Key Points:
Growth
- Third-quarter net income expected to be down 23.8% year-over-year
- Fourth quarter net income to more than double from a year prior, but it is all in the Financials
- 2009 total net income expected to fall 7.3%, but rise 23.8% in 2010
- More than half expected to post positive growth in 4Q
Levels
- Bottom-up estimate for S&P 500 now $61.35 in 2009
- S&P 500 now expected to earn $76.05 in 2010
- Top-down estimates $53.94 and $68.40, respectively
Scorecard & Surprise
- Early results strong with a median surprise 8.33%
- Only 5.6% of reports are in
Revisions
- Total estimate increases outnumber cuts almost 2:1 for 2009
- Upward revisions outnumber cuts by more than 2:1 for 2010
- Revisions ratios for both years are bouncing back
- Total revisions activity near seasonal lows
- For 2009, Tech and Staples lead; Utilities and Telecom lag
- Materials and Tech strong for 2010
- S&P 500 P/E at 16.7x based on 2009 Earnings, or Earnings Yield of 5.98%
- P/E of 13.8x based on 2010 Earnings, or Earnings Yield of 7.42%
- Earnings Yields attractive relative to Treasury and Corporate bond yields
- Health Care has lowest P/E’s of any sector
Growth
- Total net income expected to decline 23.8% in the third quarter from a year ago
- Median EPS declined 16.8% in the second Quarter; a 15.3% decline is expected in third quarter
- Explosive 119.9% growth in total income expected in fourth 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 saw massive year-over-year declines last quarter quarter and the same is expected in the 3rd Quarter. (Materials should see big gains in the fourth quarter.)
Analysts continue to raise more estimates than they are cutting. Unlike recent weeks, the total number of revisions is now rising, meaning that the changes in the revisions ratios are now being driven more by new estimates being made than old estimates falling out.
Over the next few weeks the total number of revisions will increase dramatically. 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.
On a sequential basis, the total net income for the third quarter is expected to be almost identical to the total net income in the second quarter. Almost all to the 4Q turnaround is due to the financials. 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 $152.6 billion, for a swing of $82.8 billion. The financial sector is now expected to earn $17.1 billion (the quality of the earnings is still lousy), for a swing of $81.4 billion, or 99% of the total improvement.
On a sequential basis, total net income is expected to fall for the S&P 500 by just 0.2% in the third quarter over the second quarter and to rise by 12.2% in the fourth quarter over the third quarter. Yes, the fourth-quarter improvement is nice, but it is not as robust as the 119.9% year-over-year gain would seem to indicate.
The third quarter is somewhat similar, in that year-over-year earnings growth excluding the financials is much worst than when including them, with a decline of 28.8% rather than 23.8%. The troubles started in the third quarter last year for the sector and then got really bad in the fourth quarter.
