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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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.

  • The auto parts & equipment industry in the S&P 500 consists of three companies: BorgWarner, Delphi and Johnson Controls.
  • The industry accounts for 0.11% of the S&P 500 index.
  • In 2012, the auto parts & equipment industry significantly underperformed the consumer discretionary sector (4.45% vs. 23.92%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is now outperforming the consumer discretionary sector (35.12% vs. 26.04%) and the S&P 500, which has a total YTD return of 19.62%.

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  • As we have sifted through all of the earnings reports over the past several quarters, we have noticed the positive trends within housing begin to wane, while anything tied to the auto industry has started to accelerate into more positive territory.
  • Based on the 2Q13 earnings reports and 3Q13 guidance, there is a great chance these positive trends will be sustained through the first half of 2014.

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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.

  • The homebuilding industry in the S&P 500 consists of three companies: D.R. Horton, Lennar, Pulte Group.
  • The industry accounts for 0.11% of the S&P 500 index.
  • In 2012, the homebuilding industry significantly outperformed the consumer discretionary sector (104.39% vs. 23.92%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is now significantly underperforming the consumer discretionary sector (-8.73% vs. 25.41%) and the S&P 500, which has a total YTD return of 19.61%.

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  • All of the homebuilder’s underperformance in 2013 has come after our repeated warning that the industry was grossly overvalued.
  • Let us take the time to review our prior earnings analysis on the homebuilders.
  • Back in March 2013, the industry was still outperforming.
  • We cautioned about the decelerating rate of change to the homebuilder’s positive earnings estimate revisions as prices kept moving higher.

Homebuilding Industry Earnings and Price Trends in March 2013

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  • Something had to give, either earnings estimates were going to have to eventually go up or prices fall.
  • Our qualitative analysis on the group determined it would be the latter, and we were right.
  • Here is the current updated graph on how the rates of change to homebuilding earnings estimates are moving off of expectations.

Current Homebuilding Industry Earnings and Price Trends

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In our opinion, Ben Bernanke & Co. will need three things in order before they can pull an exit stage left.

  1. Improved employment picture
  2. Healthy financial sector
  3. Solid housing market
  • If all three of the above factors are humming, the economic recovery would have an increased chance of being sustained without the need for additional Fed support.
  • As for #1, jobs have been improving; albeit slowly, but improving,
  • As for #2, financials (i.e. banks) rocked in 2Q13 earnings season. The Fed can check this box.
  • As for #3, housing is much healthier today than two years ago. But, it will be tough for the Fed to leave the party early as housing trends have become steadily less positive over the past year.
3Q 2013 Homebuilding Earnings Estimates
Company

2Q13 Report Date

3Q13 Estimate

3Q13 Est. (90 days ago)

90 Day Estimate Change

D.R. Horton

7/25/2013

$0.40

$0.39

2.56%

PulteGroup

7/25/2013

$0.37

$0.40

-7.50%

Lennar Corp

6/25/2013

$0.46

$0.52

-11.54%

Source: The Earnings Scout

 

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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.

  • The Diversified Metals & Mining industry in the S&P 500 consists of one company: Freeport- McMoRan Copper & Gold.
  • The industry accounts for 0.20% of the S&P 500 index.
  • In 2012, the diversified metals & mining industry underperformed the materials sector (-3.51% vs. 14.97%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is significantly underperforming the materials sector (-11.08% vs. 9.36%) and the S&P 500, which has a total YTD return of 19.57%.

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  • In our most recent reports, we have been very bullish on overall 2Q 2013 earnings season.
  • By no means do we mean that every industry is doing well.
  • We continue to reiterate sectors with more exposure to decelerating growth trends in emerging markets, and in particular China, are witnessing very negative rates of change to their earnings expectations.
  • No industry is more of a poster child of these negative earnings trends than the metals and miners.
  • Contrarians might be tempted to jump into the beaten down metals companies; our earnings analysis indicates it is still too early to do so.
  • As such, we continue to recommend avoiding the metals & miners until emerging market stocks start to perform better and most importantly until the industry’s underlying earnings trends begin to turn positive on a sustained basis.

