Earnings Season Picking Up Momentum - Earnings Trends
Key Points:
• Big Calendar Shift - FY1 now means 2010, not 2009
• 4Q earnings season about to get underway; early results positive - 6.25 surprise ratio
• Earnings of reported firms up 167.7% year over year, remaining firms expected to show 80% increase
• Sequentially, earnings expected to fall 9.6%
• Strong 26.7% total net income growth expected for 2010, with 20.4% 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 9.4% in 2009, rise 5.8% in 2010
• Revisions ratios fall to 1.65 for 2010 and 1.79 2011, total activity low but rising
• Revisions ratios for Materials strong, led by Metals firms
• Firms up/firms down ratio at 1.84 for 2010, 1.27 for 2011
• S&P500 expected to earn $556.1 billion in 2009, $705.4 billion in 2010, $849.0 billion in 2011
• Bottom-up estimates: $59.81 for 2009, $76.06 for 2010, $90.84 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.
We are now going to be focusing on 2010 earnings as being FY1 and 2011 being FY2. Keep that 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, and 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.
While the “official" start of earnings season was last week, only a handful of firms have their results for the fourth quarter in, and most of those are firms with November fiscal period endings. Only 6.0% of all S&P 500 firms had reported by the cut-off for this report.
This week, things really start to gain momentum as 61 more S&P firms, or 12.2%, will report. Things are off to a solid start, even with the high profile miss by Alcoa (AA). Positive earnings surprises so far are outpacing disappointments by a ratio of 6.25 to 1, and the median surprise is 6.32%. Year-over-year earnings growth so far (total net income) is a massive 167.7%. That, however, says far more about what happened a year ago than what is going on today.
The earnings growth number should come down as the earnings season progresses, but will remain the highest in recent memory by a very large margin. If we look at the expectations for the 94% of firms that have yet to report, their earnings are expected to be up 80%. Combined with the ones that have already come in, and the propensity for positive surprises, it means that to total net income for the S&P 500 in the fourth quarter of 2009 was probably roughly double that of the fourth quarter of 2008.
Looking at full-year earnings, total net income is still expected to be lower than that of 2008, but just by 9.4%, a much smaller decline than the 22.2% plunge in 2008. Next year will be one of earnings recovery, with growth of 26.7% 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 20.4% is expected for total earnings in 2011. In 2010, the percentage growth numbers will be not 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 the 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 both 2010 and 2011, even though together they account for only slightly over 25% of the total market capitalization of the index. However, in the absence of mark-to-market rules, the quality of the earnings in the Financials is suspect.
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. That will sure be the case in the fourth quarter, as revenue is expected to increase by just 1.67%, as earnings double -- talk about net margin expansion!
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 it's 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%, or 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 in
• Earnings Surprise Ratio (#beat/#miss) at 6.25, close to 3Q level
• Growth in scorecard is only for those firms that have reported, at 167.7% so far yr/yr, but that says more about a year ago than today
• Numbers will be very volatile over next few weeks
• Median Earnings Surprise 6.32%, a very strong reading
• Year-over-year Earnings Growth Ratio (# Positive Growth/# Negative Growth) at 1.00
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 and Retail are looking very strong -- each with 8 positive surprises and no disappointments. Finance has the highest earnings growth so far, at 322.1%, although only two have reported (JPM came in after the cutoff).
| Income Surprises | Yr/Yr Growth |
% Reported |
Surprise Median |
EPS Surp Pos |
EPS Surp Neg |
# Grow Pos |
# Grow Neg |
| Construction | 42.50% | 10.00% | 53.57 | 1 | 0 | 1 | 0 |
| Consumer Discretionary | -18.85% | 6.45% | 10.69 | 2 | 0 | 1 | 1 |
| Computer and Tech | 131.72% | 10.71% | 8.33 | 8 | 0 | 4 | 5 |
| Retail/Wholesale | 18.22% | 17.02% | 7.38 | 8 | 0 | 4 | 4 |
| Consumer Staples | -28.92% | 11.36% | 6.21 | 4 | 1 | 4 | 1 |
| Transportation | -30.02% | 10.00% | 2.80 | 1 | 0 | 0 | 1 |
| Industrial Products | -16.67% | 4.55% | -7.14 | 0 | 1 | 0 | 1 |
| Finance | 322.05% | 2.60% | -8.34 | 1 | 1 | 1 | 1 |
