(A) Fewer Revisions, But Still Positive – Earnings Trends
Key Points:
Growth
- Third quarter expected to be down 23.8% year-over-year
- Fourth quarter to more than double year ago, but it is all in the Financials
- 2009 total net income expected to fall 7.3%, but rise 23.8% in 2010
- More than half expected to post positive growth in Q4
Levels
- Bottom up estimate for S&P 500 now $59.61 in 2009
- S&P 500 now expected to earn $73.81 in 2010.
- Top down estimates $53.94 and $68.40, respectively
Scorecard & Surprise
- Early results strong with a median surprise of 5.32%
- A tiny sample with only 3.2% of reports in
Revisions
- Total estimate increases outnumber cuts almost 3:2 for 2009
- Upward revisions outnumber cuts by more than 7:4 for 2010
- Revisions ratios for both years slipped, but are still up big from earlier in the year
- Total revisions activity near seasonal lows
- For 2009, Discretionary and Materials lead; Utilities Telecom lag
- Discretionary and Tech strong for 2010.
Valuation
- S&P 500 P/E at 17.5x based on 2009 earnings, an earnings yield of 5.71%
- P/E of 14.2x based on 2010 earnings, or earnings yield of 7.07%
- Earnings yields attractive relative to Treasury and corporate bond yields
- Health Care has lowest P/Es of any sector
Growth
- Total net income expected to decline 23.8% in the third quarter from a year ago
- Median EPS declined 16.8% in Q2; a 15.3% decline is expected in Q3
- Explosive 118.3% growth in total income expected in Q4, but it is all about last year; median EPS expected to fall 6.3% in Q4
- Financials responsible for ALL of the expected year-over-year growth in the fourth quarter (very easy comps)
- Materials and Energy saw massive year-over-year declines in Q2 and are expected to again in Q3
Analysts continue to raise more estimates than they are cutting. However, the ratio has slipped back for 2 weeks in a row now. Since the total number of revisions are still falling and near a seasonal low, the change is mostly driven by old estimates falling out of the totals, not a swam of new cuts. The increases are widespread with only 3 sectors seeing cuts on balance for 2009 and only 2 seeing net cuts for 2010.
Total net income growth is in the process of turning around. The decline of 23.8% expected for the third quarter is well below the 30%+ declines we have been seeing in recent quarters, and growth should turn extremely positive in the fourth quarter. We are however talking about year-over-year changes, and the change says more about 2008 than it does about 2009. Almost all to the Q4 turnaround is due to the Financials. In the fourth quarter of last year, the S&P as a whole earned $69.7 billion before non recurring items as the Financial sector lost a total of $64.4 billion.
In the fourth quarter of this year the S&P 500 is currently expected to earn
$152.6 billion, for a swing of $82.8 billion. The financial sector is now expected to earn $17.1 billion (the quality of the earnings is still lousy), for a swing of $81.4 billion, or 99% of the total improvement. On a sequential basis, total net income is expected to fall for the S&P 500 by just 0.2% in the third quarter over the second quarter and to rise by 12.2% in the fourth quarter over the third quarter.
Yes, the fourth quarter improvement is nice, but it is not as robust as the 119.9% year-over-year gain would seem to indicate. The third quarter is somewhat similar, in that year-over-year earnings growth excluding the financials is much worst than when including them, with a decline of 28.8% rather than 23.8%. The troubles started in the third quarter last year for the sector and then got really bad in the fourth quarter.
