11.1.14: SP 500 Earnings Update: Technology and Industrial Sectors Looking Better, Avoid Energy


Per Thomson Reuter’s This Week in Earnings, the forward 4-quarter estimate fell this past week to $127.04 from last week’s $127.54.

All metrics as of 10/31/14:

SP 500 close: 2,018.05

P.E ratio: 15.9(x)

PEG ratio: 2.02(x), the PEG’s highest level since the week ended April 18, ’14, when the PEG was 2.25(x);

SP 500 Earnings Yield: 6.30%

Growth rate of forward estimate: 7.87% down from last week’s 9.11%.

Analysis / commentary: The decline in the “forward 4-quarter growth rate above to 7.87% from last week’s 9.11%, is an important story, but the $64,000 question remains, “How much of the decline in the forward growth rate, is Energy-sector related ?”

Here (FCearningsRTofCHANGE) is a spreadsheet we started working on this summer, which measures the “rate of change” of the growth rates of the SP 500 sector estimates as published by Thomson Reuters. The point of this is to try and isolate sectors and changes in the growth rates both to identify opportunities and risks. A couple of items that are of interest to us:

1.) 4th quarter, 2014 Energy sector earnings estimates (q4 ’14 by sector is line 1 – 20 on the spreadsheet) have declined dramatically – 1,250 basis points – in just the last 30 days from an expected +6.6% growth rate as of October 1, to an expected decline in sector earnings growth of -5.9%;

2.) Interesting that q3 ’14 data, with about 2/3rd’s of the SP 500 having reported, shows an improvement in Energy sector earnings growth. Enjoy it now, it will get worse from here;

3.) Here is the change in Energy sector estimates by quarter, from October 1 to October 31, 2014:

q3 ’14 change: +250 bp improvement (actual results, better-than-expected)

q4 ’14 change: -1,250 bp decline

q1 ’15 change: -1,120 bp decline

q2 ’15: -1,030 bp decline

q3 ’15: -1,290 bp decline

Those are sharp declines in percentage growth rates for the Energy sector, and they represent a significant drag on the SP 500 overall earnings growth.

The two sectors that continue to look good in terms of full-year 2014 earnings growth are Technology, Industrials, and Utilities:

Technology: +10.7% as of 10/31, +10.4% as of October 1;

Industrials: +10% as of 10/31, +9.5% as of October 1;

Utilities: +8% as of 10/31, +7.5% as of October 1;

Note on the spreadsheet for q4 ’14 how the “rate of change” for Industrials and Technology is slowing. That is a good sign. Typically during the calendar quarter, estimates get revised lower in the final 3 months, until we start getting those earnings reports. The fact that the downward revisions are slowing down for these two sectors is a positive sign (at east for right now).

Health Care has been flat in terms of full-year 2014 expected earnings growth, 15.2% today vs 15.2% as of October 1.

This is a lot of number-crunching and navel-gazing. Bottom line is avoid Energy (for now) and focus on Technology and Industrial sectors for opportunity.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager







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