Zacks Earning Trends

Transcription

1 December 6, 2016 Zacks Earning Trends Sheraz Mian Earnings Growth to Stay Positive in Q4 The positive earnings growth from the Q3 earnings season is expected to continue in the current period as well, with the growth pace expected to ramp up notably in the following quarters. Many in the market see the incoming administration as favorable to the overall corporate earnings picture, though it will likely be some time before we start seeing that in estimates. That said, the recent uptrend in long-term interest rates and the expected impact of those higher interest rates on banks margins is the most tangible change on the earnings front since the election. Total Q4 earnings for the S&P 500 companies expected to be up +3.2% from the same period last year on +4% higher revenues. This would follow the +3.7% growth in Q3 earnings on +1.2% higher revenues. Please note that the positive earnings growth in Q3 followed five back-to-back quarters of earnings declines for the S&P 500 index, a big part of which was the drag from the Energy sector. Comparisons for the Energy sector turn positive in Q4, with the sector s earnings growth turning positive for the first time after 8 quarters of declines. The chart below shows the Q3 earnings growth contrasted with declines in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in Estimates for Q4 have come down since the start of the period, with the current +3.2% growth rate down from +5.5% at the start of the period, as the chart below shows.

2 The negative revisions to Q4 estimates aren t new or unusual; we have been seeing this trend play out quarter after quarter for almost three years now. That said, the magnitude of negative revisions to Q4 estimates is lower relative to the comparable periods in other recent quarters. In other words, estimates for Q4 have come down, but they haven t come down as much as was the case in other recent quarters. Estimates for the Technology and Finance sectors, the two largest in the index, have held up really well. In fact, the Technology sector is the only sector to experience positive estimate revisions, largely reflecting favorable revision trends for bellwether operators like Apple (AAPL), Facebook (FB) and others. The sectors suffering the biggest negative revisions include Basic Materials, Industrial Products, Construction, Autos and Transportation. For example, Q4 earnings growth for the Basic Materials sector currently is +0.3%, which is a decline from the +18.2% growth expected at the start of the quarter. The chart below shows quarterly earnings totals (in billions of dollars) as well as the year-over-year growth rates for 9 quarters estimates for 2016 Q4 and the following three quarters and actual results for the preceding five quarters. 2

3 As you can see, the +3.2% earnings growth in Q4 is followed by +10.4% in 2017 Q1 and +9.6% in the following quarter. It is reasonable to expect estimates for 2017 Q1 to come down as companies start reporting current quarter results and share their business outlook with us. But given the relatively low magnitude of negative revisions that we experienced for Q4 estimates, 2017 Q1 estimates may not fall by that much either. The positive earnings growth in Q3 followed five back-to-back quarters of earnings declines for the S&P 500 index. The tough environment in the Energy sector was a major contributor to that run of earnings declines. The fact that earnings growth turned positive in Q3 despite the sector still facing tough comparisons is testament to the improvement in the overall growth picture. The Energy sector s comparisons turn positive in Q4, with the sector becoming a growth contributor going forward. The recent momentum in oil prices following the OPEC announcement adds to the sector s earnings outlook for the current and following periods. 3

4 Closing the Books on the Q3 Earnings Season We now have Q3 results from 496 S&P 500 members accounting for 99.5% of the index s total market cap already out. Total earnings for these 496 S&P 500 members are up +3.5% from the same period last year on +1.9% higher revenues, with 72% coming ahead of EPS estimates and 55.6% beating revenue expectations. Here is the current scorecard for the Q3 earnings season: Note: Here are few key points to keep in mind while reading this report. a. All the earnings analysis in this report pertains to the S&P 500 index, a handy proxy for the entire business world. We use the index s current membership as the basis for all period comparisons, meaning that even historical periods reflect the index s current membership. b. We divide the corporate world into 16 sectors compared to the official S&P 10 GICS. We have standalone sectors like Autos, Construction, Conglomerates, Aerospace, Transportation and Business Services that provide for a better understanding of trends in these key areas of the economy. c. All references to earnings mean total earnings and not mean or median EPS. 4