|
Total Net Income Growth1 (%)
|
|||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sector | 4Q’09 E | 3Q’09 E | 2Q’09 A | 1Q’09 A | 2008 A | 2009 E | 2010 E | ||
| Financials | – to + | 106.92% | -49.01% | -39.68% | + to – | – to + | 52.91% | ||
| Consumer Staple | 56.12 | 22.66% | -15.89% | -44.23% | -1.35% | 4.90% | 9.12% | ||
| Consumer Discr | -2.69 | -3.23% | 3.94% | 1.79% | -22.90% | 1.75% | 30.64% | ||
| Health Care | 9.09 | -4.07% | 0.14% | -299.00% | 7.48% | 0.95% | 9.24% | ||
| Technology | -5.39 | -5.01% | -5.35% | -2.63% | -0.98% | -2.06% | 22.11% | ||
| Utilities | 22.05 | -14.76% | -16.04% | -26.68% | 3.44% | -4.42% | 7.98% | ||
| Telecom | -17.15 | -20.55% | -27.40% | -16.79% | -5.60% | -19.80% | 3.92% | ||
| Industrials | -18.09 | -44.84% | -31.84% | -35.59% | -2.56% | -35.78% | 16.41% | ||
| Materials | -29.88 | -64.86% | -66.54% | -58.87% | -15.13% | -50.11% | 60.31% | ||
| Energy | 129.46 | -69.30% | -69.13% | -83.44% | 18.57% | -57.48% | 49.42% | ||
| S&P | 119.88% | -23.79% | -30.79% | -31.27% | -24.56% | -6.31% | 24.01% | ||
|
Total $ and Shares of Total ($ and %)
|
||||||||
|---|---|---|---|---|---|---|---|---|
| Sector | Total 4Q09 Est $ | Total 3Q 09 Est $ | Total 2Q 09 Act $ | Total 1Q 09 Act $ | Share 4Q 09 E % | Share 3Q 09 E % | Share 2Q 09 A % | Share 1Q 09 A % |
| Health Care | $24,569 | $24,433 | $25,573 | $25,328 | 16.11% | 17.96% | 18.77% | 20.44% |
| Technology | $28,315 | $22,754 | $20,742 | $19,048 | 18.56% | 16.73% | 15.22% | 15.37% |
| Cons. Stap. | $21,952 | $20,742 | $20,698 | $17,056 | 14.39% | 15.25% | 15.19% | 14.12% |
| Energy | $17,389 | $15,668 | $13,271 | $13,572 | 11.40% | 11.52% | 9.74% | 10.95% |
| Financials | $17,054 | $13,745 | $14,215 | $13,881 | 11.18% | 10.10% | 10.43% | 11.20% |
| Industrials | $14,941 | $12,172 | $15,730 | $13,143 | 9.79% | 8.95% | 11.55% | 10.60% |
| Cons. Disc. | $13,916 | $10,512 | $12,013 | $7,034 | 9.12% | 7.73% | 8.82% | 5.68% |
| Utilities | $5,640 | $8,566 | $6,223 | $7,421 | 3.70% | 6.30% | 4.57% | 5.99% |
| Telecom | $5,112 | $5,104 | $5,267 | $5,685 | 3.35% | 3.75% | 3.87% | 4.59% |
| Materials | $3,667 | $2,324 | $2,514 | $1,322 | 2.40% | 1.71% | 1.84% | 1.07% |
| S&P | $152,551 | $136,020 | $136,243 | $123,941 | 100.00% | 100.00% | 100.00% | 100.00% |
|
Median EPS Growth Rates %
|
||||||
|---|---|---|---|---|---|---|
| Sector | 2Q ’09 (A) | 3Q ’09 (E) | 4Q ’09 (E) | 2008 (A) | 2009 (E) | 2010 (E) |
| Consumer Staples | 9.34% | 2.40% | 4.12% | 2.80% | 9.50% | 9.40% |
| Health Care | 3.33% | 0.07% | 8.33% | 12.20% | 7.10% | 10.60% |
| Utilities | -2.86% | -3.75% | -5.71% | 3.30% | -1.40% | 8.00% |
| Technology | -19.78% | -18.11% | -6.01% | 0.50% | -4.90% | 17.50% |
| Consumer Discr | -18.52% | -8.24% | -7.70% | -6.60% | -6.90% | 15.50% |
| Telecom | -21.74% | -15.61% | -2.21% | 2.00% | -12.90% | 3.30% |
| Industrials | -22.30% | -24.88% | -17.35% | 8.25% | -18.50% | 14.45% |
| Financial Service | -32.00% | -30.51% | -17.53% | -18.00% | -23.40% | 21.90% |
| Materials | -36.45% | -21.19% | -2.42% | -5.20% | -26.70% | 18.35% |
| Energy | -65.12% | -65.52% | -32.09% | 22.80% | -56.05% | 29.70% |
| S&P 500 | -16.78% | -15.30% | -6.26% | 2.70% | -7.60% | 8.00% |
Scorecard & Surprise
- Still very early, all August quarter ends
