While we started out the fourth quarter earnings season on a very weak note, the picture has improved as the season has worn on. I would not want to suggest that this has been a good earnings season, but it is not the ugly one it appeared to be just a few weeks ago.
So far 467, or 93.4% of the firms have reported. However, assuming that all the remaining firms report exactly in like with expectations, then 96.7% of all earnings are in. Normally, when all is said and done, the median surprise runs about 3.00% and the ratio about 3.0. So far, the median is at 2.33% and the ratio is 2.28. The median up from last week, and up for the fifth week in a row, but still well below normal. While we don’t have the drama of multi billion dollar bank losses, this is still the weakest earnings season since the depths of the Great Recession.
In most recent quarters, we have started out of the gate much faster than that only to fade towards those levels, this time the reverse is true, but we are running out of real estate to catch up. Total net income for the 467 that have reported is 7.14% above a year ago. It is less than half the 15.04% growth rate that the same 467 firms reported in the third quarter. The picture is similar if we take the Financials out of the picture. Without them, the year over year rise in net income is 6.98%, down from 18.35% growth in the third quarter.
Sequentially, total net income so far is 2.81% below the third quarter, or 3.91% lower ex financials. The pressure on the growth rate is coming from both the numerator and the denominator (year ago earnings growth was strong, and thus tougher comps).
The bar is also set low for the remaining 33 firms, and significantly lower than the results we have seen so far. They are expected to see year over year growth of negative 25.08%. If we exclude the Financial sector, earnings are expected to be 28.06% below last year’s. In the third quarter, the remaining firms had growth of10.31%, but it was -4.24% if the financials are excluded. In other words, we have started out weak, and it is expected to get worse. Provided the remaining firms report in line with expectations, the final year over year growth should be 5.63%, up from 5.15% expected last week.
Revenue growth has held up better, with the 467 reporting 6.98% growth. If we exclude the Financials that have reported, revenue is up 7.03% year over year. In the third quarter, revenue growth was 11.66, or 12.36% excluding Financials.
For the 467, net margins have come in at 9.01%, up from 8.98% a year ago, and down from 9.47% in the third quarter. While in an absolute sense, those are still very healthy net margins, much higher than the average of the last 50 years or so, but they are no longer expanding significantly. Then again, it was unrealistic to expect that they would always rise. It does mean that earnings growth is going to be harder to come by going forward.
On an annual basis (all 500), net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.27% in 2009. They hit 8.39% in 2010 and are expected to continue climbing to 8.98% in 2011 and 9.58% in 2012. The very preliminary expectation is that they will rise to 10.21% in 2013.
The pattern is a bit different if the Financials are excluded, as margins fell from 7.78% in 2008 to 6.93% in 2009, but have started a robust recovery and rose to 8.13% in 2010. They are expected to rise to 8.60% in 2011. They are expected to rise to 8.88% in 2012, and then up to 9.56% in 2013. There should be some caution in using the 2013 numbers, as the analyst sample sizes are still well below those for 2012, especially when it comes to revenues.
Total net income in 2010 rose to $788.8 billion in 2010, up from $538.6 billion in 2009. The expectations for the full year are very healthy. In 2011, the total net income for the S&P 500 should be $896.8 billion, or increases of 44.4% and 15.3%, respectively. The expectation is for 2012 to have total net income come close to $1 Trillion mark to $981.2 Billion, for growth of 9.5%. followed by growth of 11.1% in 2013. Total net income is expected to finally pass the $1 Trillion mark in 2013 at $1.09 Trillion.
The “EPS” for the S&P 500 is expected to be over the $100 “per share” level for the first time at $103.53 in 2012. That is up from $56.79 for 2009, $82.03 for 2010, and $94.62 for 2011. For 2013, the S&P 500 is expected to earn $114.96. In an environment where the 10 year T-note is yielding 1.97%, a P/E of 14.4x based on 2011 and 13.2x based on 2012 earnings looks attractive. The P/E based on 2013 earnings is just 11.9x.
Estimate revisions activity is rising fast, and approaching a seasonal peak. In previous earnings seasons we have generally seen a bounce in the revisions ratio, as the analysts have reacted to better than expected earnings and the outlooks on the conference calls. So far there is little evidence of that happening.
The revisions ratio for FY1, which is mostly 2012 earnings now stands at 0.79, or almost four cuts for every three increases. The picture for FY2, or mostly 2013 is only slightly better, with a revisions ratio of just 0.88. The widespread cuts are also confirmed by the ratio of firms with rising mean estimates to falling mean estimates, which now stand at 0.3 and 0.75, respectively. .
As the earnings season has progressed, things have been getting a bit better, but only moved the season from being very poor, to mediocre. This is happening when the bar is set at its lowest point in a very long time. For the remaining firms, the bar is set even lower. The market has been off to a very strong start of the year, despite the weak early results.
Valuations are still compelling, if somewhat less so than a few months ago. While earnings growth is slowing, it is still positive. The numbers for the first quarter look like they could be a little weak. With a decline of 2.58% year over year expected for those that have reported, but for the full year, growth of 9.41% is not all that bad, especially with it expected to pick back up again to 11.1% in 2013.
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