For Immediate Release

Chicago, IL – September 17, 2009 – Zacks Research Equity Strategist, Dirk Van Dijk tracks earnings forecasts for S&P 500 companies on the Zacks.com web site, naming names those seeing upward and downward revisions, while forecasting trends for the months ahead.

Key Points:

Growth

 

  • Third quarter net income expected to be down 22.9% year-over-year
  • Fourth-quarter net ince to more than double from a year ago, but it is all in the Financials
  • Only 160, or 32% of all S&P 500 firms expected to see positive EPS growth in 3Q
  • More than half expected to post positive growth in Q4

Levels

 

  • Bottom-up estimate for S&P 500 now $60.73 in 2009
  • S&P 500 now expected to earn $75.23 in 2010
  • Top down estimates $53.94 and $68.40, respectively

Revisions

 

  • Total estimate increases outnumber cuts by 7:4 for 2009
  • Upward revisions outnumber cuts by 2:1 for 2010
  • Revisions ratios for both years slip but still up big from earlier in the year
  • Total revisions activity near seasonal lows
  • For 2009, Tech and Staples lead; Utilities and Telecom lag
  • Materials and Industrials coming on strong for 2010

Valuation

 

  • S&P 500 P/E at 17.6x based on 2009 earnings, an earnings uield of 5.69%
  • P/E of 14.2x based on 2010 earnings, or earnings yield of 7.04%
  • Earnings yields attractive relative to Treasury and corporate bond yields
  • Health Care has lowest P/Es of any sector

Growth

 

  • Total Net Income expected to decline 23.8% in the third quarter from a year ago
  • Median EPS declines by 16.8% in 2nd Quarter, 15.3% decline expected in 3rd Quarter
  • Explosive 118.3% growth in total income expected in 4th Quarter, but it is all about last year, median EPS expected to fall 6.3% in 4Q
  • Financials responsible for ALL of the expected year-over-year growth in the fourth quarter (very easy comps)
  • Materials and Energy see massive year-over-year declines in 2nd quarter and expected in the 3rd Quarter.

Analysts continue to raise more estimates than they are cutting for both this year and next, by roughly 2:1 margins for both years. The increases are wide spread with only 3 sectors seeing cuts on balance for 2009 and only 2 seeing net cuts for 2010.

Total net income growth is in the process of turning around, the decline of 23.8% expected for the third quarter is well below the 30%+ declines we have been seeing in recent quarters, and growth should turn extremely positive in the fourth quarter. We are, however, talking about year-over-year changes, and the change says more about 2008 than it does about 2009.

In the fourth quarter of last year, the S&P 500 as a whole earned $69.7 billion before non-recurring items as the Financial sector lost a total of $64.4 billion. In the fourth quarter of this year the S&P 500 is currently expected to earn $152.2 billion, for a swing of $82.4 billion. The financial sector is now expected to earn $17.0 billion, for a swing of $81.4 billion, or 99% of the total improvement.

On a sequential basis, total net income is expected to rise for the S&P 500 by just 0.1% in the third quarter over the second quarter and by 11.9% in the fourth quarter over the third quarter. Yes, the fourth-quarter improvement is nice, but it is not as robust as the 118.2% year-over-year gain would seem to indicate.

 

Revisions – The Zacks Revisions Ratio: 2010

 

  • Revisions stronger for 2010 than 2009 for first time in months
  • Revisions ratio falls to 2.00 from 2.11
  • Tech, Industrials and Materials showing best estimate momentum for 2010
  • Telecom and Utilities getting cut
  • Ratio of rising to falling mean estimates falls to 1.67 from 1.73
  • Total revisions activity nearing lows for the quarter
  • Total number of revisions falls to 1,198 from 1,216 (-1.5%)
  • Estimate increases fall to 799 from 825 (-3.2%), cuts up to 399 from 391 (2.0%)

While the revision ratios should be taken with a little bit of a grain of salt when total revisions activity is at its seasonal lows, it is still nice to see far more analysts raising their estimates than cutting them. The dramatic increase in the revisions ratios we have seen over the last month is mostly a function of old estimate cuts falling out of the system rather than a flood of new estimate increases coming into the system. On the other hand, it is nice to see that estimate cutting has come to a near complete stop.

Four different sectors are now above the 2:1 level, including the three most cyclical sectors, Discretionary, Materials and Industrials. This seems to confirm other data showing that the recession is now over.

The chip and chip equipment stocks continue to lead the Tech sector in terms of revisions. Some of the strongest performances have come from Intel (INTC), National Semiconductor (NSM), Texas Instruments (TXN) and Novellus (NVLS).

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Contact:
Dirk Van Dijk
Director of Research
312-265-9211
Visit: www.zacks.com

 

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