- EPS surprise ratio 3.60, Sales Surprise ratio 1.80
- Median Surprise 8.33%
|
Scorecard & Surprise
|
|||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sector | % Reported |
Median % Surprise |
# Pos EPS Surprise |
# Neg EPS Surprise |
# Pos Sales Surprise |
# Neg Sales Surprise |
|||
| Cons. Stap. | 17.07% | 15.15% | 6 | 1 | 3 | 4 | |||
| Cons. Disc. | 11.25% | 3.08% | 5 | 4 | 6 | 3 | |||
| Tech | 11.53% | 47.37% | 4 | 0 | 6 | 2 | |||
| Industrial | 5.36% | 7.50% | 2 | 0 | 2 | 1 | |||
| Financial | 1.28% | 500.00% | 1 | 0 | 1 | 0 | |||
| S&P 500 | 5.60% | 8.33% | 18 | 5 | 18 | 10 | |||
Revisions: The Zacks Revisions Ratio: 2009
- The revisions ratio for full S&P 500 is up to 1.85, from 1.44
- The revisions ratio is up big from earlier this year
- The change in revisions ratios is being driven by estimates falling out, not new estimates
- Seven sectors in positive territory; Tech and Staples lead
- Utilities and Telecom continue to see estimates cut
- Ratio of firms with rising to falling mean estimates stays at 1.44
- Total number of revisions (4-week total) up to 1,537 from 1,198 last week (28.3%)
- Increases down to 998 from 772 (29.2%); cuts fall to 539 from 426 (26.5%)
- Total revisions activity will rise dramatically over next few weeks
The rise is being driven by more estimate cuts falling out of the system (after their 4 weeks are up) than estimate increases falling out of the system. This is different than a flood of new estimate increases entering the system. Still, the long string of improvements in the total revisions ratio for 2009 was impressive, and a welcome change from the overwhelming preponderance of cuts we were seeing earlier in the year.
Seven sectors are in solidly positive territory. Most impressive are the better than 3:1 ratios for Tech and Staples. Telecom and Utilities continue to lag, but they are relatively small sectors both in terms of total number of companies (especially Telecom) and in terms of the total net income of the index.
| Sector | Avg. 4wk EPS Change (FY1) |
Revisions Ratio |
Firms With FY1 EPS Increase |
Firms With FY1 EPS Decrease |
| Technology | 5.22% | 3.79 | 44 | 17 |
| Consumer Staple | 0.44% | 3.69 | 30 | 7 |
| Consumer Disc | 1.06% | 2.35 | 45 | 24 |
| Industrials | 2.10% | 2.28 | 32 | 19 |
| Financial Services | -0.84% | 1.79 | 40 | 30 |
| Materials | -0.02% | 1.71 | 18 | 7 |
| Health Care | 1.63% | 1.46 | 20 | 23 |
| Energy | -2.07% | 0.65 | 20 | 19 |
| Telecom | -1.40% | 0.21 | 2 | 6 |
| Utilities | -1.03% | 0.13 | 6 | 26 |
| S&P 500 | 1.00% | 1.85 | 257 | 178 |
The Zacks Revisions Ratio: 2010
- Revisions are stronger for 2010 than 2009
- Revisions ratio rises to 2.13 from 1.76
- Tech, Industrials and Materials showing best estimate momentum for 2010
- Telecom and Utilities getting cut.
- Ratio of rising to falling mean estimates falls to 1.84 from 1.76
- Total revisions activity passed lows for the quarter
- Total number of revisions falls to 1,360 from 1,161 (17.1%)
- Estimate increases fall to 926 from 778 (19.0%); cuts up to 434 from 383 (13.3%)
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 3 most cyclical sectors, Discretionary, Materials and Industrials. This seems to confirm other data showing that the recession is now over.
