Monday, October 21, 2013

Analysts Not Slashing Q4 EPS Estimates…Yet- Factset

With the economy still weak, as I and others have detailed, does this mean that estimates are too high? Maybe we will see that back-half acceleration in growth materialize.

Late Wednesday, Congress reached an agreement to end the partial shutdown of the U.S. government that began on October 1st. During the past few weeks, some companies in the index (including Citigroup, Linear Technology, and Stanley Black & Decker) have cited the negative impact of the shutdown on actual earnings for the third quarter or on projected earnings for the fourth quarter during their earnings conference calls for the third quarter. As a result, have analysts been reducing earnings estimates for the fourth quarter at a faster pace than normal due to the shutdown?

Over the first 20 days of the fourth quarter (since September 30), the aggregate dollar-level earnings estimate for Q4 has dropped 0.72% (to $266.1 billion from $268.1 billion). How does this decrease compare to recent averages?

During the past year (4 quarters), the average decline in the aggregate dollar-level earnings estimate during the first 20 days of quarter has been 0.83%. During the past five years (20 quarters), the average decline in the aggregate dollar-level earnings estimate during the first 20 days of quarter has been 1.33%. Thus, the decline in expected (aggregate) earnings for the fourth quarter during the first 20 days of the quarter has been lower than the trailing 1-year and 5-year averages. This decline is also well below the largest declines during this 20-day window over the past five years, recorded in Q1 2009 (-8.91%) and Q4 2008 (-7.56%). Clearly, analysts are not slashing estimates at a more rapid pace than normal at this point in time.

However, it is still early in the earnings season, as only about 20% of the companies in the index have reported actual results to date. More companies may comment on the negative impact of the shutdown on fourth quarter earnings during their conference calls over the next few weeks. The market will likely keep a close eye on the number and nature of these comments during the rest of the earnings season.

S&P 500: Change in Dollar-Level Earnings Over First 20 Days of a Quarter
Of the 97 companies that have reported earnings to date for the quarter, 69% have reported earnings above estimates. This percentage is below the average of 73% recorded over the past four years. In terms of revenue, 53% of companies have reported sales above estimates. This percentage is below the average of 59% recorded over the past four years. In aggregate, companies are reporting earnings that are 2.3% below the mean EPS estimate. This percentage is also well below the average of +6.5% over the past four years.

The blended earnings growth rate for the S&P 500 overall for Q3 2013 is 1.3% this week, slightly above last week’s growth rate of 0.8%. Upside earnings surprises reported by companies in the Industrials (General Electric), Information Technology (Intel), and Financials (Morgan Stanley and Goldman Sachs) sectors were partially offset by downward revisions to estimates for companies in the Energy sector (Exxon Mobil) during the week. On September 30, the Q3 earnings growth rate for the index was 3.1%. However, only three sectors have witnessed a decline in earnings growth rates since that date, led by the Financials and Energy sectors. The Information Technology and Industrials sectors have seen the largest increases in expected earnings growth since the end of the quarter.

The blended earnings growth rate for the quarter is 1.3%. Seven of the ten sectors are reporting or are projected to report an earnings increase for the quarter, led by the Consumer Discretionary (6.6%) and Industrials (5.7%) sectors. On the other hand, the Energy (-7.8%) and Financials (-2.1%) sectors have the lowest earnings growth rates for the quarter. The blended revenue growth rate for the index for Q3 is 1.9%, down from an estimate of 2.5% at the end of the third quarter.


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