THIS WEEK IN EARNINGS September 29, 2008 October 3, 2008 Thomson Reuters Proprietary Research Group, 617-856-2459 Volume 6 - Issue 39 - Sep 26, 2008 John Butters, Director, U.S. Earnings: john.butters@ David Dropsey, Senior Research Analyst: david.dropsey@ OVERVIEW Six S&P 500 companies expected to announce Q3 2008 earnings Q3 2008 S&P 500 earnings growth rate: -1.7% EARNINGS OUTLOOK by John Butters The next couple of weeks will see the first few companies reporting numbers for Q3 2008. During the week of September 29 th, six S&P 500 companies are expected to announce earnings for Q3 2008. Q3 2008 Earnings Growth - Revisions At this time, the estimated growth rate for Q3 2008 stands at -1.7%. On April 1 st, the estimated growth rate for Q3 2008 was 17.3%. On July 1 st, the estimated growth rate was 12.6%. If the final growth rate for Q3 2008 is -1.7%, it will mark the first time the S&P 500 has recorded five consecutive quarters of negative earnings growth since Q1 2001 Q2 2002. The decline in the Q3 2008 growth rate during the past week (to -1.7% from -0.3%) can be attributed in part to downward estimate revisions in the Energy and Financials sectors. The growth rate for the Energy sector dropped to 57% from 59% during the past week. Companies in the sector that recorded downward estimate revisions over this timeframe include Chevron, ConocoPhillips and ExxonMobil. The growth rate for the Financials sector dropped to -59% from -55% during the past week. Companies in the sector that recorded downward estimate revisions over this timeframe include American International Group (AIG), Merrill Lynch and XL Capital. Since the start of the quarter, most of the decrease in the Q3 2008 growth rate (to -1.7% from 12.6%) can be attributed to downward estimate revisions in the Financials sector. At the industry level, the aggregated net income for companies in the Diversified Financials (-$3.8 billion), Investment Bank & Brokerage (-$7.3 billion) and Multi-line Insurance (-$4.7 billion) industries has decreased by $15.8 billion since the beginning of the quarter. Q3 2008 Earnings Growth Sectors At the sector level, the Energy (57%) sector is expecting the highest earnings growth in Q3 2008. The Financials (-59%) and Consumer Discretionary (-8%) sectors are expecting the weakest earnings growth. 2008 Thomson Reuters. All marks herein are used under license. 1
The Energy sector is expecting the highest earnings growth rate of any sector at 57%. Should the growth rate finish at 57%, it will mark the highest growth for the sector since Q3 2005 (62%). At the industry level, the Oil & Gas Integrated industry is the largest contributor to earnings growth, accounting for about 70% of the growth in the sector. The Oil & Gas Refining & Marketing industry is the only industry (out of seven) anticipating an earnings decline compared to the year-ago quarter. If the Energy sector is removed from the index, the Q3 2008 growth rate for the remaining nine sectors would be -11.9%. The Financials sector is expecting the weakest earnings growth rate of any sector at -59%. In aggregate, the sector is expected to earn $16.1 billion in Q3 2008 compared to earnings of $39.3 billion in Q3 2007. Should the growth rate finish at -59%, it will mark the fifth consecutive quarter of negative earnings growth for the sector. The Multi-line Insurance, Diversified Financials and Investment Bank & Brokerage industries are the largest contributors to the earnings decline. These three industries combined are anticipating earnings to be $14.1 billion below year-ago levels. If the Financials sector is removed from the index, the Q3 2008 growth rate for the remaining nine sectors would be 13.1%. If both the Energy and Financials sectors are removed from the index, the Q3 2008 growth rate for the remaining eight sectors would be 3.0%. The Consumer Discretionary sector is expecting the second weakest earnings growth rate (-8%) of any sector. Over the past four quarters, the sector has recorded an average earnings growth rate of -29%. At the industry level, the Automobile Manufacturing industry is the largest detractor to earnings growth. If this industry is removed from the index, the growth rate for the sector would be 11%. Despite an estimated loss for the quarter, the Homebuilding industry is the largest contributor to earnings growth for the sector. The industry is expecting a loss of $630 million for Q3 2008 compared to a loss of $2.6 billion in Q3 2007. If the Homebuilding industry is removed from the index, the growth rate for the sector would be -20%. If both the Automobile Manufacturers