What Is the Real Story On Earnings?July 21, 2012 @ 10:05 AM EST
Recent headlines from this quarter's earnings parade have been more than a little contradictory. For example:
GOOGLE (GOOG) SEARCHES OUT RECENT HIGHS ON EARNINGS!
CHIPOLTE MEXICAN GRILL (CMG) CRASHES AND BURNS LIKE A HOT PEPPER!
INDICES HIGHEST IN TWO MONTHS OFF EARNINGS!
EARNINGS SHOW LOWEST SALES RESULTS SINCE 2009!
We have seen any number of comments in the print and broadcast media on the state of the earnings season so far and really wanted to dig into some objective data to see what the actual story is (and we promise to keep this brief).
Very quickly, let’s recall that year over year earnings forecasts were all over the lot, with estimates anywhere from a decline of about -3.0% to an increase of around +8.0% and everywhere in between. Let’s also recall that the media was all over the high level of earnings warnings coming into this season and the reduction of many analysts’ targets. According to one report about two weeks ago, “the ratio of earnings warnings to positive pre-announcements already stands at levels not seen in more than a decade.”
So what has transpired so far?
The general theme is a higher than expected ratio of earnings beats has seemingly come in, but that actual revenue results are disappointing.
Here are the facts from two independent sources:
-To date, 104 companies in the S&P 500 have reported revenues and earnings for the second quarter. Of these 104 companies, 74% have reported actual EPS above the mean estimate. This percentage is slightly higher than recent averages. Over the past four years on average, 68% of companies have reported actual EPS above the mean EPS estimate at this same point in time in the earning season.
-However, only 45% of companies have reported actual revenues above mean estimate. This percentage is well below recent averages. Over the past four years on average, 56% of companies reported actual sales above the mean sales estimate at this same point in time in earnings season.
-Season-to-date, 119 S&P companies have reported for Q2, with the EPS beat rate running at 76% and the revenue beat rate at 45%. This compares to last week's season-to-date reading of 70%/47% and the four quarter trailing average of 72%/63%.
-While Q2 results have certainly not been impressive, particularly in terms of the performance of revenues and guidance vs. consensus expectations, earnings season has been cited as a tailwind for the broader market. The big takeaway thus far seems to be that despite the extent of the negative estimate revision activity on the Street (recall that consensus expectations for Q2 y/y S&P 500 EPS growth had fallen to ~3% at the start of earnings season from just under 7% at the beginning of the quarter), investor expectations had de-rated even further.
As we look at various sectors, there are mixed stories throughout, with big tech wins for IBM and GOOG but MSFT gave up early gains on a very mixed report last night. In financials, there were some notable early applauding for JPM and GS, but both ended Friday lower than last Friday and MS really took it on the chin. It really does seem to be a very case by case basis, with Europe, currency fluctuations, the weather, raw material costs, China, energy, the consumer, small business, employment, credit availability, housing, etc. all coming into the discussions.
And despite the overall better than expected results versus a going-in gloomy sentiment, Bloomberg’s latest tracking forecast calls for a year over year decline of in the neighborhood of -2.0%.
But The Big Kahuna reports next week and we thought we saw the beginning of the ramp up into earnings Thursday and Friday for Apple (AAPL), as it put in a slow move up all week to the $615 area, only to come back to earth and close at $604 and change. But of course a lot of funny business can occur with AAPL on a monthly options expiration day.
The whispers have already started on how AAPL may blow out earnings on July 24th. The “official” consensus estimates are $10.37 EPS and $37 billion in revenue, with the EPS representing a 33.1% increase from year ago. And now the whispers are coming in at $12.00+ EPS and $42+ billion in revenue. Given the history of analysts missing AAPL by a factor of 10-20%, the whispers do not seem so outrageous and, if true, might give overall market bears some pause for caution in the next few trading days.
David W. (aka The Underground Trader)
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