The Earnings Scout: A Focus on 3Q 2013 Guidance Update

August 5, 2013

Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • Most of the major Asian stock indices started the week off on a positive note led by a gain in China.
  • Data from HSBC showed China’s service economy growth held steady in July from June.

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  • This was taken as a positive since China’s service sector growth has been showing signs of deceleration, but maybe they have finally stabilized?
  • China’s government also issued a separate report on its service economy, and surprise, surprise, it claimed service sector growth actually accelerated in July from June.
  • Not all markets in Asia started the week off positively though, red-hot Japan saw its benchmark index, the Nikkei, drop 1.44%, Korean stocks lost 0.37%, and Russia’s main stock index opened the week 0.41% lower.
  • Stocks opened higher in Europe but are paring some of those gains.
  • Service sector data was also released throughout Europe overnight and like other data we have been collecting across the pond, it showed the overall Euro economy is contracting, but not as bad as feared.
  • Through Friday’s close, the S&P 500 index is now up over 21% on a total return basis year-to-date.
  • Small and mid-cap U.S. stock indices are doing even better.
  • All the while, as you will see at the end of this report, 2013, 2014, and 2015 S&P 500 earnings estimates continue to fall on an absolute basis.
  • This has many strategists and pundits puzzled. In doubt, they say earnings do not matter and stocks are only rising because of the Fed.
  • Those who say earnings do not matter cannot be more wrong.
  • The key to the markets rise has been the positive delta to those earnings expectations, which we measure better than anyone else.
  • In fact, we are the only ones measuring deltas to earnings expectations across the entire economy.

Into the Weeds: 3Q 2013 Guidance Update

  • We are now to the point we view 2Q 2013 earnings season as almost over with 79% of the companies in the S&P 500 reported.
  • We have shown how both 2Q 2013 earnings and sales growth rates have re-accelerated, albeit slowly, from the 1Q 2013 period.
  • This has been an unexpected positive surprise.
  • Another positive surprise?
  • A majority of companies (67%) beat 2Q 2013 earnings estimates, and a majority of those companies would have still beaten their estimates from 90 days ago.
  • So, lowered estimates were not needed as much this quarter.
  • While 2Q 2013 scorecards are nice to look at, the 3Q 2013 guidance is far more important.
  • How does it look? Well, on the surface, 3Q 2013 guidance looks bad. That is if you were only looking at this period alone.
  • Please do not look at the 3Q 2013 guidance table in this way (i.e. as a snapshot.)
  • We want to change the way you view earnings and the market. That way you will see the improvement in trends that the market is also picking up on.
  • Focus on where guidance has been in the past –more companies were cutting estimates and by a larger in prior quarters.
  • And most importantly, pay attention to the fact 2H13 estimates are not being cut significantly (many felt they were way too high), this indicates that the probabilities of a re-acceleration of growth has grown more likely.

3Q 2013 EPS Guidance Scorecard, as of August 2, 2013

Sector

*Average 3Q13 Guidance

Raise

Maintain

Lower

Reported

% Reported

Utilities

-0.39%

35%

26%

39%

23

74%

Telecommunication Services

-1.25%

0%

33%

67%

3

50%

Industrials

-1.48%

22%

15%

64%

55

89%

Consumer Discretionary

-1.68%

29%

10%

61%

52

63%

Financials

-2.05%

40%

38%

22%

73

90%

Energy

-2.46%

30%

11%

59%

37

86%

Health Care

-2.74%

18%

20%

62%

45

83%

Information Technology

-2.78%

28%

17%

55%

53

76%

Consumer Staples

-3.57%

8%

28%

64%

25

63%

Materials

-5.92%

11%

11%

79%

28

93%

S&P 500

-2.36%

26%

20%

54%

394

79%

Source: The Earnings Scout
*3Q13 EPS estimate change after 2Q 2013 earnings release

How does current guidance companies are providing compare to prior quarters?

Period

Average Guidance

Raise

Maintain

Lower

3Q 2013

-2.36%

26%

20%

54%

+2Q 2013

-2.45%

23%

24%

53%

*1Q 2013

-2.76%

26%

17%

57%

*4Q 2012

-3.04%

25%

17%

58%

*3Q 2012

-3.50%

22%

14%

63%

Source: The Earnings Scout
+2Q13 guidance during 1Q13 earnings season
*Prior periods only include the results of the 394 companies that have reported 2Q13 earnings

Estimates continue to fall after companies report earnings, but at a lesser rate

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Earnings reports this week – by sector

  • 57 more companies in the S&P 500 will report earnings is week
  • Companies in every sector will be represented with the most earnings reports coming from the consumer discretionary, financials and utilities sectors this week.
  • By weeks end, over 90% of the S&P 500 will have reported 2Q13 results.

Updated earnings expectations and PE trends

Updated Actual and Estimated S&P 500 Quarterly EPS Growth

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Consensus S&P 500 EPS Estimates

Fiscal Year

Current EPS

1 Week Ago

1 Month Ago

3 Months Ago

6 Months Ago

2013

$109.08

$109.25

$109.72

$110.87

$112.42

2014

$120.65

$120.92

$121.62

$122.43

$124.43

2015

$130.89

$131.08

$132.18

$133.88

$140.22

Price to Earnings Ratios

Fiscal Year

Current P/E

1 Week Ago

1 Month Ago

3 Months Ago

6 Months Ago

2013

15.67

15.48

14.87

14.73

13.46

2014

14.17

13.99

13.42

13.34

12.16

2015

13.06

12.91

12.35

12.20

10.79

Source: The Earnings Scout
Data as of market close on August 2, 2013
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