Earnings update for October 2012 Part 2
This is the second part of the three part series providing S&P500 earnings reports for Traverse City, Michigan. In this report we will look at how earnings projections are doing in comparison to previous time periods and on a sector basis. I also included some comments at the close of the article for investors in the Traverse City area to think about.
Overall the un-weighted next full year forward earnings projections that were gathered on Oct 26, 2012 increased by 0.04% over those gathered on Sept 21, 2012.
The next full year forward projections increased on 192 (38.40%) of the constituents, of these 48 (25.00%) had increases of $0.10 or more and 59 (30.73%) had an increase of $0.01. There were 15 (7.81%) that had increases of 10% or more and 100 (52.08%) had an increase of less than 1%. The projections remained the same on 90 (18.00%) of the constituents. The projections decreased on 218 (43.60%), of these 71 (32.57%) had decreases of $0.10 or more and 42 (19.27%) had decreases of $0.01. There were 22 (10.09 %) that had decreases of 10% or more and 77 (35.32%) had a decrease of less than 1%.
Of the 192 constituents with increases, Telecommunications Services (62.50%), Financials (55.56%) and Consumer Staples (52.38%) had the highest rate of constituent increases. Industrials (12.90%), Information Technologies (27.14%) and Materials (29.03%) had the lowest rate of increases.
Of the 218 constituents with decreases, Industrials (72.58%), Information Technologies (58.57%) and Materials (51.61%) had the highest rate of decreases. Telecommunications Services (12.50%), Consumer Staples (16.67%) and Financials (27.16%) had the lowest rate of decreases.
Of the 182 constituents that remained unchanged Consumer Staples (30.95%), Utilities (25.81%) and Telecommunications Services (25.00%) had the highest rates that remained the same. The lowest rates of unchanged earnings were seen in Energy (4.65%), Information Technologies (14.29%) and Industrials (14.52%).
The largest earnings projection increases seen between the two reports were in Financials (1.63%), Consumer Staples (1.02%) and Telecommunication Services (0.82%). The largest earnings projections decreases were seen in Industrials (-2.20%), Materials (-0.94%) and Energy (-0.82%).
The largest earnings projection increases over the projections of a quarter ago were seen in Telecommunication Services (6.13%), Financials (1.66%) and Consumer Staples (0.76%). The largest earnings projections decreases were seen in Industrials (-3.94%), Materials (-2.59%) and Energy (-2.47%). Overall there was a decrease in earnings projections of 0.93% over those a quarter ago.
The following is based on the beginning of quarter earnings estimates as outlined in Part 1 of this report. None of the companies that will be omitted from this data had reported at the time this data was collected.
Of the 269 constituents that have reported earnings in the third quarter, the sectors with the highest percentage beating the beginning of the quarter estimates were seen in Health Care (70.00%) with 30 of 52 reporting, Financials (66.67%) with 51 of 81 reporting and Consumer Staples (63.64%) with 22 of 42 reporting. The lowest rates were seen in Telecommunication Services (25.00%) with 4 of 8 reporting, Utilities (33.33%) with 6 of 31 reporting and Materials (36.36%) with 22 of 31 reporting.
The sectors with the highest percentage missing the beginning of the quarter estimates was seen in Utilities (66.67%) with 6 of 31 reporting, Energy (50.00%) with 18 of 43 reporting and Materials (50.00%) with 22 of 31 reporting. The lowest rates of misses were seen in Consumer Staples (18.18%) with 22 of 42 reporting, Health Care (20.00%) with 30 of 52 reporting and Information Technologies (23.81%) with 42 of 70 reporting.
Of the 269 that I found reported earnings for the third quarter, the sector with the highest percentage increase in the actual earnings amounts reported over the beginning of the quarter estimates was seen in Telecommunications Services (9.52%) with 4 of 8 reporting, Financials (9.12%) with 51 of 81 reporting and Health Care (4.97%) with 30 of 52 reporting. Three sectors saw decreases in comparison to the beginning of the quarter estimates with those being Materials (-4.63%) with 22 of 31 reporting, Information Technologies with 42 of 70 reporting (-2.59%) and Energy (-0.32%) with 18 of 43 reporting.
Overall the reporting constituents beat the beginning of the quarter earnings estimates by 2.34%.
I’d like to point out some things I find interesting about this data.
The first area I find interesting is the full year forward estimates. I mentioned in the comments section of the Stock Market Preview for Oct 26 that less than 5% of the companies are not doing well with earnings, and I would like to point out how I came to this conclusion, and part of it is from this month’s data.
