2.1.14: SP 500 Earnings: Q4 ’13 Earnings Growth is Strong, 2014 Remains Constant near 10%

Per ThomsonReuter’s “This Week in Earnings”, the forward 4-quarter EPS estimate for the SP 500 estimate fell $0.52 last week to $119.80, from the prior week’s $120.32.

The p.e ratio on the forward estimate ended the week at 14.88.

The PEG ratio ended the week at 2.28(x), still at the high end of the 6-month range, but becoming more reasonable.

The “earnings yield” on the SP 500 ended last week at 6.72%, same as the prior week.

Most importantly, the year-over-year growth rate of the forward estimate rose to 6.52%, the highest in the last 4 weeks, although still down from the 8% growth we saw in mid-December, ’13.

Commentary / analysis: the q4 ’13 earnings growth per ThomsonReuters is now 8.9%, year-over-year, closing in our 10% expectation for q4 ’13, which as late as last week, I wasn’t sure we would see. Last week, the year over year growth in q4 ’13 earnings was just 7.5%, so we saw a pretty big pop this week in “actual earnings growth”, not expected growth. In fact, despite the negative commentary now flooding financial media, q4 ’13 earnings are very strong and coming in better-than-expected.

Here is how q4 ’13 sector earnings growth has progressed by sector since Jan 1 ’14: (The first column is the sector, the 2nd column is the y/y earnings growth as of 1/31/14, and the 3rd column is the y/y earnings growth since 1/1/14):

Cons Disc: +6.9%, +9.1% (Retail reports in Feb ’14. Should be interesting. Sector has been mkt leader for years. No question now weak)

Cons Spls: +4.4%, +4.3% (Should see better performance in tougher mkt in ’14. Coca-Cola dead money for years.)

Energy: -9%, -7.5% (Still underweight the sector but looking for support areas to get long.)

Financials: +23.6%, +22.4% (Growth will slow in 2014, but Financials had great year in ’13, on no revenue growth)

Hlth Care: +9.3%, +5.9% (Continues to lead in ’14. We are staying with pharma, AMGN, and JNJ)

Industrials: +13.7%, +11.5% ( Led by Aero and Defense, should continue to trade well in ’14 if dollar doesn’t get very strong)

Materials: +20.7%, +6.8% (Huge upside in earnings led by Chemicals and US Steel. Long AA, X, FCX. Our sleeper sector for 2014. We have 5% weight in group, vs 3% SP 500 weight);

Technology: +8.2%, +5.7% (Even with AAPL drop of 8%, tech earnings are strong, valuations are reasonable. Facebook another homer for us in Jan ’14. Tech our largest overweight.)

Telco: +24,5%, +22.6% (We have no exposure. Defined benefit plans being marked-to-mkt now for T, VZ. SP should fold sector into tech sector)

Ute’s: -3.9%, -4.1% (no exposure, we think the interest rate rally has almost run its course. Never been a big ute investor either)

SP 500: +8.9%, +7.6%

Our expectation for 10% earnings growth for q4 ’13 for the SP 500 is looking realistic once again. But earnings growth predictions don’t make client’s money. With half the SP 500 having reported q4 ’13 earnings and provided analysts with some idea of 2014 guidance, the 2014 10% earnings growth estimate for the SP 500 hasn’t changed much. I do think corporate managements have very little reason to be aggressive about guidance and estimates, given the anti-business climate from Washington, and the lack of expected revenue growth within the SP 500 sector.

Going forward, while q4 ’13 earnings growth will be important, it is the full-year 2014 expectations we will zero in on. Since Jan ’14, the expected earnings growth for the SP 500 has fallen from 10.8% to 9.8% over 4 weeks, or roughly a 10% decline for the full year. Not one sector is expecting higher earnings growth for 2014, on 1/31/14, than on 1/1/14. All sectors have been revised lower slightly.

If there is one thing to take away from this week’s earnings update, focus on the technology sector results. John Butter’s Factset, published in his weekly Earnings Insight missive, a table that noted the Top 10 companies with the highest revenue growth for q4 13; all 10 were technology companies. Now this may not differ from any “any-time” analysis given the sector’s fundamentals and the way companies emerge and die within the tech life-cycle, but the SP 500 is a more “mature” index. You don’t get into the index, from being an overnight sensation.

Of the Top 10 companies, Facebook (FB) was #1, since MU’s revenues were impacted by the Elpida acquisition.

Thanks for reading.

More to come this weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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