Weekly Earnings Update: Nice Start to Q2 ’15 Earnings – All Eyes on Apple and Old Tech This Week

The surprising aspect to the many Financial stocks that reported Q2 ’15 earnings this week, is that many beat on revenue, meaning actual revenue for the quarter, exceeded the Thomson Reuters consensus estimate for the quarter.

By the numbers:

Forward 4-quarter estimate:$125.26 as of 7/17, down from $125.60 last week.

P.E ratio:  17(x) again, a metric which has been remarkably consistent for some time.

PEG ratio: (-15) still negative because the forward 4-quarter growth rate has been negative.

SP 500 earnings yield: fell to 5.89% this week, after the SP 500’s 2.4% rally.

Forward 4-quarter growth rate: fell to -1.16% from last week’s -0.88%, and continues to be the one metric I fret about regarding the SP 500 prospects for forward returns and valuation. The best thing that could happen is that as we move through August and September and start lapping the higher crude and commodity prices from ’14, the forward 4-quarter estimates start to be positive once again.

Analysis / conclusion:¬†Since starting this earnings-related blog several years ago, I’ve noted several times that the “forward 4-quarter estimate” didn’t start to turn lower until July 23rd, 2008, almost nine months after the SP 500 peaked in October ’07. Maybe the forward estimate isn’t the leading indicator I had hoped it would be. It does worry me that the forward estimate cannot turn positive, but it sure isn’t impacting the SP 500.

Last week, roughly 60 companies reported Q2 ’15 earnings, and this coming week, there will be 126 companies. IBM, Apple and Microsoft lead the Technology sector. All three companies are relatively cheap: Apple has the best growth, Microsoft probably offers the best risk-reward, since it has consolidated the last 9 months between $50 and $40, and IBM is clearly the best opportunity for an immediate capital gain if some of the recent initiatives can show results.

It is the topic worthy of a separate post, but Commodities and Energy continue to get crushed from a relative performance perspective. Forward estimates (late 2015, but particularly 2016) on Energy are getting revised lower, albeit from very high growth rates, so while Energy should show positive earnings growth in 2015, it may not be as nearly as robust as the forward estimates are expecting.

The goal each week is to try and leave readers with one metric that is noteworthy about SP 500 earnings and this week it is compliments of Thomson Reuters, “This Week in Earnings”: “should current trends continue, this (i.e. Q2 ’15) would be the 16th consecutive quarter, where the earnings estimate beat rate, exceeded the revenue estimate beat rate, as well as the 16th consecutive quarter with higher earnings growth than revenue growth.”

The 2nd half of that sentence should not surprise readers: SP 500 earnings growth should typically exceed revenue growth for extended periods of time, based simply on productivity. In a free market, capitalist economy, the shareholder always comes first.

For longer-term investors, the Industrial sector continues to look interesting to me, as the expected sector growth rates are subdued thanks to the US dollar strength. While the dollar has started firming again, the sector is looking better from a risk-reward perspective, and for investors with a longer horizon. Another post will be forthcoming on just this topic.

One final note: on CNBC’s Delivering Alpha this past week, Jeff Gundlach noted Apple’s size and his concern about Apple’s market cap relative to the rest of the SP 500. As we await AAPL’s earnings Tuesday night, here is a www.Fundamentalis.com blog post from last April ’15, noting AAPL’s importance to the Sp 500 and the QQQ’s. (Long SPY and QQQ). You dont have to manage $1 billion or more to have good insights into the markets.


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