Earnings Surge Starting...Now! - Earnings Trends
Key Points:
• Big Calendar Shift - FY1 now means 2010, not 2009
• 4Q earnings season about to get underway; early results positive
• Excluding non-recurring items, total net income to jump 86.0% year over year in 4Q, but fall 11.4% from 3Q levels
• Strong 27.0% total net income growth expected for 2010, with 19.9% more expected for 2011
• Rebounding earnings for Finance, Materials and Energy to lead 2010 charge
• Revenues to fall more than Earnings in 2009, rise less in 2010: Margins expanding
• Total revenues expected to fall 9.8% in 2009, rise 6.0% in 2010
• Revisions ratios near 2.0 for both 2010 and 2011, although total activity low
• Revisions ratios for Tech strong, led by chip firms
• Firms up/firms down ratio at 1.81 for 2010, 1.27 for 2011
• S&P500 expected to earn $554.4 billion in 2009, $704.5 billion in 2010, $844.3 billion in 2011
• Bottom-Up estimates: $59.78 for 2009, $75.95 for 2010, $91.49 for 2011
• Top-Down estimates: $57.45 for 2009, $74.24 for 2010, 84.33 for 2011
Welcome to the new Earnings Trends. We have decided to start focusing our analysis of the S&P 500 based on Zacks' own sector groupings rather than the S&P GICS sectors. There are 16 Zacks sectors and only 10 GICS sectors, so the new groupings will result in better granularity of the data. The old way simply grouped too many very different companies together. In addition, we for the first time are presenting top-line as well as bottom-line expectations and surprise information. This is very much or a work in progress, and we will be adding additional information, tables and perhaps even some graphs over the next few months.
IMPORTANT NOTE: December fiscal years have moved their 2009 earnings from being FY1 to FY0. As a result, we are now going to be focusing on 2010 earnings as being FY1 and 2011 being FY2. Keep this in mind if you are looking at this report and comparing it to previous editions of it. Also keep in mind that while we use the convention of referring to the next full fiscal year to be completed as 2010, not all firms are on December fiscal years, this can cause discontinuities in the data, particularly around this time of year. The data is based on FY1, not based on 2010, even though I may call it 2010 in the report.
The fourth quarter earnings season is about to start. While the official kickoff by Alcoa (AA) was disappointing, it is not reflected in the numbers here. However, there are a number of firms that have November fiscal period ends that have already reported. The early indications are quite good, with positive earnings surprises outnumbering disappointments by 7:1, and on revenues positive surprises are leading disappointments by a 1.67:1 ratio. It will be a confusing earnings season due to the year-ago being a near total washout, and one filled with all sorts of extraordinary items (which we try to exclude).
Looking at full-year earnings, total net income is still expected to be lower than that of 2008, but just by 9.7% -- a much smaller decline than the 22.2% plunge in 2008. Next year will be one of earnings recovery, with growth of 27.1% expected, but note that that will still leave earnings below 2007 levels.
While the data is still relatively thin for 2011, and thus should be taken with a grain of salt, further growth of 19.9% is expected for total earnings in 2011. In 2010, the percentage growth numbers will not be really meaningful for the Auto and Construction sectors, since they will be going from negative total earnings to positive total earnings. In 2009, the losses were much lower than the losses in 2008.
Among the larger sectors, Basic Materials and Financials are expected to be the growth leaders for the year (Financials did the negative-to-positive thing in 2009). Energy is also expected to see a large rebound in its total profits. Together, Finance and Energy will account for more than half of all the incremental earnings in 2010, even though together they account for only slightly over 25% of the total market capitalization of the index.
Cost cutting has been the major force driving earnings and earnings surprises. However, the costs to one company are either the revenues of another company or someone’s paycheck, which is then spent to create revenues for firms. The bottom-up data coming out of all these individual firms seems to confirm what we have been getting from the macro statistics from the government: the economy is growing due to increases in productivity. Higher GDP with fewer workers. While clearly companies cannot continue to grow earnings forever based only on cost cutting, it does mean that when they do start to see revenue growth, earnings growth could be explosive as the greater operating leverage kicks in.
The revisions ratios for both 2010 and 2011 are strong, and should give us confidence that those growth rates will actually be achieved, if not exceeded (although still very early for 2011). The S&P 500 is selling for 15.1x consensus expectations for 2010, or an earnings yield of 6.62% -- almost twice the yield on the 10-year Treasury note. The S&P is selling for just 12.6x consensus expectations for 2011, although that consensus is still very thin. Stocks look very attractive, at least relative to bonds, at this point.
