The first quarter 2013 earnings season has gotten underway, though it will take another three weeks for the reporting cycle to heat up. The initial reports from the likes of Oracle (ORCL) and FedEx (FDX) have been disappointing, but it would be premature to extrapolate these results onto the entire quarter.
Growth expectations remain weak, a reflection of underwhelming management guidance and tough comparisons — the first quarter of 2012 remains the high point of quarterly earnings since the current earnings cycle got underway in 2009. These tough comparisons are particularly pronounced in the Finance sector, which is expected to experience an earnings decline after many quarters of double-digit growth. The outlook for Tech is even weaker and fairly widespread, which would come after the sector’s underwhelming results in the previous quarter.
But the lack of growth in the first quarter is not much of a concern for the market, as investors are looking ahead to period of robust growth later in the year, particularly in the back half of 2013 and all of 2014. The expectation is that the +0.9% earnings growth in the first half of 2013 will be followed by double-digit earnings growth in the second half of the year and into next year. Driving these optimistic growth expectations are strong revenue gains and further expansion in margins which are already in record territory.
Revenue growth is a function of economic growth. And while GDP growth has been fairly erratic in recent quarters, the expectation is for a sustained period of growth starting in the second half of the year. Hard to tell how reasonable the revenue growth expectations are since they are so closely tied to the uncertain economic backdrop.
But margins are a different story. Expecting margins to continue expanding after they have crossed the prior cyclical peak does not seem reasonable or plausible.
- The first-quarter 2013 reporting season has gotten underway. Expectations remain low and it wouldn’t take much to come ahead of them.
- Total earnings in the first quarter are expected to be down 2.8% from the same period last year. This reflects a -1% decline in revenues and a modest contraction in aggregate net margins. Total earnings were up 2% in the fourth quarter, with a beat ratio of 64.7% and median earnings surprise of +3.4%.
- Weak management guidance and tough comparisons account for the expected negative earnings growth. Total earnings reached their highest quarterly total in the first quarter of 2012 and have yet to get back to that level. Earnings are expected to bottom in the first quarter and start growing again from the second quarter onwards — the earnings total for Q2 expected to surpass the Q1 2012 level.
- Unlike the last many quarters, Finance will be a drag on growth this quarter, with total Finance sector earnings expected to drop -3.2% after +10.3% growth in Q4 and four-quarter average growth pace of +22.1%. Tough comparisons for Bank of America (BAC) and AIG (AIG) account for most of the earnings weakness.
- Finance earnings resume double-digit earnings growth from the second quarter onwards, with third quarter 2013 earnings for the sector expected to top the first quarter 2012 peak. For the full-year 2013, total earnings for the sector expected to be up +11.6%.
- Tech earnings were weak last quarter and they are expected to be even weaker this time around, with total Tech earnings expected to be down 5.1% after the 1.6% gain in Q4 and the four-quarter average gain of 11.5%. The sector’s earnings weakness is broad based and not solely due to the negative comparisons for Apple (AAPL) and Intel (INTC).
- The Absolute level of quarterly earnings has been flat since Q2 2012, with second half 2012 earnings up just +0.9%. This sub-par growth pace continues in the first half of 2013, with total earnings increasing 1%. But the growth is expected to pick up materially in the second half, with 11.3% growth and further gains of 11.7% in full-year 2014.
- A combination of revenue gains and margin expansion reflect the positive outlook for the back half of the year. Net margins modestly contract in the first quarter, but start expanding from the second quarter onwards. For the full year 2013, net margins are expected to top the 2006 peak and expand even more in 2014.
- Total earnings are expected to increase by 6.7% in 2013 and 11.7% in 2014. In dollar terms, earnings are expected to total $1.03 trillion in 2013 and $1.15 trillion in 2014, up from the 2012 total of $966 billion. The bottom-up ‘EPS’ for the S&P 500 for 2013 and 2014 currently stands at $109.60 and $122.49, respectively.
READ THE FULL EARNINGS TRENDS REPORT by clicking here: Will Q1 Provide the Earnings Growth Bottom?
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