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  • Earnings Roundup: S&P 500 Companies Continue To Surprise Analysts

    Financials and industrials were both strong sectors this week. Of the 14 financials companies that reported, 13 beat their estimates, and 15 of the 19 industrials companies beat analyst earnings estimates.

    Nearly half of the companies in the S&P 500 index have reported fourth-quarter earnings, and the results continue to improve. Of the 126 companies that reported this week, 74% exceeded their consensus earnings estimates, while 64% posted positive revenue surprises. These strong earnings results caused the blended earnings growth rate to jump to 8.9%. Much of the improvement this week comes from the financials and industrials sectors. As shown below in Exhibit 1, financials and industrials companies reporting this week beat their earnings estimates by 93% and 79%, respectively.

    Exhibit 1. S&P 500: Q4 2013 Earnings Scorecard - Companies Reporting This Week

    Source: Thomson Reuters I/B/E/S

    A total of 13 of the 14 financials companies that reported this week beat their estimates. Financials earnings have been strong in 2013, and particularly the fourth quarter, as growth is currently estimated at 23.6%. The results of Hudson City Bancorp (HCBK.O) are emblematic of the improvement in customer credit that is helping the sector stabilize and exceed analyst estimates. Hudson City Bancorp reported earnings of 9 cents per share, beating the 7-cent estimate. In its press release, the company highlighted decreases in nonperforming loans, early-stage loan delinquencies, and loan losses.

    In addition to benefitting from the housing market and mortgage business, financials sector earnings are also showing growth as a result of the strong year for the stock market. All four asset management companies that reported this week beat their estimates, with Invesco (IVZ.N) leading the way in terms of growth, with a 28.9% profit increase. The company noted a 4.5% increase in assets under management due to both market returns and asset inflows.

    Of the 19 industrials companies that reported this week, 15 beat analyst earnings estimates, with only one company missing its estimate. Some of the largest surprises came from the aerospace & defense sub-industry, where analysts had lower expectations due to cutbacks in U.S. defense spending. Some of these revenue reductions were offset by other areas of the business, as highlighted by Wes Bush, CEO of Northrop Grumman Corporation (NOC.N), during the earnings call. He said, "So as I look at 2013 performance, I'm particularly proud of our results in the context of last year's challenging U.S. government budget environment. In contrast to the challenges in the U.S. market last year, we are seeing growth in our international business."

    Elsewhere in the industrials sector, Robert Half International (RHI.N) beat its earnings estimate, its $0.49 EPS having grown 17% from a year ago. The improving labor market in the U.S. benefitted the company, which saw its strongest growth domestically, and particularly among small- and mid-size businesses. While many companies have complained about healthcare reform and increasing government regulation, Robert Half is a beneficiary, as CEO Max Messmer explained during the earnings call. He elaborated, "The regulatory and compliance space is one area where we are seeing a greater need for skilled finance and information technology talent. Financial services regulations such as Dodd-Frank are creating demand by companies for compliance expertise. Likewise, U.S. healthcare reform and consumer protection regulations are fueling demand for our services. The global regulatory environment is creating demand."

    Feb 10 2:37 PM | Link | Comment!
  • European Corporate Earnings Expected To Return To Growth

    Investors in Europe have seen nothing but cloudy skies recently, with four straight quarters of significant declines in corporate earnings. However, the sky may be brightening in 2014.

    Analysts are now projecting that fourth quarter earnings for the STOXX 600 will return to growth, with a 0.4% increase expected. The next two earnings seasons are expected to be a transitional phase, with modest earnings growth, followed by strong growth throughout the remainder of 2014, as shown below in Exhibit 1.

    Analysts expect the third quarter of 2013 to mark the end of a streak of poor earnings results, as earnings declined 14.5%, and missed expectations by 0.8% in aggregate in the most recent reported quarter. Economically-sensitive sectors were particularly hard hit. Companies in the Consumer Cyclicals sector missed earnings estimates 60% of the time while reporting an aggregate earnings decline of 29.8%. In the Energy sector, 62% of companies missed estimates while profits fell 21.2%.


    (click to enlarge)

    Source: Thomson Reuters I/B/E/S

    Yearend improvement

    Looking ahead to the fourth quarter earnings season, Consumer Cyclicals earnings are expected to grow 0.5%, while Energy is expected to suffer an 18.0% earnings decline. Although Energy, now the second largest sector in terms of earnings, is expected to report a weak quarter, six of the ten sectors are seen growing profits, four of them by double digit percentages.