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3Q 2013 Diversified Metals & Mining Earnings Estimates
Company

2Q13 Report Date

3Q13 Estimate

3Q13 Est. (90 days ago)

90 Day Estimate Change

Freeport-McMoRan

7/23/2013

$0.65

$0.95

-31.58%

Source: The Earnings Scout

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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.

The Industrial Conglomerates industry in the S&P 500 consists of three companies: 3M, Danaher and General Electric.

• The industry accounts for 2.45% of the S&P 500 index.

• In 2012, the industrial conglomerates industry outperformed the industrials sector (19.76% vs. 15.35%) and the S&P 500, which returned 16.00%.

• In 2013, the industry is slightly outperforming the industrials sector (21.08% vs. 20.29%) and the S&P 500, which has a total YTD return of 19.91%.image002

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3Q 2013 Industrial Conglomerates Earnings Estimates
Company 2Q13 Report Date 3Q13 Estimate   3Q13 Est.(90 days ago) 90 Day Estimate Change 
General Electric

7/19/2013

$0.40 

$0.40 

0.00% 

3M

7/25/2013 

$1.78 

$1.80 

-1.11%

Danaher

7/18/2013

$0.84 

$0.85

-1.18% 

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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.

• The Systems Software industry in the S&P 500 consists of six companies: BMC Software, CA,
Microsoft, Oracle, Red Hat and Symantec.
• The industry accounts for 2.68% of the S&P 500 index.
• In 2012, the systems software industry outperformed the information technology sector
(15.22% vs. 14.82%) and underperformed the S&P 500, which returned 16.00%.
• In 2013, the industry is outperforming the information technology sector (12.99% vs. 10.26%)
and underperforming the S&P 500, which has a total YTD return of 19.60%.

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3Q 2013 Systems Software Earnings Estimates
Company

2Q13

Report Date

3Q13

Estimate

3Q13 Est.

(90 days ago)

90 Day

Estimate Change

CA

7/25/2013

$0.73

$0.62

17.74%

Red Hat

6/19/2013

$0.33

$0.33

0.00%

BMC Software

8/6/2013

$0.99

$1.00

-1.00%

Oracle

6/20/2013

$0.56

$0.58

-3.45%

Symantec

7/31/2013

$0.45

$0.48

-6.25%

Microsoft

7/18/2013

$0.58

$0.68

-14.71%

Source: The Earnings Scout

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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.

• The Other Diversified Financial Services industry in the S&P 500 consists of three companies:
Bank of America, Citigroup and JPMorgan Chase.
• The industry accounts for 3.52% of the S&P 500 index.
• In 2012, the other diversified financial services industry outperformed the financial sector
(56.99% vs. 28.82%) and the S&P 500, which returned 16.00%.
• In 2013, the industry is outperforming the financial sector (30.37% vs. 28.04%) and the S&P
500, which has a total YTD return of 20.06%.

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• Not much has changed since we issued our last report on big banks on June 11, other than the
confirmation in their 2Q 2013 earnings reports of improving underlying trends.
• We have long said we believe the Fed wants financial institutions to do well because their
success will be needed for a sustained economic recovery without the need for additional
support.
• As such, we continue to recommend the other diversified financials industry be over weighted
in your portfolio.
• Further, we also like regional banks for the same reasons mentioned above; however relative
to the rates of change to their underlying earnings trend the regional banks are much more
expensive.
• As you look at the earnings / price trends for the three companies
in the industry, we would say all of them are exhibiting similar
favorable trends that should continue into the 1H of 2014.
• Bank of America was the big winner in 2012 with a total return of
109.53%, but is slightly lagging its peers in 2013
by “only” rising 28.85% YTD.

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