and the Homebuilding industries are removed from the index, the growth rate for the sector would be -4%. Of the 33 industries that comprise the sector, thirteen are expecting earnings to improve relative to Q3 2007. Q3 2008 Earnings Guidance In the FC Universe (about 5500 companies) there have been 426 negative EPS pre-announcements issued by corporations for Q3 2008 compared to 160 positive EPS pre-announcements. By dividing 426 by 160, one arrives at a negative-to-positive (N/P) ratio of 2.7 for the FC Universe. This 2.7 ratio is above the N/P ratio at the same point in time in Q2 2008 (1.8) and above the long-term average (2.2). In the S&P 500, there have been 88 negative EPS pre-announcements issued by corporations for Q3 2008 compared to 43 positive EPS pre-announcements. By dividing 88 by 43, one arrives at an N/P ratio of 2.0 for the S&P 500 Index. This 2.0 ratio is equal to the N/P ratio at the same point in time in Q2 2008 (2.0) but slightly below the long-term average for the S&P 500 (2.1). Q4 2008 Earnings Growth At this time, the estimated growth rate for Q4 2008 stands at 52.6%. On July 1 st, the estimated growth rate for Q4 2008 was 59.3%. Last week, the estimated growth rate was 55.2%. The Energy (29%) and Materials (32%) sectors are expecting the highest growth rates for the quarter. The Financials sector is expected to earn $31.8 billion in Q4 2008 compared to a loss of $21.5 billion in Q4 2007. 2008 Thomson Reuters. All marks herein are used under license. 2
Valuation: Forward P/E Ratio At this time, the forward four-quarter (Q3 2008 Q2 2009) P/E ratio for the S&P 500 stands at 12.8. This P/E ratio is below the forward four-quarter P/E ratio from last week (13.0) and below the average forward fourquarter P/E ratio recorded over the previous 52 weeks (13.7). 2008 Thomson Reuters. All marks herein are used under license. 3
EARNINGS DATA Reporting Season Q308 Reported To Date Report This Week Report Next week Report week After next Subsequent Weeks DJIA 30 0 0 2 5 23 S&P 500 10 6 6 34 444 Earnings vs. Estimates: Q3 2008 # % Above 9 50% On-Target 4 22% Below 5 28% Total 18 Calendar Year 2008: Valuation EPS P/E Industry Analysts 83.94 14.5 Forward 4 Quarter (Q3 2008 Q2 2009): Valuation EPS P/E Industry Analysts 95.10 12.8 Calendar Year 2009: Valuation EPS P/E Industry Analysts 103.70 11.7 2008 Thomson Reuters. All marks herein are used under license. 4
PRE-ANNOUNCEMENT DATA Earnings Pre-announcement N/P ratio: Q3 2008 22-Aug 29-Aug 5-Sep 12-Sep 19-Sep 26-Sep LT Avg Q3 2008 2.5 2.6 2.6 2.7 2.7 2.7 2.2 Q3 2007* 2.5 2.5 2.5 2.4 2.3 2.2 2.2 Q2 2008* 1.9 1.9 1.9 2.0 1.9 1.8 2.2 * on equivalent date in earlier quarters. Major Q3 2008 Positive Pre-announcements (Sep 22 Sep 26) Anc Date Tic Company Qtr PreAnc Summary Est Current End @Anc Est 22-Sep UNP Union Pacific Sep 1.28 to 1.33 1.21 1.31 Major Q3 2008 Negative Pre-announcements (Sep 22 Sep 26) Anc Date Tic Company Qtr End PreAnc Summary Est @Anc Current Est 23-Sep APD Air Products Sep 1.24 to 1.26 1.40 1.25 25-Sep GE General Electric Sep 0.43 to 0.48 0.52 0.51 2008 Thomson Reuters. All marks herein are used under license. 5
CALENDAR Monday: September 29 Economic Reports: Report Median Low High Prior Earnings Reports: Date Ticker Company Qtr Est Yr Ago % Dif 29-Sep-08 WAG WALGREEN CO Q4-Aug.08 0.45 0.4 12.6 2008 Thomson Reuters. All marks herein are used under license. 6
Tuesday: September 30 Economic Reports: Report Median Low High Prior Earnings Reports: Date Ticker Company Qtr Est Yr Ago % Dif 30-Sep-08 PBG PEPSI BOTTLING GROUP INC Q3-Sep.08 1.04 0.99 5.2 2008 Thomson Reuters. All marks herein are used under license. 7
Wednesday: October 1 Economic Reports: Report Median Low High Prior Earnings Reports: Date Ticker Company Qtr Est Yr Ago % Dif 1-Oct-08 MU MICRON TECHNOLOGY INC Q4-Aug.08-0.22-0.21 4.3 Other Reports / Events: Chrysler, Ford Motor and General Motors release monthly sales numbers for September 2008 Thomson Reuters. All marks herein are used under license. 8
Thursday: October 2 Economic Reports: Report Median Low High Prior Earnings Reports: Date Ticker Company Qtr Est Yr Ago % Dif 2-Oct-08 STZ CONSTELLATION BRANDS INC Q2-Aug.08 0.44 0.35 25.7 2-Oct-08 MAR MARRIOTT INTERNATIONAL INCORPORA Q3-Sep.08 0.32 0.31 2.7 2008 Thomson Reuters. All marks herein are used under license. 9
Friday: October 3 Economic Reports: Report Median Low High Prior Earnings Reports: Date Ticker Company Qtr Est Yr Ago % Dif 3-Oct-08 FDO FAMILY DLR STORES INC Q4-Aug.08 0.34 0.26 31.3 2008 Thomson Reuters. All marks herein are used under license. 10
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