By Dirk Van Dijk, CFA, Zacks Investment Research
- Almost done with earnings season, with 499 or 99.8% of second-quarter results in. Total earnings growth low at 11.9%, but mostly due to one stock (BAC - Analyst Report). Ex-financials growth is 19.4% year over year. Total revenue growth 11.0%, 11.3% ex-financials. Median earnings surprise 3.01% and median sales surprise 1.80%.
- At start of earnings season 9.65% growth expected, 12.18% ex-financials. Current year-over-year earnings growth of 12.0% expected for EPS in the third quarter, 11.7% ex-financials. For revenues, 5.85% and 6.04% ex-financials.
- Earnings beats top misses by a 3.43 ratio; sales beats top misses by 2.48 ratio, 69.3% of all firms report positive earnings surprise, 70.5% beat on revenues. Growing earnings firms outpace declining earnings by 3.16 ratio, revenues 5.16 growth ratio.
- Full-year total earnings for the S&P 500 jumps 45.9% in 2010, expected to rise 15.5% further in 2011. Growth to continue in 2012 with total net income expected to rise 10.1%. Financials major earnings driver in 2010. Excluding financials, growth was 27.7% in 2010, and expected to be 18.6% in 2011 and 9.4% in 2012.
- Total revenues for the S&P 500 rise 7.88% in 2010, expected to be up 6.68% in 2011 and 6.14% in 2012. Excluding financials, revenues up 9.16% in 2010, expected to rise 11.30% in 2011 and 5.37% in 2012.
- Annual Net Margins marching higher, from 5.88% in 2008 to 6.37% in 2009 to 8.62% for 2010, 9.27% expected for 2011 and 9.69% in 2012. Margin expansion major source of earnings growth. Net margins ex financials 7.79% in 2008, 7.04% in 2009, 8.23% for 2010, 8.77% expected in 2011 and 9.11% in 2012.
- Revisions ratio for full S&P 500 at 0.65 for 2011 (bearish), at 0.42 for 2012 (very bearish). Ratio of firms with rising to falling mean estimates at 0.71 for 2011 (bearish), 0.41 (very bearish) for 2012. Total revisions activity past peak and plunging.
- S&P 500 earned $543.6 billion in 2009, rising to $793.0 billion in 2010, expected to climb to $916.1 billion in 2011. In 2012, the 500 are collectively expected to earn $1.009 Trillion.
- S&P 500 earned $56.90 in 2009: $83.12 in 2010 and $96.02 in 2011 expected, bottom up. For 2012, $105.79 expected. Puts P/Es at 14.27x for 2010, and 12.35x for 2011 and 11.21x for 2012, very attractive relative to 10-year T-note rate of 1.92%. Top-down estimates, $95.91 for 2011 and $104.59 for 2012.
The Earnings Picture
Second quarter earnings season is effectively over with 499 or 99.8% of S&P 500 reports in. With the exception of a handful of financials, most notably Bank of America (BAC - Analyst Report), which had a $12 billion negative swing in net income from last year, this is another great earnings season.
The year-over-year growth rate for the S&P 500 is 11.9%, way off the 17.1% pace those same 499 firms posted in the first quarter. However, it you exclude the Financial sector, growth is 19.3%, actually up slightly from the 19.1% pace of the first quarter. At the beginning of earnings season, growth of 9.7% was expected; 12.2% ex-Financials.
Attention will now start to shift to the expected growth in the third quarter. Things are expected to slow a bit, with 12.0% growth expected overall, and 11.7% if the financials are excluded. While that is down fairly significantly from the second quarter, especially ex-financials, it is roughly in-line with what the expectations for the second quarter were before companies started to report.
Top-line results were also very strong, with 10.00% year-over-year growth for the 499, actually up from the 8.84% growth they posted in the first quarter. The top-line results are even more impressive if the financials are excluded, rising to 10.32% from the 9.58% pace of the first quarter.
