that high tick of 2.40%.

To conclude, we expect SP 500 earnings to continue to improve as we move through the year. Financials finally seeing what we hope is sustainable revenue growth is a key positive.

Thanks for reading and stopping by. Want to keep it brief this week.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager





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