Director of Zacks Equity Research Dirk van Dijk, CFA tracks quarterly earnings results among most major industries. He puts together his Earnings Trends piece once a week, and was also good enough to share his views here in our forum.
How are certain industries currently performing this earnings season? Any major surprises?
Based on the actual returns, Tech is winning the growth derby, with median EPS growth of 25.0%. This is based on the results of 52 companies, or 73.2% of the total Tech firms in the index. Energy is in the Silver medal spot, and should have a good kick at the end of the race, with the remaining firms expected to post 46.4% growth. This should propel it into the gold medal spot when the race is done, but with almost three quarters of the results in, time is getting short and Tech just might pull an upset here.
On the surprise front, two sectors have been particularly impressive. Health Care’s median EPS growth rate is 17.4%. Health Care is showing 7.5 positive surprises for each disappointment, with a median surprise of 4.56%. This is not based on just a handful or results either, as over three quarters of Health Care reports are already in. The Industrials have been just as impressive, with growth of 15.6%, a 7:8 surprise ratio and a 5.13% median surprise. It looks like those two will be battling for the bronze medal in terms of median EPS growth. Health Care is currently ahead, but the expectations of the remaining firms suggest that the industrials should have a better kick at the end.
Where have you seen particular weakness?
The Financials have been the weakest sector by far, with the median EPS dropping by 18.2% from a year ago. The sector is responsible for over one third of all the earnings disappointments to this point. It is the only sector where disappointments have exceeded positive surprises in number. The Consumer Discretionary sector is the only other one to show negative year over year growth on a median EPS basis (-1.8%).
The expected results for the remaining Financials are not as bad as the ones which have already reported, but are still fairly soft at -1.4%. Materials should provide the worst remaining results at down 80.0% expected, but there are just a handful of remaining Materials firms. The remaining Consumer Discretionary firms are expected to show a 1.8% decline meaning that there should not be a big change from what has already been reported.
What are you looking for in companies that show some upside potential?
Some of the factors which should help median EPS growth are share repurchases, which though have slowed in recent months, will still reflect what happened last year. Oddly, increased share counts will also help boost EPS among the Financials. Since the ones that have increased their share counts the most (by going hat-in-hand to the sovereign wealth funds looking for new capital) are also the ones that are likely to reports losses, so the loss per share will be less.
In addition, to the extent that firms have large operations overseas, they should benefit from the currency translation effects of the weak dollar. The weak dollar has also boosted those companies that export a substantial portion of their sales.
Keep in mind that median growth rates are inherently equally weighted, so the growth rate for Cabot Oil and Gas (COG) is just as significant to the results for the Energy sector as the growth rate for Exxon (XOM).
Dirk van Dijk, CFA is the Director of Zacks Equity Research.