Top-line surprises have been almost as good as than the bottom-line surprises, with a median surprise of 1.80% and a 2.48 surprise ratio. The revenue growth in the first half is remarkable, given only 0.4% GDP growth in the first quarter and just 1.0% in the second, with low overall inflation. High commodity prices helped revenues among the Energy and Materials sectors, and higher growth abroad and currency translation effects from a weak dollar have also helped.
Looking ahead to the third quarter, year-over-year growth of 5.85% is expected for the full S&P 500, and 6.04% growth if financials are excluded. At the very start of reporting season, revenue growth of 9.62% total growth was expected, and 8.94% excluding the financials.
Net Margins Growing but Slowing
Net margins have been one of the keys to earnings growth, but cracks in the story are starting to appear. The 499 that have reported have net margins of 9.17%, up from 9.10% a year ago. That, however, is due to the financials, especially BAC. Excluding financials, next margins have come in at 8.53%, up from 7.95% a year ago. In the third quarter, overall net margins are expected to expand to 9.67%, and 8.56% excluding the financials.
On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.37% in 2009. They hit 8.62% in 2010 and are expected to continue climbing to 9.27% in 2011 and 9.69% in 2012. The pattern is a bit different, particularly during the recession, if the financials are excluded, as margins fell from 7.78% in 2008 to 7.04% in 2009, but have started a robust recovery and rose to 8.23% in 2010. They are expected to rise to 8.77% in 2011 and 9.11% in 2012.
Full-Year Expectations – And Beyond
The expectations for the full year are very healthy, with total net income for 2010 rising to $793.0 billion in 2010, up from $543.6 billion in 2009. In 2011, the total net income for the S&P 500 should be $916.1 billion, or increases of 45.9% and 15.5%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.009 Trillion, for growth of 9.4%.
That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $105.79. That is up from $56.90 for 2009, $83.12 for 2010 and $96.02 for 2011. In an environment where the 10-year T-note is yielding 1.92%, a P/E of 14.3x based on 2010 and 12.4x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 11.2x. Those P/Es are based on the Thursday close, so are even lower after Friday’s fall.
Estimate Revisions Slowing
Estimate revisions activity has past its seasonal peak. During the last seasonal decline in revisions activity, the ratio of increases to cuts also declined sharply, from over 2.0 at the height of the last earnings season, but dropped sharply after earnings season was over. It is happening again. The revisions ratio for 2011 dropped to 0.65, which is a bearish reading, and for 2012, it is down to a very bearish reading of 0.42.
The number of estimate increases has plunged, as many of the increases that came right on the heels of earnings beats are now over 4 weeks old, and very few new estimate increases are being made. This is a less worrisome situation than if the revisions ratios were plunging due to a flood of new estimate cuts, but it can hardly be considered a good sign.
The numbers are also confirmed by the ratio of firms with rising mean estimates to those with falling mean estimated dropping to 0.71 for 2011 and 0.41 for 2012. Given the weakness in the economy, and the reduced economic forecasts for 2012, the lack of estimate increases, and the relative abundance of estimate cuts is not exactly shocking. Still, it is an important thing to keep an eye on.
Recap of Key Data and Events of Last Week
It was a relatively light week for economic data. While it is hard to call the numbers we got “strong,” at least they were generally better than expected.
The ISM non-manufacturing (or service) survey actually rose to 53.3 from 52.7, much better than the expected drop to 51.0. That means that the service sector of the economy actually expanded faster in August than in July, but still not what would call robust growth. Still, it is a positive.
That comes on top of the ISM manufacturing survey the week before, which also surprised to the upside, although it fell to 50.6 from 50.9, meaning very slow — but still positive — growth and much better than the expected level of 48.5. With both measures above the magic 50 mark, it is very unlikely that we are currently in a double dip, but there is not a lot of margin for error.
The best news of the week came from a sharp drop in the Trade Deficit, to $44.81 billion in July from a downwardly revised $51.57 billion in June. Most of the decline was due to lower oil prices as the oil deficit dropped to $25.6 billion from $29.4 billion. The non-oil goods deficit also fell, to $34.08 billion from $36.58 billion.