    The Financials sector is an important part of the earnings turnaround. Earnings in the sector are estimated to grow 17.5% in the fourth quarter after declining 13.8% in the third quarter. Within Financials, the Investment Banking and Investment Services industry group is expected to drive growth, primarily because of the performance at UBS (UBSN.VX), which lost $0.36 per share a year ago and is expected to report a profit of $0.24 per share when it announces fourth quarter results.

    Similarly, the Industrials sector is expected to contribute to earnings growth in the fourth quarter. After a 10.4% earnings decline in the third quarter, companies in the sector are expected to report an aggregate 47.6% earnings increase. Easy comparisons to a weak quarter a year ago are a significant factor in the high growth rate for the sector, but the improving European economy is helping as well. Industrial conglomerate Siemens (SIEGn.DE) reported 6.3% earnings growth, surprising analysts, who had projected a decline in profits for the company. The company credited an improved macroeconomic environment in developed markets but did caution that business in China was giving mixed signals and that the company faces challenging conditions in other emerging markets.

    Feb 10 2:37 PM | Link | Comment!
  • Company-Issued Guidance Most Negative Level On Record – Cautious Consumer Spending And Reduced Government Spending Responsible?

    The current N/P earnings guidance ratio of 11.4 for Q4 2013 is the most negative on record. Prior to this, 6.8 was the highest negative-to-positive ratio. Some broad reasons companies are giving for negative guidance are that consumers remain cautious about spending, and that October's federal government shutdown reduced government spending.

    Now that the majority of S&P 500 companies have reported their third-quarter earnings results, investors are looking ahead to the fourth-quarter earnings season. Currently, analysts expect earnings to grow 7.8% over the fourth quarter of 2013. This estimate is down from the 10.9% estimate at the beginning of the quarter. Given the 0.4% expected revenue growth, it may be difficult to achieve profit increases of the magnitude currently expected.

    Companies have been expressing concerns about high fourth-quarter expectations in the form of earnings guidance. So far, S&P 500 companies have issued negative guidance 103 times and positive guidance only 9 times. The resulting 11.4 negative-to-positive guidance ratio is the most negative on record by a wide margin. The highest N/P ratio prior to this quarter was 6.8 for Q1 2001.

    (click to enlarge)

    Throughout the first three quarters of this year, company-issued guidance was more pessimistic than usual, resulting in downward estimate revisions on the part of analysts. Though estimates were frequently being cut in prior quarters, analysts and company management teams frequently left their full-year estimates intact under the assumption that profits would be made up in the latter part of the year. Now that the fourth quarter is upon us, earnings expectations are still very optimistic, resulting in negative guidance as companies adjust their internal projections based on the current environment.

    In addition to generally optimistic estimates, companies have been citing broad themes as reasons for earnings guidance. Even as the economy recovers and the employment picture improves, consumers are still cautious about spending. Target Corporation (TGT.N) cited this factor as it estimated fourth-quarter profits of $1.28 per share, well below the $1.41 analyst consensus at the time. Kathee Tesija, EVP of Merchandising, discussed the consumer outlook during the earnings call. She stated, "As we survey our guests and monitor the overall consumer environment, we continue to see anxiety regarding the economy and the ability to stay within household budgets, particularly among lower- and middle-income consumers. We even heard from some guests that they were cutting trips for fear they would be tempted to spend too much, a behavior we first observed in the recession. In light of this environment, we are entering the holiday season with a cautious outlook for sales and a very liquid inventory position."

    NetApp, Inc. (NTAP.O) mentioned the government shutdown and associated effects as a reason for its negative guidance. During the earnings call, CEO Tom Georgens expressed his concerns about the effects of reduced government spending on NetApp and on other companies that sell to the government. He explained his unease regarding "companies like us that have a dependency upon that business-and we see it slow down, and perhaps for a protracted period of time, that has impacted on our spending. If other companies are acting like we are, then clearly the impact of the government is going to spill over into the commercial side of the house. We will see that going forward as well, and that is also reflected in our guidance to some degree."

    With guidance at an overwhelmingly negative level, analysts are starting to cut fourth-quarter estimates. However, the question is whether it has fallen far enough. Expected earnings growth has come down 3 percentage points since the beginning of the quarter, but analysts are still projecting solid earnings growth of nearly 8 percent. Should estimates remain near this level, we will have to wait until the fourth-quarter earnings season to find out if analysts are too optimistic or if management teams have been too pessimistic.

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    Dec 16 11:27 AM | Link | Comment!
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