S&P 500 Forward 12-Month EPS vs. Price: 10-Year

Transcription

1 EARNINGS INSIGHT Key Metrics + Earnings Growth: The estimated earnings growth rate for Q is 6.3%. The Financials sector is projected to have the highest earnings growth rate for the quarter, while the Energy sector is projected to have the lowest earnings growth rate for the quarter. + Earnings Revisions: On September 30, the earnings growth rate for Q was 9.6%. Nine of the ten sectors have recorded decreases in earnings growth rates over this time frame, led by the Energy sector. + Earnings Guidance: For Q4 2013, 94 companies have issued negative EPS guidance and 13 companies have issued positive EPS guidance. + Valuation: The current 12-month forward P/E ratio is This P/E ratio is based on Tuesday s closing price of and forward 12-month EPS estimate of $ Earnings Scorecard: Of the 19 companies that have reported earnings to date for Q4 2013, 63% have reported earnings above the mean estimate and 58% have reported sales above the mean estimate. S&P 500 Forward 12-Month EPS vs. Price: 10-Year John Butters, Senior Earnings Analyst jbutters@factset.com Media Questions/Requests media_request@factset.com S&P 500 January 3, 2014 All data published in this report is available on FactSet. Please contact media_request@factset.com or FACTSET for more information. FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 1

2 Topic of the Week EARNINGS INSIGHT January 3, 2014 Lower Estimate Cuts Than Average for S&P 500 During the Fourth Quarter Over the course of the fourth quarter, analysts have lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 3.5% (to $27.90 from $28.91) from September 30 through December 31. How significant is a 3.5% decline in the aggregate EPS estimate during the quarter? How does this decrease compare to recent quarters? During the past year (4 quarters), the average decline in the EPS estimate during the quarter has been 3.9%. During the past five years (20 quarters), the average decline in the EPS estimate during the quarter has been 5.8%. During the past ten years, (40 quarters), the average decline in the EPS estimate during the quarter has been 4.3%. Thus, the decline in the EPS estimate recorded during the course of the Q quarter was lower than the trailing 1-year, 5-year, and 10-year averages. Although the percentage reduction was lower than average, analysts did take down earnings estimates during the quarter. At the same time, the value of the S&P 500 increased 9.9% (to from ), closing at a record high value on the last day of the quarter. Is it unusual for the earnings estimate for the index to decline and the value of the index to increase during the course of a quarter? In recent quarters, it has not been unusual for the value of the index to increase at the same time analysts are trimming earnings estimates for the same quarter. In fact, it has occurred in 13 of the past 20 quarters (including Q4 2013). During these 13 quarters, the average decrease in the bottom-up EPS has been 3.0%, while the average increase in the value of the index has been 8.7%. S&P 500 Q3 2013: Change in EPS vs. Change in Price FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 2