The Materials sector is being lead by metals stocks including Alcoa (AA) – this data is from before its big positive surprise on 10/07, Freeport-McMoran (FCX) and U.S. Steel (X).
Tech is still being lead by the chip companies like National Semiconductor (NSM) and Texas Instruments (TXN).
| Sector | Avg. 4wk EPS Change (FY2) |
Revisions Ratio |
Firms With FY2 EPS Increase |
Firms With FY2 EPS Decrease |
| Materials | 1.63% | 4.50 | 21 | 4 |
| Technology | 3.01% | 4.18 | 49 | 15 |
| Industrials | 2.21% | 3.00 | 38 | 15 |
| Consumer Discr | 2.19% | 2.55 | 50 | 19 |
| Health Care | 1.31% | 2.08 | 23 | 19 |
| Consumer Staples | 0.21% | 2.00 | 26 | 10 |
| Financial Services | -0.20% | 1.85 | 39 | 28 |
| Energy | 0.55% | 1.07 | 22 | 17 |
| Utilities | -1.89% | 0.58 | 9 | 20 |
| Telecom | -1.85% | 0.45 | 3 | 5 |
| S&P 500 | 1.15% | 2.13 | 280 | 152 |
Valuation: Earnings Shares and P/Es
- Earnings Shares, including historical, based on current make up of S&P 500
- Health Care to take earnings crown from Energy in 2009, but yield to Tech in 2010
- Energy’s earnings share expected to plunge to 10.7% from 23.4%
- Financials 2009 earnings share expected to rise to 11.6% from -1.81% in 2008
- Financials back to having the second-highest weight in the index
- 12-month forward S&P P/E of 14.29 equates to an earnings yield of 7.00%, which is attractive relative to 10 year T-note yield of 3.18% and somewhat attractive relative to 4.80% A-rated 10-year corporate.
- Health Care the lowest P/E sector for both 2009 and 2010; its market cap share (index weight) well below its earnings share
|
Earnings Shares and P/E’s
|
|||||||
|---|---|---|---|---|---|---|---|
| Sector | 2008% | 2009% | 2010% | Market Cap % |
P/E 2008 |
P/E 2009 |
P/E 2010 |
| Technology | 16.52% | 16.77% | 16.52% | 19.08% | 18.6 | 19.0 | 15.6 |
| Financials | -1.81% | 11.62% | 14.32% | 14.45% | nm | 20.8 | 13.6 |
| Health Care | 16.27% | 17.65% | 15.55% | 12.86% | 12.3 | 12.2 | 11.2 |
| Cons Stpl | 13.00% | 14.45% | 12.71% | 12.55% | 15.2 | 14.5 | 13.3 |
| Energy | 23.36% | 10.65% | 12.83% | 11.32% | 7.6 | 17.8 | 11.9 |
| Industrials | 13.60% | 9.63% | 9.04% | 10.13% | 11.3 | 17.6 | 15.1 |
| Cons Discr | 6.51% | 8.37% | 8.82% | 9.70% | 19.7 | 19.4 | 14.8 |
| Utilities | 4.54% | 4.95% | 4.31% | 3.61% | 11.7 | 12.2 | 11.3 |
| Materials | 3.82% | 2.09% | 2.70% | 3.19% | 12.8 | 25.6 | 16.0 |
| Telecom | 4.20% | 3.82% | 3.20% | 3.10% | 10.9 | 13.6 | 13.1 |
| S&P 500 | 100.00% | 100.00% | 100.00% | 100.00% | 13.7 | 16.7 | 13.5 |
Data in this report, unless stated otherwise, is through the close on Friday 9/25/2009
1 Note that we use the convention where the last full fiscal year to be completed is referred to as “2008” and the next full fiscal year is referred to as “2009” This can cause the 2008 actual numbers to change as firms with odd fiscal years complete “2008” and “2010” becomes “2009”. This convention holds for the entire report