| Total Net Income Growth1 (%) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sector | 4Q’09 E | 3Q’09 E | 2Q’09 A | 1Q’09 A | 2008 A | 2009 E | 2010 E | ||
| Financials | - to + | 106.92% | -49.01% | -39.68% | + to - | - to + | 52.76% | ||
| Cons. Disc. | 56.12 | 22.66% | -15.89% | -44.23% | -23.51% | -2.63% | 31.25% | ||
| Health Care | -2.69 | -3.23% | 3.94% | 1.79% | 7.80% | 1.11% | 9.05% | ||
| Cons. Stap. | 9.09 | -4.07% | 0.14% | -299.00% | -2.76% | 4.01% | 9.65% | ||
| Utilities | -5.39 | -5.01% | -5.35% | -2.63% | 3.42% | -4.37% | 8.21% | ||
| Technology | 22.05 | -14.76% | -16.04% | -26.68% | -0.89% | -2.91% | 22.58% | ||
| Telecom | -17.15 | -20.55% | -27.40% | -16.79% | -5.57% | -19.33% | 4.22% | ||
| Industrials | -18.09 | -44.84% | -31.84% | -35.59% | -0.61% | -36.24% | 14.45% | ||
| Energy | -29.88 | -64.86% | -66.54% | -58.87% | 18.55% | -57.59% | 48.00% | ||
| Materials | 129.46 | -69.30% | -69.13% | -83.44% | -14.30% | -51.75% | 62.22% | ||
| S&P | 119.88% | -23.79% | -30.79% | -31.27% | -24.37% | -7.32% | 23.83% | ||
| Total $ and Shares of Total ($ and %) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Sector | Total 4Q09 Est $ | Total 3Q 09 Est $ | Total 2Q 09 Act $ | Total 1Q 09 Act $ | Share 4Q 09 E % | Share 3Q 09 E % | Share 2Q 09 A % | Share 1Q 09 A % |
| Health Care | $24,569 | $24,433 | $25,573 | $25,328 | 16.11% | 17.96% | 18.77% | 20.44% |
| Technology | $28,315 | $22,754 | $20,742 | $19,048 | 18.56% | 16.73% | 15.22% | 15.37% |
| Cons. Stap. | $21,952 | $20,742 | $20,698 | $17,056 | 14.39% | 15.25% | 15.19% | 14.12% |
| Energy | $17,389 | $15,668 | $13,271 | $13,572 | 11.40% | 11.52% | 9.74% | 10.95% |
| Financials | $17,054 | $13,745 | $14,215 | $13,881 | 11.18% | 10.10% | 10.43% | 11.20% |
| Industrials | $14,941 | $12,172 | $15,730 | $13,143 | 9.79% | 8.95% | 11.55% | 10.60% |
| Cons. Disc. | $13,916 | $10,512 | $12,013 | $7,034 | 9.12% | 7.73% | 8.82% | 5.68% |
| Utilities | $5,640 | $8,566 | $6,223 | $7,421 | 3.70% | 6.30% | 4.57% | 5.99% |
| Telecom | $5,112 | $5,104 | $5,267 | $5,685 | 3.35% | 3.75% | 3.87% | 4.59% |
| Materials | $3,667 | $2,324 | $2,514 | $1,322 | 2.40% | 1.71% | 1.84% | 1.07% |
| S&P | $152,551 | $136,020 | $136,243 | $123,941 | 100.00% | 100.00% | 100.00% | 100.00% |
| Median EPS Growth Rates % | ||||||
|---|---|---|---|---|---|---|
| Sector | 2Q ’09 (A) | 3Q ’09 (E) | 4Q ’09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Health Care | 9.34% | 2.40% | 4.12% | 12.40% | 7.55% | 10.20% |
| Cons. Stap. | 3.33% | 0.07% | 8.33% | 2.80% | 7.30% | 9.30% |
| Utilities | -2.86% | -3.75% | -5.71% | 3.20% | -1.50% | 8.20% |
| Tech | -19.78% | -18.11% | -6.01% | 4.50% | -6.20% | 17.35% |
| Telecom | -18.52% | -8.24% | -7.70% | 2.00% | -7.20% | 4.20% |
| Cons Disc | -21.74% | -15.61% | -2.21% | -6.85% | -10.00% | 14.70% |
| Industrials | -22.30% | -24.88% | -17.35% | 10.90% | -19.85% | 12.95% |
| Financials | -32.00% | -30.51% | -17.53% | -15.75% | -25.00% | 24.20% |
| Materials | -36.45% | -21.19% | -2.42% | -0.20% | -26.60% | 19.40% |
| Energy | -65.12% | -65.52% | -32.09% | 23.10% | -56.70% | 19.95% |
| S&P 500 | -16.78% | -15.30% | -6.26% | 3.20% | -9.15% | 7.60% |