3 Q Earnings Season: Overview EARNINGS INSIGHT January 3, 2014 No Change in Earnings Growth This Week, But Down 1/3 since September 30 The estimated earnings growth rate for the fourth quarter is 6.3% this week, unchanged from last week s estimated earnings growth rate of 6.3%. Energy Sector Has Seen Largest Cuts to Earnings Estimates since September 30 The estimated earnings growth rate for Q of 6.3% is below the estimate of 9.6% at the start of the quarter (September 30). Nine of the ten sectors have recorded a decline in expected earnings growth during this time frame, led by the Energy sector. Other sectors that have also witnessed large decreases in predicted earnings growth since September 30 include the Materials and Consumer Discretionary sectors. The only sector that has seen a slight improvement in expected earnings growth since September 30 is the Telecom Services sector (to 14.3% from 14.2%) The Energy sector has seen the largest drop in expected earnings growth (to -7.8% from -0.9%) since the beginning of the quarter. Companies that have seen significant reductions in EPS estimates during this time include WPX Energy (to -$0.21 from -$0.12), Tesoro Corporation (to $0.49 from $0.80), Noble Energy (to $0.70 from $1.10), and Rowan Companies (to $0.44 from $0.63). The Materials sector has witnessed the second largest dip in expected earnings growth (to 9.5% from 14.6%) since the start of the quarter. Companies that have seen major reductions to EPS estimates include Allegheny Technologies (to -$0.19 from $0.09), Vulcan Materials (to -$0.04 from -$0.01), U.S. Steel (to -$0.25 from -$0.13), and The Mosaic Company (to $0.43 from $0.76). The Consumer Discretionary sector has witnessed the third largest decline in expected earnings growth (to 6.1% from 10.2%) since the beginning of the quarter. Companies that have seen the largest cuts to estimates during this time include Darden Restaurants (to $0.15 from $0.21), Cablevision Systems (to $0.08 from $0.11), TripAdvisor (to $0.20 from $0.26), Target (to $1.25 from $1.48), and Ford Motor (to $0.28 from $0.33). Q4 Guidance: High Percentage (88%) of Negative Guidance due to Lack of Positive Projections At this point in time, 107 companies in the index have issued EPS guidance for the fourth quarter. Of these 107 companies, 94 have issued negative EPS guidance and 13 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 88% (94 out of 107). This percentage is well above the 5-year average of 64%. One of the reasons for the high percentage of negative EPS guidance is the unusually low number of companies issuing positive EPS guidance. Over the past four quarters (Q412 Q313), 86 companies on average have issued negative EPS guidance and 26 companies on average have issued positive EPS guidance. Thus, the number of companies issuing negative EPS guidance for Q4 is up 9% compared to the one-year average, while the number of companies issuing positive EPS guidance for Q4 is down 50% compared to the one-year average. For more details on guidance, please see our Guidance Quarterly report, which was published on December 31. Estimated Earnings Growth is 6.3%, as the Financials Sector Leads Growth The estimated earnings growth rate for Q is 6.3%. Eight of the ten sectors are expected to report higher earnings relative to a year ago, led by the Financials, Telecom Services, and Industrials sectors. On the other hand, the Energy sector is predicted to report the lowest earnings growth of all ten sectors. FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 3

4 Financials: Insurance and Diversified Financial Services Industries Lead Growth The Financials sector is projected to have the highest earnings growth rate (24.1%) of all ten sectors. It is also expected to be the largest contributor to earnings growth for the entire index. If the Financials sector is excluded, the earnings growth rate for the S&P 500 falls to 2.9%. Seven of the eight industries in the sector are predicted to report earnings growth for the quarter. Five of these seven industries are expected to report double-digit earnings growth, led by the Insurance (56%) and Diversified Financial Services (41%) industries. If these two industries are excluded, the earnings growth rate for the sector would drop to 7.7% The Insurance industry (56%) is expecting the highest earnings growth of all eight industries in the sector. Within this industry, the Multi-line Insurance (240%) and Property & Casualty Insurance (109%) sub-industries are expected to report the highest earnings growth. These sub-industries are expecting high earnings growth rates due in part to comparisons to weak earnings in the year-ago quarter, caused by catastrophic losses for Hurricane Sandy. In the year-ago quarter (Q4 2012), the Mutli-line Insurance (-72%) and Property & Casualty Insurance (-45%) sub-industries reported substantial declines in yearover-year earnings growth. The Diversified Financial Services industry (41%) is expecting the second highest earnings growth of all eight industries in the sector. Within the industry, Bank of America and Citigroup are the largest contributors to earnings growth for the industry, due in part to comparisons to weak earnings in the year-ago quarter. The mean EPS estimate for Bank of America is $0.27, compared to the year-ago actual EPS of $0.03. The mean EPS estimate for Citigroup is $1.07, compared to the year-ago actual EPS of $0.69. Telecom Services: Verizon Drives Growth The Telecom Services sector is predicted to have the second highest earnings growth rate at 14.3%. At the company level, Verizon Communications is the largest contributor to earnings growth for the sector. The mean EPS estimate for the company is $0.61, compared to $0.45 in the year-ago quarter. If Verizon is excluded, the earnings growth rate for the sector would drop to 5.6%. Industrials: Balanced Growth Expected The Industrials sector is expected to have the third highest earnings growth rate at 14.1%. Growth is predicted to be broad-based across the sector. All twelve industries in the sector are projected to see earnings growth. Seven of these industries are expected to see double-digit earnings growth, led by the Building Products (312%), Airlines (132%), and Construction & Engineering (75%) industries. At the other end of the spectrum, the Machinery industry (5%) is expected to have the lowest earnings growth rate for the quarter. Energy: Exxon Mobil Leads Decline The Energy sector is expected to have the lowest earnings growth of any sector at -7.8%. Four of the seven sub-industries in this sector are expected to report a decline in earnings, led by the Coal & Consumable Fuels (-97%) and Oil & Gas Refining & Marketing (-59%) sub-industries. At the company level, Exxon Mobil is the largest detractor to earnings growth. The mean EPS estimate for the company is $1.96, compared to year-ago EPS of $2.20. If Exxon Mobil is excluded, the growth rate for the Energy sector would improve to -4.5%. Estimated Revenue Growth is 0.3%, as the Financials Sector is a Drag on Growth The estimated revenue growth rate for Q is 0.3%, below the growth rate of 0.9% estimated at the start of the quarter (September 30). Eight of the ten sectors are predicted to report revenue growth for the quarter, led by the Information Technology, Health Care, and Consumer Discretionary sectors. The Financials sector is expected to report the lowest revenue growth for the quarter. FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 4

