Be Very Very Quiet: I'm Hunting Earnings

by: Joe Eqcome


2nd-quarter earnings.

Earnings by sector.

Weighted actual to consensus EPS deviation.

If you are at all paying attention to the markets, then you are aware that earnings season is well underway for the second quarter. And so far... so good. Over the past three weeks, according to data provided by, 678 companies have reported earnings. Of these 678 companies, 527 have either met or beat expectations. That's close to 78%. Below is a pie chart showing the distribution of these 678 companies by sector.

Sector Breakdown: As can be seen from Chart 1, about 25% of the recent earnings reports have come from Financials, a sector that has changed dramatically since the "housing crisis" and is still dealing with regulations and settlements. Technology and Industrials have also been strongly represented during the past three weeks.

Weighted Deviation: Since the current bull market seems to have no end in sight, we decided to break down the recent earnings reports to see get a better sense of their effect on the market and to see if we can figure out where all of this excitement is coming from. To do this, we compared each company's actual earnings per share to its estimated earnings per share and weighted it by its portion of its respective sector's total EPS. We then added these values together to see how each sector performed against market expectations.

For example, below is a chart of this past week's earnings reports from a few companies in the energy sector. The second to last column, EPS vs. Consensus, shows each company's percentage deviation of its EPS from its EPS Consensus. We then multiplied those values by each company's EPS portion of the sector's total EPS (3.31). These values were then added together to get the sector's Weighted EPS Deviation vs. Consensus (-3.95%). Outliers whose Weighted EPS Deviation vs. Consensus was greater than 15% or less than -15% were removed so as not to skew the results.




EPS Consensus

EPS vs. Consensus

Weighted EPS Deviation vs. Consensus

El Paso Pipeline Partners






Kinder Morgan






Kinder Morgan Partners






Baker Hughes














Hey Good Lookin': As can be seen in Chart 2, earnings have beaten the street's expectations by a notable amount.

The Health Care sector has performed very well, and is made up of a good sample size of 68 reports, or 10%. However, both the Financial and Technology sectors, which are the two largest sample sizes of 24% and 21% respectively, have also performed very well this earnings season. As stated above, some companies whose Weighted EPS Deviation vs. Consensus was greater than 15% or less than -15% were omitted from the study so that they would not sway the results. For example, BreitBurn Energy (BBEP), which missed its EPS estimate of $0.18 by $1.07 (resulting in an EPS of ($0.89)), was omitted because this dramatic deviation was not representative of the group as a whole. If BBEP was to be included, the Health Care sector as a whole would have missed estimates by 66%. The same is true for the Utility sector. Because only 5 companies reported earnings, UNITIL Corporation (NYSE:UTL) made up 34% of the sector's earnings. If it were to be included, the Utility sector as a whole would have beat EPS estimates by 32%.

How About the Markets?: Over this same three-week period, stock markets have moved relatively sideways, with the major markets (Dow Jones, Nasdaq, S&P 500, and Russell 2000) all closing a bit lower than their July 3rd levels. Since that time, the S&P 500 has seen an equal number of up days as down days, including July 3rd. During this time, the hi/lo spread has been 2% and the average daily hi/lo spread has been 0.63%.

Stock Buybacks: In a recent GrowthIncome CEF Weekly Report, we touched on a very important yet often overlooked fact about earnings per share valuations. EPS requires two metrics to be calculated, earnings and outstanding shares. This means that not only will a company's earnings have an effect, but stock buybacks can also play a role by reducing the denominator of the EPS equation. According to Birinyi Associates, a market research and money management firm in Westport, last year, companies spent close to $600 billion on stock buybacks, second to 2007 for the highest annual total in history. In addition, the first quarter of 2014 was the largest quarter for stock buybacks since 2007 at $188 billion. In addition, both Jeffrey Kleintop of LPL Financial and Scott Clemons at Brown Brothers Harriman Private Banking calculated that half of the S&P 500's per-share earnings gains were a result of reduced share counts, not increased earnings. What may look like better earnings could actually be a result of fewer shares in the system.

What Does it All Mean?: We will continue to investigate the effect of earnings on the overall stock markets, as well as report in further detail about individual companies' buyback programs. If positive earnings can't push the market further, then it might be a signal for a market correction.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.