5 d. We make adjustments to reported GAAP earnings to account for non-recurring or one-time items, but we do consider employee stock options (ESOs) as a legitimate business expense. Unlike Zacks, Wall Street and all other data vendors don t treat ESO s as a recurring business expense. This is a notably better performance than we have seen from this same group of companies in other recent periods, as indicated earlier. The side-by-side charts below compare the results from the 496 index members with what this same group of index members reported in other recent periods. The left-hand chart compares the earnings and revenue growth rates with historical periods while the right-hand chart is doing the same comparisons for positive EPS and revenue surprises. Positive surprises were notably tracking above historical periods earlier this reporting cycle. But they came down eventually and have ended up about in-line with what we have been seeing from this same group of 496 index members in the recent past, as the right-hand chart above shows. The proportion of companies beating both earnings and revenue estimates are modestly tracking above historical periods, as the chart below shows, but not in a big way 5

6 The earnings and revenue growth pace for these 496 index members are still low, but nevertheless an improvement over other recent periods. The growth picture improves notably once the Energy sector s drag is removed from the data. The Energy sector s results have come in better than expected, but they are still down in a big way from the year-earlier period, with the sector s Q3 earnings down -63.3% on -12.9% lower revenues. Excluding the Energy sector, total Q3 earnings would be up +6.8% from the same period last year on +3.4% higher revenues. The comparison charts below show the growth picture, with and without the Energy sector. 6

7 Most of the recent results were from the Retail Sector, with total Q3 earnings for the Retail sector up +7.3% on +5.0% higher revenues, with a below index average 60.5% beating EPS estimates and an even weaker 44.2% coming ahead of top-line estimates. The comparison charts below show that while earnings growth has improved, revenue growth remains below historical periods. Importantly, the proportion of retailers beating EPS and revenue estimates is tracking notably below historical periods. The proportion of retailers beating EPS estimates was the second lowest in the S&P 500 index, behind only the Construction sector (positive revenue surprises are the sixth lowest of all 16 sectors). No doubt the price impact column in the Scorecard table shows the sector with the third weakest stock price response to earnings announcements, behind the Construction and Auto sectors. For the Finance sector, total Q3 earnings were up +12.3% from the same period last year on +4.9% higher revenues, with 72.2% beating EPS estimates and 76.7% beating revenue estimates. This is better performance than we have seen from the sector in other recent periods, as the comparison charts below show 7

8 For the Technology sector, we now have Q3 results from 98.4% of the index s total market capitalization in the S&P 500 index. Total earnings for these Tech companies are up +4.0% on -1.3% lower revenues, with 80% beating EPS estimates and 75% beating revenue estimates. The table below shows the Technology sector s scorecard This is better performance than we have seen from these companies in other recent periods, as the comparison charts below show 8

9 As you can see, the sector s growth comparison offers a mixed picture, largely as a result of Apple which reported -19% lower earnings in Q3 on -9% lower revenues. Excluding Apple, the sector s earnings would be up +9.9% on +0.2% higher revenues. The charts below compare the sector s growth performance, with and without the Apple results. Q3 Expectations As a Whole For Q3 as a whole, combining the actual results from the 496 S&P 500 members that have reported already with estimates from the still-to-come 4 companies, total earnings are expected to be up +3.7% from the same period last year on +1.2% higher revenues. The quarter s growth picture has been steadily improving since the reporting cycle got underway, with the current +3.7% growth up from -3% decline at the start of October. The table below provides a summary view of the expectations for 2016 Q3 9

10 As you can see in the table above, the Energy sector continues to be a big drag on growth this quarter as well, with total earnings for the sector expected to decline -63.3% from the same period last year on -12.3% lower revenues. Excluding the Energy sector, total earnings for the rest of the index would be up (up +7.0% on +2.5% higher revenues). In other major sectors, earnings growth is expected to be positive in the Consumer Staples (+6.3%), Consumer Disc (+7.4%), Retail (+7.3%), Construction (+7.1%), Medical (+6.2%), Utilities (+16.3%), Aerospace (+18.6%), Basic Materials (+4.7%), Business Services (+16.7%), and Industrial Products (+13.7%). 10

11 The Context for Growth Expectations Let s take a look at how consensus earnings expectations for 2016 Q3 compare to what companies earned in the last few quarters and what they are expected to earn in the coming quarters. Table 2 below presents the year over year quarterly earnings growth rates actuals as well as estimates. Table 3 presents the same data for revenues. Table 2 Earnings Growth Context 11

12 Table 3 Revenue Growth Context The next two tables present the same data in a different format instead of year-overyear growth rates, we have the dollar level of total earnings and revenues for each of these quarters. 12