5 Highest Sales Growth: Information Technology, Health Care, and Consumer Discretionary The Information Technology sector is expected to report the highest revenue growth at 3.9%. Five of the eight industries in the sector are predicted to report growth in sales, led by the Internet Software & Services (19%) industry. Three of the eight industries in the sector are predicted to report a decline in sales, led the Office Electronics (-5%) industry. The Health Care sector is projected to report the second highest revenue growth rate at 3.5%. Four of the six industries in the sector are predicted to report growth in sales, led by the Biotechnology (14%) and Health Care Technology (12%) industries. On the other end of the spectrum, the Health Care Equipment & Supplies industry is expected to see the lowest sales growth (-14%). The Consumer Discretionary sector is predicted to report the third highest revenue growth rate at 3.2%. Ten of the twelve industries in the sector are expected to report growth in sales, led by the Internet & Catalog Retail (22%) industry. On the other end of the spectrum, the Specialty Retail (-0.3%) and Multiline Retail (-0.4%) industries are expected to see the lowest sales growth rates. Financials Sector: Largest Detractor to Sales Growth The Financials sector is predicted to report the lowest revenue growth of all ten sectors (-10.2%), and is the largest detractor to sales growth in the index. If the Financials sector is excluded, the revenue growth rate for the S&P 500 would improve to 1.9%. However, one company is mainly responsible for the expected year-over-year decline in sales for the sector: Prudential. For the Q quarter, the mean revenue estimate is $11.5 billion. In the year-ago quarter (Q4 2012), however, the company reported an unusually high revenue number ($46.1B) due to large pension risk transfer transactions during the quarter. Due to this one-time boost to year-ago revenue, Prudential is not only the largest detractor to revenue growth for the Financials sector, but it also the largest detractor to revenue growth for the entire S&P 500 for Q If Prudential is excluded, the estimated revenue growth rate for the Financials sector improves to -0.3%, and the estimated sales growth rate for the S&P 500 improves to 1.6%. Global Concerns: F/X Rates, Europe and China Less Favorable F/X Rates The U.S. dollar has strengthened relative to the Japanese yen and other foreign currencies over the past year. In the year-ago quarter (Q4 2012), one dollar was equal to about $81.15 yen on average. For Q4 2013, one dollar was equal to about $ yen on average. A number of companies commented on the negative impact of F/X rates on revenues and earnings for the third quarter. Did this trend continue in Q4? For example, the year-over-year exchange rates for the yen for both the spot rate and the average rate have weakened 20% against the dollar. Other major FX moves occurred in India, Australia, Argentina and Brazil. These were somewhat offset by a slight strengthening of the euro. Overall, FX rates had a negative impact on our revenue and billings growth for the quarter although the impact on profitability was less pronounced. Red Hat (Sep. 23) I want to start by letting you know that currency in Q1 gave us a 2% headwind for new software license and total revenue which was more than my guidance last quarter. Oracle (Sep. 18) Year-over-year, FX rate changes had an $18 million negative impact on reported revenue. Adobe Systems (Sep. 17) FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 5