Scorecard & Surprise
- Still very early, all August quarter ends
- EPS surprise ratio 3.67, Sales Surprise ratio 2.16
- Median Surprise 5.32%
| Scorecard & Surprise | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sector | % Reported |
Median % Surprise |
# Pos EPS Surprise |
# Neg EPS Surprise |
# Pos Sales Surprise |
# Neg Sales Surprise |
|||
| Cons. Stap. | 9.76% | 10.35% | 4 | 0 | 1 | 3 | |||
| Cons. Disc. | 8.75% | 5.08% | 4 | 3 | 7 | 0 | |||
| Tech | 6.58% | 0.00% | 1 | 0 | 3 | 2 | |||
| Industrial | 3.57% | 3.75% | 1 | 0 | 1 | 1 | |||
| Financial | 1.25% | 500.00% | 1 | 0 | 1 | 0 | |||
| Healthcare | 0.00% | nm | 0 | 0 | 0 | 0 | |||
| Utilities | 0.00% | nm | 0 | 0 | 0 | 0 | |||
| Telecom | 0.00% | nm | 0 | 0 | 0 | 0 | |||
| Materials | 0.00% | nm | 0 | 0 | 0 | 0 | |||
| Energy | 0.00% | nm | 0 | 0 | 0 | 0 | |||
| S&P 500 | 3.80% | 5.32% | 11 | 3 | 13 | 6 | |||
Revisions – The Zacks Revisions Ratio: 2009
- Revisions ratio for full S&P 500 up to 1.44, from 1.76
- Revisions ratio up big from earlier this year
- Change in revisions ratios being driven by estimates falling out, not
new estimates - Seven sectors in positive territory; Discretionary and Materials lead
- Utilities and Telecom continue to see estimates cut
- Ratio of firms with rising to falling mean estimates falls to 1.44 from
1.50 - Total number of revisions (4-week total) down to 1,198 from 1,262 last
week (-5.1%) - Increases down to 772 from 805 (-4.1%); cuts fall to 426 from 457
(-6.8%) - Total Revisions activity near seasonal low
The revisions ratio fell back this week, but at this point the rise is being driven by more estimate cuts falling out of the system (after their 4 weeks are up) than estimate increases falling out of the system. This is different than a flood of new estimate increases entering the system.
Still, the long string of improvements in the total revisions ratio for 2009 was impressive, and a welcome change from the overwhelming preponderance of cuts we were seeing earlier in the year.
Seven sectors are in solidly positive territory. Most impressive are the 3:1 ratio for Discretionary and the 5:2 ratio for Materials. Telecom and Utilities continue to lag, but they are relatively small sectors both in terms of total number of companies (especially Telecom) and in terms of the total net income of the index.
| Sector | Avg. 4wk EPS Change (FY1) |
Revisions Ratio |
Firms With FY1 EPS Increase |
Firms With FY1 EPS Decrease |
| Consumer Disc | 0.90% | 3.06 | 52 | 17 |
| Materials | -0.01% | 2.50 | 15 | 6 |
| Consumer Staple | 0.26% | 2.10 | 21 | 10 |
| Technology | 3.94% | 1.85 | 37 | 20 |
| Health Care | -0.02% | 1.59 | 27 | 17 |
| Industrials | 0.73% | 1.58 | 30 | 19 |
| Financial Services | 0.52% | 1.10 | 33 | 30 |
| Energy | 0.14% | 0.80 | 16 | 20 |
| Utilities | -0.32% | 0.36 | 8 | 22 |
| Telecom | -0.27% | 0.33 | 2 | 6 |
| S&P 500 | 0.91% | 1.44 | 241 | 167 |
The Zacks Revisions Ratio: 2010
- Revisions stronger for 2010 than 2009
- Revisions ratio falls to 1.76 from 2.00
- Tech, Industrials and Materials showing best estimate momentum for 2010
- Telecom and Utilities are getting cut.