Most of the recent earnings warnings and guidance reductions were done a week or more before the data for this report was gathered. I read the reports or listened to earnings conference calls for many of the companies that gave prior earnings warnings or reduced guidance. I came away from most of these reports feeling they weren’t as bad as the news had reported. I touched on some of these in recent articles and went a little more in depth with the Alcoa (AA) report since it is the unofficial kickoff of the earnings season.
I feel that it probably averages close to one in twenty of these reports I seen were actually bad, or about 5%, the rest are showing slower growth, but provided indications that things could get better than they look at the moment. Even some of the 5% that I felt were bad have glimmers of hope.
A few of the things in this data I found to support the less than 5% number include the forward earnings estimates, specifically the breakdown of those with decreases. There were 22 that had decreases of 10% or more in their full year forward earnings. This amounted to 10.09% of the 218 that had decreases, or about 4.4% of the full S&P500.
One of the sectors that I feel has seen an extreme amount of bad press this reporting season has been Information Technologies, yet the sector has the third lowest miss percentage with only 23.81% missing projections. The sector is the second highest in actual earnings missed from the beginning of the quarter estimates at 2.59% below the estimates, but if you take the Google (GOOG) and Advanced Micro Devices (AMD) misses out of this sector’s earnings, it would be reporting a 2.00% increase.
There are similarly small numbers of bad reports in other sectors. In the materials sector, removing Cliffs Natural Resources (CLF) and DuPont (DD) misses takes the sector’s 4.63% miss into a 0.11% beat. Also in the Energy Sector, removing the two worst misses; CONSOL Energy Inc. (CNX) and FMC Technologies Inc. (FTI), changes the sector from down 0.32% to up 3.34%.
By removing just these six reports (or 2.2% of the reports) the index does not have one sector missing the beginning of the quarter projections, and the overall beat rate for the 263 remaining reports increases from 2.34% to 3.71%. A relatively small number of companies are reporting bad earnings, and as a result, a relatively small number of companies are reducing earnings guidance by substantial amounts. Doesn’t necessarily mean these companies stock prices are too high, many are not, even with reduced earnings projections.
I am not saying that some companies are not reducing growth estimates just that most are not projecting lower earnings than they are currently making. That means record earnings, plus a somewhat slower growth. If these companies were trading at the forward guidance they gave before, this might be a problem, but very few of the constituents are trading at present earnings value, let alone forward earnings value.
These guidance reductions reflect current conditions, and as many companies have stated while giving this lowered guidance, there are things that are happening that could improve the forward outlook. Many believe that increases will be seen late in the fourth quarter due to the timing of China’s need for materials in recent stimulus projects. When these increases begin, many will likely be raising guidance again.
Many were also seeing temporary sales declines due to those holding off on purchases of computers, tablets and even cell phones for Windows 8 arrival. Unfortunately Hurricane Sandy’s arrival was very close to that of Windows 8, so it will undoubtedly cloud the début, but presales of the software were much higher than those seen for Windows 7. At the same time, many of these devices were likely destroyed in the storm, and this could increase sales as they are replaced.
In the article mentioned above I’d also estimated that about 30% aren’t making expectations. This includes both current expectations, as somewhat less than 30% are missing both the current and beginning of the quarter estimates, but also on the forward projections. There were 218 or 43.60% of the constituents that had full year forward estimates reduced this quarter, but 77 of these reductions were less than 1% and not really meaningful, as next month they are just as likely to increase by less than 1%. That leaves about 28.2% with meaningful drops in forward estimates.
With all the talk of a slowdown and the company guidance that has been lowered, this month saw a 0.04% increase in forward estimates, and not the decrease many might have expected to see. The next full year forward earnings estimates are still 15.07% higher than the current trailing twelve month earnings of the constituents.
Earnings are at record levels, and likely to go higher. The earnings growth rate might not be well above 20% like it was through most of the rebound, so yes earnings growth is slowing, but stock prices are still lagging the earnings growth we have seen to this point. I continue to believe most stocks are still cheap.
Many of these sources were used in this article.
Have a great day trading.
Disclosure: I have investments in AA, AMD, CLF and DD. I do not have any investments in GOOG, CNX or FTI. I am currently about 92% long in stocks in my trading accounts.
Disclaimer: This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research and where appropriate, seek professional investment advice before acting on any information contained in these articles.