6 Europe EARNINGS INSIGHT January 3, 2014 Europe reported a slight improvement in economic growth relative to last year. According to FactSet Economics, the European Union recorded an increase in GDP of 0.1% in Q3 2013, relative to the decline of 0.5% reported in Q A number of companies stated that economic conditions were still weak in Europe in the third quarter. However, some companies stated that conditions may have reached a bottom or improved slightly. Did companies see continued improvement in Europe in the fourth quarter? I think so from a macroeconomic situation, the one area that I called out was in particular the EMEA region had its lowest percentage of total bookings or total company bookings that they've had in some time. Having said that, I think their Q3 and Q4 is shaping up better and I'm hopeful that we're going to see some improvement there. Red Hat (Sep. 23) In Europe, first quarter sales in constant currency declined 3%, reflecting the tough operating environment in the region. General Mills (Sep. 18) Emerging Markets Economic growth for some countries in emerging markets regions has also seen some improvement relative to last year. According to FactSet Economics, three of the four BRIC countries recorded higher GDP growth in the most recent quarter. For Q3 2012, China, India, and Brazil recorded GDP growth of 7.4%, 2.5%, and 0.9% respectively. By Q3 2013, GDP growth rates for China, India, and Brazil had improved to 7.8%, 5.6%, and 2.2%. However, comments on business conditions in China and emerging markets continued to be mixed during Q3. Some companies (such as Yum! Brands and NIKE) reported weak conditions, while others (such as General Mills) saw strength. Did this trend continue in the fourth quarter? For the third quarter, we reported a 15% decline in EPS before special items, which is obviously disappointing. This decline was led by sales and profit declines in our China Division as well as a higher tax rate. YUM! Brands (Oct. 9) Revenues for the NIKE Brand were $6.5 billion, up 7 percent on a currency neutral basis, with growth in every product type and every geography except Greater China. NIKE (Sep. 26) And by the way, while many of you have commented on the softening in emerging market economies overall, I mean, I do want to point out that our business continues to be very strong in emerging markets. We had a very strong quarter in China and we're seeing terrific growth in Brazil. General Mills (Sep.18) Earnings Growth Expected to Improve Each Quarter in 2014 For Q1 2014, analysts are expecting earnings growth of 4.4%. However, earnings growth is projected to improve in each subsequent quarter for the remainder of the year. For Q2 2014, Q3 2014, and Q4 2014, analysts are predicting earnings growth rates of 9.2%, 12.2%, and 13.5%. For all of 2014, the projected earnings growth rate is 10.5%. Valuation: Forward P/E Ratio is 15.4, above the 10-Year Average (14.0) The current 12-month forward P/E ratio is This P/E ratio is based on Tuesday s closing price of and forward 12-month EPS estimate of $ At the sector level, the Consumer Discretionary (18.5) and Consumer Staples (17.2) sectors have the highest forward 12-month P/E ratios, while the Financials (12.9) and Energy (13.1) sectors have the lowest forward 12-month P/E ratios. FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 6

7 The P/E ratio of 15.4 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 13.1, and above the prior 10-year average forward 12-month P/E ratio of It is also above the forward 12-month P/E ratio of 15.1 recorded one month ago. During the past month, the price of the index rose by 2.4%, while the forward 12-month EPS estimate increased by 0.2%. At the sector level, seven of the ten sectors recorded an increase in the forward 12-month P/E ratio over the past month, led by the Information Technology (to 15.5 from 14.8) sector. Three of the ten sectors recorded a decrease in the forward 12-month P/E ratio, led by the Telecom Services (to 13.7 from 14.0) sector. Companies Reporting Next Week: 6 During the upcoming week, six S&P 500 companies are scheduled to report earnings for the fourth quarter. FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 7