- Ratio of rising to falling mean estimates falls to 1.76 from 1.73
- Total revisions activity nearing lows for the quarter
- Total number of revisions falls to 1,161 from 1,198 (-3.1%)
- Estimate increases fall to 778 from 799 (-2.6%); cuts down to 383 from
399 (4.0%)
While the revision ratios should be taken with a little bit of a grain of salt when total revisions activity is at its seasonal lows, it is still nice to see far more analysts raising their estimates than cutting them.
Four different sectors are now above the 2:1 level Incorporatedluding the three most cyclical sectors, Discretionary, Materials and Industrials. This seems to confirm other data showing that the recession is now over.
The Discretionary sector is being led by retailers like Best Buy (BBY), Big Lots (BIG) and Tiffany (TIF). The Tech sector continues to be led by chip stocks like Intel (INTC) and National Semiconductor (NSM).
| Sector | Avg. 4wk EPS Change (FY2) |
Revisions Ratio |
Firms With FY2 EPS Increase |
Firms With FY2 EPS Decrease |
| Consumer Discr | 1.71% | 2.79 | 53 | 19 |
| Technology | 3.53% | 2.47 | 42 | 17 |
| Materials | 1.07% | 2.29 | 16 | 7 |
| Industrials | 0.74% | 2.19 | 35 | 16 |
| Consumer Staples | 0.10% | 1.58 | 19 | 12 |
| Financial Services | 0.08% | 1.57 | 33 | 21 |
| Energy | 0.16% | 1.44 | 23 | 16 |
| Health Care | 1.22% | 1.37 | 26 | 19 |
| Telecom | -0.93% | 0.60 | 3 | 5 |
| Utilities | -0.82% | 0.53 | 8 | 15 |
| S&P 500 | 1.04% | 1.76 | 258 | 147 |
Valuation – Earnings Shares and P/Es
- Earnings Shares Incorporatedluding historical, based on current make up of S&P
500 - Health Care to take earnings crown from Energy in 2009, but yield to
Tech in 2010 - Energy’s earnings share expected to plunge to 10.8% from 23.5%
- Financials’ 2009 earnings share expected to rise to 11.6% from -3.68% in
2008 - Financials back to having the second highest weight in the index
- 12-month forward S&P P/E of 15.33 equates to earnings yield of 6.62%,
which is attractive relative to 10-year T-note yield of 3.47%, and somewhat
attractive relative to 4.82% A rated 10-year corporate. - Health Care has the lowest P/E sector for both 2009 and 2010; its market
cap share (index weight) well below its earnings share
| Earnings Shares and P/E’s | |||||||
|---|---|---|---|---|---|---|---|
| Sector | 2008% | 2009% | 2010% | Market Cap % |
P/E 2008 |
P/E 2009 |
P/E 2010 |
| Technology | 15.71% | 16.46% | 16.29% | 18.99% | 19.6 | 20.2 | 16.5 |
| Financials | -3.62% | 11.63% | 14.35% | 14.64% | nm | 22.1 | 14.5 |
| Health Care | 16.33% | 17.82% | 15.69% | 12.75% | 12.7 | 12.5 | 11.5 |
| Cons Stpl | 12.91% | 14.49% | 12.83% | 12.15% | 15.3 | 14.7 | 13.4 |
| Energy | 23.46% | 10.73% | 12.83% | 11.44% | 7.9 | 18.7 | 12.6 |
| Industrials | 14.20% | 9.77% | 9.03% | 10.38% | 11.9 | 18.6 | 16.3 |
| Cons Discr | 7.78% | 8.17% | 8.66% | 9.74% | 20.3 | 20.9 | 15.9 |
| Utilities | 4.85% | 5.00% | 4.37% | 3.60% | 12.1 | 12.6 | 11.7 |
| Materials | 3.94% | 2.05% | 2.69% | 3.29% | 13.5 | 28.1 | 17.3 |
| Telecom | 4.45% | 3.88% | 3.26% | 3.01% | 11.0 | 13.6 | 13.1 |
| S&P 500 | 100.00% | 100.00% | 100.00% | 100.00% | 16.2 | 17.5 | 14.2 |
Data in this report, unless stated otherwise, is through the close on Friday
9/25/2009
Zacks Investment Research
View original at: Zacks.com News Feed
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