Recap of Q3 & Looking Ahead to Q4 - Analyst Blog
19 Décembre 2011 - 8:56AM
Zacks
Third quarter earnings season was a good one. Total net income
growth was far higher than expected, although the median surprise
and the ratio of positive surprises to disappointments is slightly
below normal.
This week we will change our focus to the expectations for the
fourth quarter. Only eight of the S&P 500 have reported so far,
so the focus is on those yet to report. For those eight, total net
income is up 17.4% year over year, down from 25.7% growth in the
third quarter. Five positive surprises and two disappointments with
a median surprise of 2.71%. A decent start, but too early to
draw any conclusions.
The year-over-year growth rate for the remaining 492 of the S&P
500 is expected to slow dramatically, to just 3.91% from 13.75% in
the third quarter. Excluding Financials, the growth slowdown is
expected to be even more dramatic, dropping to just 3.32% from
17.8%.
Keep in mind, though, at the start of the third quarter earnings
season the expected level of earnings growth was just 12.04%,
11.73% excluding the Financials. Thus, it is not inconceivable that
we might squeak into double-digit growth again in the fourth
quarter, but the odds look increasingly long.
Earnings growth is slowing on both sides. Revenue growth is
expected to slow to 4.42% from 11.23% year over year. Excluding
Financials, revenue growth is expected to slow to 7.05% from 13.16%
in the third quarter. Sequentially, revenues are expected to be up
0.49% overall, and up just 1.31% ex-Financials.
The End of Net Margin Expansion?
As revenue growth is slowing, net margin expansion is stalling.
Overall net margins are expected to fall to 9.04% from 9.05% a year
ago. Excluding Financials, net margins are expected to fall to
8.56% from 8.87% last year. Sequentially, net margins are expected
to be down both in total and ex-Financials from 9.48% and 9.23%,
respectively.
The net margin expansion game is getting long in the tooth, but it
does not look like it is entirely over. It has played a key
role in the remarkable earnings recovery we have seen since the
depths of the Great Recession.
On an annual basis, net margins continue to march northward.
In 2008, overall net margins were just 5.88%, rising to 6.27% in
2009. They hit 8.51% in 2010 and are expected to continue climbing
to 9.19% in 2011 and 9.61% in 2012. The pattern is a bit different,
particularly during the recession, if the Financials are excluded,
as margins fell from 7.78% in 2008 to 6.93% in 2009, but have
started a robust recovery and rose to 8.12% in 2010. They are
expected to rise to 8.72% in 2011 and 8.91% in 2012.
Total net income in 2010 rose to $788.8 billion in 2010, up from
$538.6 billion in 2009. The expectations for the full year are very
healthy. In 2011, the total net income for the S&P 500 should
be $903.3 billion, or increases of 46.5% and 14.5%, respectively.
The expectation is for 2012 to have total net income come close to
$1 Trillion mark to $992.1, for growth of 9.8%.
Consider those earnings relative to nominal GDP. If we use the
middle of the year GDP level, S&P 500 net income has climbed
from 3.89% in 2009 to 5.45% in 2010 and assuming that the 2011
expectations are on target, 6.02% in 2011. Of course, the S&P
500 earns a lot of its income abroad, and there are a lot more than
500 companies in the U.S., so to some extent that is an
apples-to-oranges comparison. Nevertheless, it does demonstrate
that corporate profits are doing a heck of a lot better than the
rest of the economy.
A much broader measure of (domestic only) corporate profits tracked
by the government rose to 9.92% of GDP in the third quarter. Since
1959 (when the data starts), that measure has averaged 5.99% of
GDP. It is still not a record though, that was set in the third
quarter of 2006 at 10.29% of GDP. Meanwhile, wages fell to a record
low of just 43.75% of GDP, while the average since 1959 is 48.42%
of GDP.
Higher profits are great for the stock market, but ultimately
companies need customers, and their customers need to have income
(or borrowing capacity). Thus there has to be a very real question
about the sustainability of these great earnings. I don’t think it
is wise to assume that corporate profits will continue to take an
ever larger share of the economic pie.
The “EPS” for the S&P 500 is expected to be over the $100 “per
share” level for the first time at $104.63 in 2012. That is up from
$56.81 for 2009, $83.21 for 2010, and $95.28 for 2011. In an
environment where the 10-year T-note is yielding 1.85%, a P/E of
14.6x based on 2010 and 12.8x based on 2011 earnings looks
attractive. The P/E based on 2012 earnings is just 11.6x.
Estimate Revisions Go Dormant
Estimate revisions activity is close to its seasonal low, and
should at least triple from here by early February. We saw a little
bit of a bounce in the ratio of upwards to downwards revisions
during the third quarter earnings season, especially for this year,
but now that bounce seems to be over.
Once again, there are more estimate cuts than increases, with a
0.66 ratio. That is now well into bearish territory. The situation
for 2012 is worse. There the ratio never got above 1.0 during the
earnings season, and has now also started dropping again, and
currently stands at 0.65. That is a slightly bearish reading.
To some extent, there is a mechanical reason for upwards revisions
to this year. After all, the third quarter is part of the full
year, so if a company beats by a nickel, and the analysts don’t
increase their estimates for the firms by at least that much, they
are implicitly cutting their numbers for the fourth quarter. With
almost three positive surprises for every disappointment, one
should expect more upward revisions than cuts. Many of those
increases are now falling out of the four-week moving totals. That
suggests that, on balance, the guidance given in the earnings
conference calls was negative.
At the sector level, with the drop in overall revisions activity,
the sample sizes are getting quite thin, which makes them somewhat
less significant, but that does not mean that they should be
ignored entirely. For 2012, the estimate cuts are very widespread.
There are just three sectors -- Industrials, Transports and Retail
-- that have seen more upwards than downwards revisions for 2012,
and Retail just barely (1.09 ratio).
Meanwhile, six sectors have at least two cuts per increase. Autos,
Aerospace and Utilities are faring the worst, but on very think
sample sizes. Financials and Tech still have a large number of
total revisions, and there the ratios are 0.43 and 0.42,
respectively.
Who Won the Quarter?
As far as sectors are concerned, it looks like the clear winner in
the third quarter was Energy. It won gold by a healthy margin for
both earnings and revenue surprise, as well as for revenue growth.
It took home silver for earnings growth, edged out by Construction,
which was coming off a very low base a year ago. There was no clear
cut loser for the quarter, but Utilities, Aerospace and Financials
were all candidates for that dubious distinction.
The third quarter was a good one. However, the expectations are
very subdued for the fourth quarter, and the hurdle is getting
lower. Looking ahead to the first quarter, that slowing is expected
to continue, with just 0.78% total, and 2.24% ex-Financials growth
expected.
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