Earnings update: Feb 9th, 2013: What the “Forward 4-quarter” SP 500 Estimate is Telling Us

According to ThomsonReuters, the “forward 4-quarter” earnings estimate for the SP 500 as of Friday, February 8th was $112.41, down slightly from last week’s $112.47 and down about $1.40 from the record $113.88 estimate in early January, 2013.

The p.e ratio on this forward estimate is 13.50(x) and the earnings yield as of Friday’s market close was 7.41%.

The year-over-year (y/y) growth rate in the forward estimate jumped to 5.91%.

Also according to ThomsonReuters, Q4 ’12 earnings are now expected to grow 5.2% (we thought that Q4 ’12 earnings would hit at least 5% growth) while revenue growth for q4 ’12 is now coming at +3.6%, both better than expected from where we started January ’13.

For Q1 ’13, which earnings we won’t start seeing until April 15th, expectations are for just 1.7% earnings growth for the SP 500, down from +4.3% as of Jan 1 ’13. The estimate cuts are a little harsher than I thought at this point in the quarter given how the the 4th quarters results have come in, but I think sequestration and the payroll tax reinstatement are tempering analyst expectations.

SP 500 earnings continue to be an unambigious positive for the market, and get little respect. Last year, in 2012, y/y earnings growth started out strong for the first two quarters of 2012, and then slowed for the last 2 quarters. This year, we expect the opposite to happen, as the Q1 ’13 and Q2 ’13 are the lowest growth y/y growth rates of the year and then as we head into the back of the year, and the sky doesnt fall, growth should re-accelerate.

Energy has been the pleasant surprise for Q4 ’12 earnings: there is an 8% earnings growth difference as analysts had projected -2% y/y growth for q4 ’12 as of Jan 1 ’13 and actual growth has been +6%.

Stat of the week:

A significant change occurred in the “forward 4-quarter earnings estimate” in August, as the y/y growth of the forward estimate started to increase once again, after stagnating for about 12 months. This isn’t discussed very much outside of Jeff Miller’s “A Dash of Insight” blog occasionally focusing on one-year earnings estimates. We think this is a key metric. In the 1980’s and 1990’s, when the market p.e ratio is expanding, it was an almost certainty that forward earnings will rise. Under those conditions, stock prices look to be leading earnings growth.

Today, and off the generational market low in March ’09, it looks as if earnings are leading stock prices. It is a “show me” market, as the SP 500 of 12(x) – 13(x) has been relatively constant for the last few years.

Here is the track of the SP 500 0ne-year forward earnings estimate and how it measures relative to the forward estimate 52 weeks prior. The first column is the actual dollar estimate, and the second column is the y/y growth rate:

Feb 8, 13: $112.41 +5.91%

Feb 2 ’13: $112.47 +5.86%

Jan 4’13: $113.88 +5.45%

Dec 7 ’12: $109.20 +4.54%

Nov 2’12: $110.58 +5.30%

Oct 5 ’12: $112.26 +4.17%

Sep 7 ’12: $108.02 +2.18%

Aug 3 ’12: $108.23 +1.08%

It was in early August, 2012 that the growth rate bottomed on a y/y basis, and has been moving steadily higher since, as the table details. The major media outlets miss this subtle distinction in their vacuous earnings commentary.

It was in early August 2012 that we (I think) got the “Death of Equities” article out of PIMCO and CNBC turned overwhelmingly pessimistic on the 2nd half of 2012. In both cases the conventional wisdom was not accurate.

Q1 ’13 earnings estimates again look too conservative. Energy estimates were much too conservative for Q4 ’12, as we now see with actual Q4 ’12 earnings reports.

Bank of America (BAC) took a $5.6 billion charge ($3.66 bl after-tax) in early January, and before their earnings release, for the FNMA settlement but ThomsonReuters has not detailed to what degree BAC hampered financial sector earnings. The Financial sector still grew earnings 15.4% in Q4 ’12 , despite the BAC charge, versus the SP 500’s 5.2%.

Conclusion: SP 500 forward earnings expectations continue to be conservative and tempered by the macro issues, but forward growth has begun to accelerate once again. However, the forward estimate for the SP 500 does remain at a record high. You don’t hear this often in the financial media.

Various and sundry commentary:

The SP 500 remains overbought, but as Todd Harrison of Minyanville once wrote, the market can correct through either time or price. The pattern since early 2010 as we enter the spring season is to see a nasty selloff. Whan that pattern gets predictable, it tends to surprise market participants. Each nasty daily selloff the last few weeks immediately gets a bid. We remain long a small position in the SH.

* Wal-Mart (WMT) reports earnings later than usual – Feb 21 ’13. Here is a chart from an excellent technician, Gary Morrow, http://twileshare.com/aeia. WMT closed the week above $71. The big worry around WMT is the payroll tax hike and its impact on their demographic, but that didnt seem to hurt Target (TGT) this week.  TGT was up over 2% this week alone. (Long WMT)

* Coca-Cola reports Tuesday morning, Feb 12th. Here is our earnings preview http://seekingalpha.com/article/1164401-coca-cola-earnings-preview-stable-boring-earnings-consistency-but-growth-needed, found on SeekingAlpha. We think fair value is closer to $45 on KO. As you might expect the stock rarely gets cheap. (Long KO)

* Our high yield sale now looks prescient, but suddenly everyone is bearish high yield. If earnings and the economy remain in “slow-growth” mode, then high yield should do ok, but what we did was re-allocate client accounts to the higher end of the high yield market. (Long PIMCO high-yield). Pulled off of StockTwits, Jeremy Stein, a new Fed Governor, thinks the junk bond market is overheated. http://www.federalreserve.gov/newsevents/speech/stein20130207a.htm. Here is his speech.

* Sequestration has really crushed the defense sector. We are going to spend the next few days doing a lot of spreadsheet work on Lockheed (LMT), Northrop (NOC) and a few others. I thought I read that Q4 GDP saw the lowest rate of defense spending in 40 years, and was a major reason Q4 ’12 GDP was so weak, relative to expectations. The Republicans and the political climate in Washington don’t seem to want to contest the defense cuts. There is a lot of bad news baked into these stocks;

* Ryan Detrick another excellent technician out of Cincinnati we follow: http://stocktwits.com/message/11935577. Has made some good calls of late. Next week is expiration week. Thinks the bullish trend continues, but then we could see some issues after expiration ends;

* Lots of earnings next week: Masco (MAS), Deere (DE), Coca-Cola (KO), Cisco (CSCO), Whole Foods (WFM) – we are going to try and pound out earnings previews on all.

* We bought some Google on Friday after the breakout to all-time highs. Then Friday after the close, Google Chairman Eric Schmidt announces he is selling almost half his stake in GOOG stock. We have a small position, but I could have done a better job of buying the stock.

* Alcoa (AA) may finally be ready to break out here. More to come next week. Chart is looking interesting and the price of aluminum on the LME has been in an uptrend.

Summary: we are still long our SH and are awaiting a better pullback to put cash to work in client accounts, but this year looks like it could be another pleasant surprise to the upside. “As January goes, so goes the market” is one old investing maxim, which means 2013 is on track for a good year. Some retail names are looking oversold like (Coach (COH) and Apple. We recently bought COH for the first time and havent yet sold a share of Apple.







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