8 Q3 2013: Scorecard EARNINGS INSIGHT January 3, 2014 Q Earnings: Above, In-Line, Below Estimates Q Revenues: Above, In-Line, Below Estimates FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 8

9 Q3 2013: Scorecard Q3 2013: Surprise % Numbers Q3 2013: Sector Level Surprise % FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 9

10 Q3 2013: Scorecard EPS Surprise %: Top 10 Companies EPS Surprise %: Bottom 10 Companies FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 10

11 Q3 2013: Growth Q Earnings Growth Q Revenue Growth FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 11

12 Q4 2013: Guidance EARNINGS INSIGHT January 3, 2014 Number of Positive & Negative EPS Preannouncements: Q Percentage of Positive & Negative EPS Preannouncements: Q FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 12

13 Q4 2013: EPS Revisions EARNINGS INSIGHT January 3, 2014 Highest Upward Change (Trailing 4-Weeks) in Mean EPS Estimate: Top 10 Companies Highest Downward Change (Trailing 4-Weeks) in Mean EPS Estimate: Top 10 Companies FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 13

14 Q4 2013: Growth Q Earnings Growth Q Revenue Growth FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 14

15 CY 2013: Growth CY 2013 Earnings Growth CY 2013 Revenue Growth FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 15

16 CY 2014: Growth CY 2014 Earnings Growth CY 2014 Revenue Growth FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 16

17 Bottom-up EPS Estimates: Revisions EARNINGS INSIGHT January 3, 2014 CY Bottom-Up EPS vs. Top-Down Mean EPS (Trailing 26-Weeks) Change in Q413 Bottom-Up EPS vs. Price (Trailing 26-Weeks) FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 17

18 Bottom-up EPS Estimates: Current & Historical Calendar Year Bottom-Up EPS Actuals & Estimates Quarterly Bottom-Up EPS Actuals & Estimates FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 18

19 Bottom-up SPS Estimates: Current & Historical Calendar Year Bottom-Up SPS Actuals & Estimates Quarterly Bottom-Up SPS Actuals & Estimates FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 19

20 Net Margins: Current & Historical EARNINGS INSIGHT January 3, 2014 Trailing 12M Net Margin: 10 Years Quarterly Net Margins (Bottom-Up EPS / Bottom-Up SPS) FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 20

21 Forward 12M Price / Earnings Ratio: Sector Level Sector-Level Forward 12-Month P/E Ratios Sector-Level Change in Price vs. Change Forward 12M EPS: 1-Month FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 21

22 Forward 12M Price / Earnings Ratio: Long-Term Averages Change in Price vs. Change in Forward 12M EPS: 10-Year Forward 12M P/E Ratio: 10-Year FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 22

23 Trailing 12M Price / Earnings Ratio: Long-Term Averages Change in Price vs. Change in Trailing 12M EPS: 10-Year Trailing 12M P/E Ratio: 10-Year FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 23

24 Important Notice EARNINGS INSIGHT January 3, 2014 The information contained in this report is provided as is and all representations, warranties, terms and conditions, oral or written, express or implied (by common law, statute or otherwise), in relation to the information are hereby excluded and disclaimed to the fullest extent permitted by law. In particular, FactSet and its affiliates disclaim implied warranties of merchantability and fitness for a particular purpose and make no warranty of accuracy, completeness or reliability of the information. This report is for information purposes and does not constitute a solicitation or an offer to buy or sell any securities mentioned within it. The information in this report is not investment advice. FactSet and its affiliates assume no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this report. About FactSet FactSet (NYSE:FDS) (Nasdaq:FDS) combines integrated financial information, analytical applications, and client service to enhance the workflow and productivity of the global investment community. The company, headquartered in Norwalk, Connecticut, was formed in 1978 and now conducts operations along with its affiliates from twenty-four locations worldwide, including Boston, New York, Chicago, San Mateo, London, Amsterdam, Frankfurt, Paris, Milan, Tokyo, Hong Kong, Mumbai, Dubai, and Sydney. FactSet.com Copyright 2013 FactSet Research Systems Inc. All rights reserved. 24