Scorecard & Earnings Surprise
• Just a handful of reports in, half of all sectors have none so far
• Earnings Surprise Ratio (#beat/#miss) at 7.00
• Growth in scorecard is only for those firms that have reported, at 6.99% so far yr/yr
• Numbers will be very volatile over next few weeks
• Median Earnings Surprise 6.06%, a very strong reading
• Year-over-year Earnings Growth Ratio (# Positive Growth/# Negative Growth) at 1.08
In evaluating the data presented here, keep the percentage reported in mind. For some sectors, the sample size is extremely small. The move to the 16 Zacks sectors means that even when all reports are in, some of the sectors will still have relatively few firms in them. For firms with only a few reports in, the median surprise will be very volatile as new firms are added to the sample. This is particularly true now as only a handful of firms (mostly with November fiscal periods) have reported so far.
Among the sectors with more than just a single report in, Tech is looking very strong with six positive surprises and no disappointments. It has the highest earnings growth so far, at 38.5%, although of the seven firms that have reported only three have posted positive growth from a year ago.
Retail paints a similar picture with seven positive surprises, no disappointments and 22.2% overall growth, despite only four firms earning more than they did a year ago.
Growth
Reported
Median
Surp
Pos
Surp
Neg
Grow
Pos
Grow
Neg
Sales Surprises
• Sales Surprise Ratio at 1.67, median surprise 0.77%
• Tech beating expectations, but sales below year ago at 6 of 7 firms
• Retail posting positive growth and beating expectations
• Sales Growth Ratio at just 0.56
• Total revenue so far up 1.16% yr/yr for the 25 that have reported
Growth
Reported
Median
Surp
Pos
Surp
Neg
Grow
Pos
Grow
Neg
Expected Quarterly Growth: Total Net Income
• S&P total net income to soar 86.0% from a year ago, even when non-recurring items are excluded. Only those firms that have not reported 4Q earnings are included below
• Move from losses a year ago to profits this year in Finance and Autos responsible for most of the growth
• Cyclical Basic Materials to post huge year-over-year growth (low base)
• Positive yr/yr growth expected for 8 sectors, negative for 8; Industrials, Energy, Transportation and Retail to lag
• Earnings expected to fall 11.4% from 3Q levels, but 20.4% sequential growth expected for 1Q
• Positive surprises could lead to flat earnings sequentially
4Q 09 E
1Q 10 E
3Q 09 A
Reported Quarterly Growth: Total Revenues
• Total S&P 500 Revenues down 11.3% year over year in 3Q
• Year-over-year revenue growth of 0.6% expected for 4Q, up 0.5% expected in 1Q
• Retail expected to take sequential revenue lead in 4Q, mostly due to seasonality
• Finance and Aerospace to post highest year-over-year revenue growth
• Only 5 sectors expected to post positive year-over-year revenue growth in 4Q; 11 negative
• Construction revenues continue to be demolished
4Q 09 E
1Q 10 E
3Q 09 A
Annual Total Net Income Growth
• Total S&P 500 Net Income in 2009 expected to be 9.7% below 2008 levels
• Total earnings for the S&P 500 expected to jump 27.1% in 2010, 19.9% further in 2011
• Total earnings in 2010 to still be 9.4% below 2007 levels
• Data for 2011 is still thin, so take with a grain of salt
• Staples, Medical, Business Service and Utilities only sectors to see positive growth for 2009, although Finance moving from a loss to a profit. Construction and Autos see much smaller losses
• Construction and Auto go from loss to profit in 2010. Basic Materials, Finance and Energy expected to be earnings growth leaders in 2010. Conglomerates, Medical and Retail expected to lag, although all sectors expected to be positive
• Early data suggests that all sectors are expected to see further growth in 2011, Autos, Construction to lead (low base). Aerospace and Medical only single-digit sectors
| EPS Growth | 2008 | 2009 | 2010 | 2011 |
| Auto | + to - | - to - | - to + | 81.76% |
| Construction | + to - | - to - | - to + | 214.21% |
| Finance | + to - | - to + | 100.23% | 47.97% |
| Basic Materials | -10.07% | -63.48% | 100.14% | 23.00% |
| Oils and Energy | 20.42% | -56.27% | 44.93% | 25.42% |
| Computer and Tech | 9.81% | -12.66% | 22.07% | 14.09% |
| Utilities | 13.66% | 7.11% | 18.49% | 16.03% |
| Transportation | 3.72% | -30.81% | 18.27% | 20.87% |
| Business Service | 79.98% | 12.01% | 17.94% | 19. |
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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