13 Table 4 Total Quarterly earnings 13

14 Table 5 Total Quarterly Revenues It may be obvious, but it s still useful to explain what we mean by total earnings. This means the sum of net income for all companies in the S&P 500. For historical periods through 2016 Q2, we have taken the total earnings (net income, not EPS) for each company in the S&P 500 and added them up to arrive at the sector and index level totals (we do adjust reported GAAP earnings for non-recurring items, but consider employee stock options as a legitimate business expense). For the coming quarters, including the ongoing Q3 reports, we have taken the Zacks Consensus EPS for each company in the index, multiplied that by the corresponding share count (from the last reported quarter) to arrive at the total earnings for each company. And then we aggregated them to arrive at the totals for each sector and the 14

15 index as a whole. The lack of accuracy in real-time share count notwithstanding, this gives us a fairly accurate view of the total earnings picture. In plain language, what Table 4 tells us is that companies in the S&P 500 earned $267.8 billion in 2016 Q2 and are currently expected to earn $285.4 billion in 2016 Q3. Annual Earnings For full-year 2016, total earnings for the S&P 500 index are currently expected to be down -2.2% on +0.4% higher revenues, which would follow the -1.1% decline in the index s total earnings last year. On an ex-energy basis, 2016 earnings would be up +0.8% vs. +6.0% in Table 6 below provides a summary view for 2016 contrasted with estimates for 2017 and the actual results for As you can see, consensus expectations reflect a notable improvement in earnings growth momentum next year, with total 2017 earnings for the index expected to be up +12.1% on +3.4% higher revenues and strong margin gains. Tables 7 & 8 on the following pages provide the summary annual earnings and revenue data for the 10-year period from 2008 through

16 Table 6 Summary Annual Earnings Picture 16

17 Table 7 Summary Annual Earnings 17

18 Table 8 Annual Revenues The charts below show current consensus earnings estimates for this year contrasted with what is expected for 2017 and 2018 and actual results for the preceding 8 years. 18

19 Chart 9 Total Annual S&P 500 Earnings Chart 10 Total Annual S&P 500 Earnings (Excluding Energy) 19

20 Chart 11 Total Annual Earnings Growth Chart 12 Total Annual Earnings Growth (ex-energy) The three sectors expected to be big drivers of earnings growth in 2017 and 2018 include Technology, Finance and Energy. The charts below show current earnings expectations for these sectors 20

21 Chart 13 Energy Expected to Stabilize Chart 14 Tech Growth Expected to Ramp Up 21

22 Chart 15 Finance Expected to Become the Biggest Earnings Contributor Index EPS and PEs The table below shows the PEs and EPS for the index. As you can see, the index is expected to earn $ in EPS in 2016 on a bottom-up basis and $ on a topdown basis. 22

23 23

24 The Margins Picture The table below shows net margin expectations for Q1 in the context of where they have been and where they are expected to go in the coming quarters. Table 16: Quarterly Net Margins The charts below show current margins expectations in a historical context. The first chart shows margins on a quarterly basis since early 2011 while the second one shows annual margins since As you can see, margins are already past cyclical highs. 24

25 Market Cap vs. Total Earnings The charts below show the share of estimated total earnings for 2016 as well as the share of total market capitalization for each of the 16 Zacks sectors. Since the S&P 500 is a market-cap weighted index, each sector s market cap share is also its index weight. The Finance sector is about even with the Technology sector in terms of earnings contribution even though it carries a smaller weight in the index. 25

26 % Share of Mkt Cap Consumer Discrt 5.3% Retail 8.9% Medical 12.1% Consumer Stapls 7.7% Auto/Tires/Trks 1.1% Basic Materials 2.4% Transportation 2.3% Utilities 2.9% Business Svcs 3.3% Industrial Prod 2.1% Construction 0.7% Conglomerates 3.0% Finance 17.1% Computer & Tech 22.4% Oils/Energy 7.0% Aerospace 1.8% 26

27 Share of 2016 Income Consumer Discrt 5.4% Retail 7.5% Medical 15.2% Consumer Stapls 7.0% Auto/Tires/Trks 2.3% Basic Materials 2.4% Transportation 2.8% Utilities 3.3% Business Svcs 2.9% Industrial Prod 1.9% Construction 0.7% Conglomerates 2.9% Finance 21.0% Computer & Tech 22.0% Oils/Energy Aerospace 1.0% 1.7% Want more information about this report or about Zacks Investment Research? Contact Terry Ruffolo at or at Visit the Zacks Media Room at zacks.com/media-room Disclosure: This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. 27