For the first quarter of 2013, defensive sectors were the front runners as Health Care, Consumer Staples and Utilities were top quarterly performers. This took many by surprise as one would tend to believe that more economically sensitive sectors (Ex. Cyclicals) would be out in front of a market that was accelerating higher at a considerable speed. Alexandra Scaggs recently wrote in a Wall Street Journal article entitled, "Stock Rally Strikes a Defensive Tone" that these three sectors are "…relatively insulated from the state of the economy; people will cut back on spending in tight times but not on medication, food or electric bills." Perhaps this reveals the types of sectors that are positioned to perform better within a "plow-horse economy" or perhaps this is a result of the risk tolerance comfort level of many investors who re-entered the stock market during the first three months of the New Year. To this end, Scaggs wrote in the same WSJ article cited above that some investors seem to be, "…concerned about growth in the U.S. and abroad…searching for investments that will offer steady cash payouts as interest rates remain low."
Sector performances during the second quarter should help to provide a better indication of this interesting first quarter phenomenon in terms of whether or not it will continue or if the momentum will shift back to cyclicals. We will also look for additional forward-looking sector guidance in 1st quarter earnings results.
We are anxious to review the 1st quarter 2013 earnings results of a wide sampling of companies within a diverse group of sectors. These results will help to provide a context to the vibrancy of the U.S. economic recovery and the strength of consumer spending in light of the extraordinary gains experienced by the U.S. stock market during the first three months of the New Year. We approach this earnings season cautiously as we believe that 1st quarter earnings results will not paint a pretty picture. In a CNBC article entitled, "After March Madness, Earnings Season Could Bring April Anxiety", author JeeYoon Park provides the following relevant statistics:
- For the 1st quarter of 2013, earnings growth is expected to gain by just 1.6% - well below the 6.2% gain experienced during the 4th quarter of 2012, according to Thomson Reuters data.
- Negative earnings warnings are high. According to Thomson Reuters data, there have been 108 negative revisions for S&P 500 companies vs. 23 positive revisions thus far. This represents the worst pace of negative to positive revisions on 12 years.
Thus far, the following list represents some of the more noteworthy earnings announcements, recognizing that "beat rates" can sometimes be misleading when gauging earnings strength and momentum in environments where analysts are revising their estimates downward in unison:
- Apple (AAPL) beat earnings estimates (which were revised downward following two consecutive quarterly earnings misses during the 3rd and 4th quarters of 2012) and narrowly missed revenue estimates with earnings of $13.81 per share on revenue of $54.51 billion vs. consensus estimates of $13.34 per share and $54.58 billion respectively.
- Bank of America (BAC) missed earnings estimates on earnings of 20 cents a share vs. consensus estimate of 23 cents a share. While they missed estimates, the results were considerably higher than then 3 cents a share they earned during the first quarter of 2012.
- Federal Express (FDX) reported earnings of $1.13 ($1.23 when excluding restructuring costs) per share on revenue of $11 billion for their third quarter which ended on February 28, 2013 vs. a consensus estimate of $1.38 per share. The company also revised their 2013 earnings forecast lower and announced plans to cut their capacity in Asia.
- Intel (INTC) reported that its first quarter profits were down 25% from a year prior and earned 40 cents a share, which was in-line with consensus estimates.
- Deere & Co. (DE) reported first quarter earnings of $1.65 per share on net income of $649.7 million vs. a consensus estimate of $1.40 per shares.
- Johnson & Johnson (JNJ) reported 1st quarter earnings of $1.44 a share on net income of $3.5 billion (which were down 11% when compared to the prior year) vs. a consensus estimate of $1.39.
- General Electric (GE) reported 1st quarter earnings of $0.34 per share ($0.35 after certain adjustments) on revenue of $35 billion and net income of $3.5 billion. Earnings were in-line with the consensus estimate.
- International Business Machines (IBM) reported that 1st quarter net income fell 1.1% from the year prior and earnings, excluding certain items, were $3 per share vs. a consensus estimate of $3.05 per share. IBM's miss sent the stock price lower after the announcement and led many analysts to lower their forward price targets. This could be a reason for concern for stock investors as since 2003 Bespoke found that after the 21 times IBM's stock price increased the day after its earnings report, the S&P 500 followed suit 81% of the time over the next 5 weeks, while IBM's 20 negative price reactions were followed by net decreases in the broader index 75% of the time.
Beyond the 1st quarter, analysts remain positive about the outlook for earnings for the balance of 2013. To this end, at the beginning of the year, consensus analyst earnings growth estimates were at 6.8% for the 2ndquarter of 2013. If this estimate proves to be remotely accurate, it would represent a significant increase from the current expectations for the first quarter of 2013 and from the actual results of the fourth quarter of 2012. This might also lead to the sector momentum shift discussed earlier.
The sentiment expressed above around future earnings is consistent with our outlook for how we believe that the year of 2013 will unfold from an economic and stock market perspective. It would seem to us that consumers and businesses will show restraint with respect to spending and that businesses will be reluctant to hire new workers and invest in their existing operations until the fiscal uncertainties surrounding the Fiscal Cliff and Debt Ceiling are behind us.
We would also contend that economic growth, as measured by Gross Domestic Product, will likely coincide with the pattern of earnings growth that is realized throughout 2013 as earnings are often associated with retail sales. Retail sales provide an important glimpse into consumer spending patterns which are critical to economic growth as consumer spending accounts for over 70% of GDP at present.