| Basic Materials | 104.07% | 4.76% | -80.00 | 0 | 1 | 0 | 1 |
| Medical | na | 0.00% | na | na | na | na | na |
| Auto | na | 0.00% | na | na | na | na | na |
| Conglomerates | na | 0.00% | na | na | na | na | na |
| Aerospace | na | 0.00% | na | na | na | na | na |
| Oils and Energy | na | 0.00% | na | na | na | na | na |
| Utilities | na | 0.00% | na | na | na | na | na |
| Business Service | na | 0.00% | na | na | na | na | na |
| S&P | 167.71% | 6.00% | 6.32 | 25 | 4 | 15 | 15 |
Sales Surprises
• Sales Surprise Ratio at 1.90, median surprise 0.89%
• Two firms with declining revenues for each with an increase 90.50 sales growth ratio
• But total Revenues up 6.0% so far for the 30 that have reported
• Construction, Industrial and Transport revenues down double-digits
• Tech leads in revenue surprises
| Sales Surprises | Yr/Yr Growth |
% Reported |
Surprise Median |
Sales Surp Pos |
Sales Surp Neg |
# Grow Pos |
# Grow Neg |
| Finance | 31.76% | 2.60% | 0.93 | 1 | 1 | 2 | 0 |
| Basic Materials | -4.48% | 4.76% | 0.11 | 1 | 0 | 0 | 1 |
| Construction | -28.48% | 10.00% | 0.07 | 1 | 0 | 0 | 1 |
| Computer and Tech | 11.54% | 10.71% | 0.03 | 7 | 1 | 1 | 8 |
| Transportation | -9.88% | 10.00% | 0.03 | 1 | 0 | 0 | 1 |
| Consumer Discretionary | 4.75% | 6.45% | 0.01 | 1 | 1 | 1 | 1 |
| Retail/Wholesale | 3.74% | 17.02% | 0.00 | 5 | 3 | 5 | 3 |
| Consumer Staples | -7.74% | 11.36% | 0.00 | 2 | 3 | 1 | 4 |
| Industrial Products | -10.15% | 4.55% | -0.01 | 0 | 1 | 0 | 1 |
| Medical | na | 0.00% | na | na | na | na | na |
| Auto | na | 0.00% | na | na | na | na | na |
| Conglomerates | na | 0.00% | na | na | na | na | na |
| Aerospace | na | 0.00% | na | na | na | na | na |
| Oils and Energy | na | 0.00% | na | na | na | na | na |
| Utilities | na | 0.00% | na | na | na | na | na |
| Busines Service | na | 0.00% | na | na | na | na | na |
| S&P | 5.96% | 6.00% | 0.01 | 19 | 10 | 10 | 20 |
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
• The numbers in the table (and Revenue Growth table) below only refer to those firms which have not reported yet
| Income Growth | Sequential Q1/Q4 E | Sequential Q4/Q3 E | Year over Year 4Q 09 E |
Year over Year 1Q 10 E |
Year over Year 3Q 09 A |
| Basic Materials | 41.29% | -18.30% | 207.26% | 199.93% | -46.80% |
| Auto | -42.24% | -20.67% | 135.87% | 134.35% | 183.55% |
| Finance | 576.92% | -85.94% | 105.23% | 9.25% | 374.64% |
| Construction | 37.69% | -56.17% | 54.36% | 83.96% | 84.27% |
| Business Service | 48.78% | 21.88% | 12.67% | 13.66% | 15.45% |
| Computer and Tech | -12.00% | 15.27% | 11.82% | 21.71% | -9.89% |
| Retail/Wholesale | -26.07% | 25.37% | 9.13% | 1.63% | 3.02% |
| Consumer Discretionary | -29.23% | 13.20% | 7.87% | 13.26% | -12.79% |
| Aerospace | -8.06% | 150.01% | 5.22% | 2.18% | -59.63% |
| Consumer Staples | -4.70% | -18.17% | 5.19% | 14.27% | 1.13% |
| Medical | 9.98% | -4.08% | -0.59% | 10.83% | 3.62% |
| Utilities | 32.09% | -36.01% | -1.05% | 4.14% | 3.71% |
| Conglomerates | -27.49% | -11.80% | -7.73% | -14.68% | -21.64% |
| Transportation | -18.81% | 6.44% | -22.40% | 16.33% | -34.41% |
| Industrial Products | 12.34% | -23.56% | -26.01% | 15.80% | -29.11% |
| Oils and Energy | 10.16% | 8.65% | -26.49% | 47.87% | -62.98% |
| S&P | 8.02% | -9.60% | 79.99% | 19.58% | -12.34% |
Quarterly Growth: Total Revenues
• S&P 500 Revenues (of unreported) down 11.9% year over year in 3Q
• Year-over-year revenue growth of 1.7% expected for 4Q, up 4.7% 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 in 4Q
• Only 6 sectors expected to post positive year-over-year revenue growth in 4Q, 9 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 9.4% below 2008 levels
• Total earnings for the S&P 500 expected to jump 26.9% in 2010, 20.4% further in 2011
• Data for 2011 is still thin, so take with a grain of salt
• Staples, Medical and Business Service 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 and Retail expected to lag, although all sectors expected to be positive
• Despite strong growth in both 2010 and 2011, Energy earnings in 2011 expected to be 18.7% below 2008 levels
• Early data suggests that all sectors are expected to see further growth in 2011, Autos, Construction to lead (low base). Aerospace and Utilities only single-digit sectors. Eight sectors seeing 20%+ growth
| EPS Growth | 2008 | 2009 | 2010 | 2011 |
| Auto | + to - | - to - | - to + | 81.41% |
| Construction | + to - | - to - | - to + | 237.16% |
| Finance | + to - | - to + | 113.65% | 46.94% |
| Basic Materials | -10.07% | -63.63% | 103.46% | 24.68% |
| Oils and Energy | 20.42% | -56.31% | 46.17% | 27.26% |
| Computer and Tech | 9.81% | - | ||
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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