The surplus we run in Services expanded slightly to $15.82 billion from $15.46 billion. The decline is extremely welcome, but the level of the trade deficit is an ongoing national disaster. It is the trade deficit — not the budget deficit — that is responsible for our being deeply in debt to the rest of the world, most notably China. The trade deficit lowers the level of GDP on essentially a dollar-for-dollar basis.
The reduced drag from the trade deficit, if it continues in August and September, is one thing that could well cause GDP growth to be higher in the third quarter than it was in the second. Getting rid of the trade deficit is probably the single most promising path to a restoration of prosperity, and resolving global economic imbalances.
For that to happen, two things need to occur: The dollar will have to become significantly weaker against all other major currencies and we have to find a way to end our addiction to foreign oil. Unfortunately, the governments and central banks of the other major currencies have a vote on the value of the dollar, and every president since Nixon has promised to end our oil addiction, with no success.
Initial claims for jobless benefits rose again, to 414,000. Remaining above the 400,000 is not a good sign. That is the level that would indicate that the economy is producing enough jobs on balance to start to bring down the unemployment rate.
The major “event” of the week was Obama’s speech of jobs. He proposed a $447 billion stimulus package to get the economy moving again. Not all of that is incremental spending over what is being spent this year, but it does prevent the cutbacks that were scheduled to happen at the end of this year.
The biggest part of the program was an extension and expansion of the payroll tax cut. In 2011, the individual side was cut to 4.2% from 6.2% and for 2012 he is proposing that it come down to 3.2%, and that the employer side also be cut. I’m not sure how much the cut on the employer side will cause them to increase employment, especially since it only lasts for a year, but at the margin it should help. The typical worker will get about $1,500 more in their pocket to spend than they would if the program were allowed to expire, and $500 more than they had in 2011.
Since the payroll tax ends for earnings over $106,800, the maximum after-tax spending boost from the cut will be $3,204, or $1,068 more in 2012 than 2011. The incremental spending power in people’s pockets should help increase demand, and thus put people back to work. There were also parts of the program designed to help State and Local governments avoid having to lay off teachers, cops and fire fighters, as well as significant public works programs. The details of how this would be paid for are due out this week.
The program is pretty much of a textbook answer as to what to do when the economy is in a deep slump. Here is a passage from Lord Maynard Keynes that sort of illustrates where the program is coming from:
“If it is impracticable materially to increase investment, obviously there is no means of securing a higher level of employment except by increasing consumption…Moreover, I should readily concede that the wisest course is to advance on both fronts at once. Whilst aiming at a socially controlled rate of investment with a view to a progressive decline in the marginal efficiency of capital, I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume.
“There is room, therefore, for both policies to operate together — to promote investment and, at the same time, to promote consumption, not merely to the level which with the existing propensity to consume would correspond to the increased investment, but to a higher level still.”
The General Theory of Employment, Interest and Money
If the program were to be passed, it should, based on some back-of-the-envelope-type calculations result in economic growth of between 1% and 2% more than it would have been. That should be more than enough to avoid a double dip. It might lead to significant progress on bringing down unemployment. I don’t think it would be enough to get us down to anything like full employment, but might shave a full percentage point or more off the current 9.1% rate.
The program was more ambitious and larger than I was expecting. The details of how it will be paid for could be very significant, as they would have the potential to offset the good that the program would do. However, in one very important sense, it really doesn’t matter. It is highly unlikely that this can pass Congress, particularly the House.
The speech is best seen as the opening of the 2012 re-election campaign. One thing I would have liked to have seen in the program that was not there is a crash program to start to use cheap, abundant, and domestic natural gas as a transportation fuel. That is the single most promising path towards ending our oil addiction.
At the micro level, earnings and valuations, provide plenty of reason to be bullish. This is particularly true when one looks at the prevailing level of interest rates. Currently, 242 S&P 500 (48.4%) firms have dividend yields higher than the Friday yield on the 10-year T-note (1.91%), and over two thirds (345, or 69.0%) yield more than the five year note (0.80%). Heck, 104 or 20.8% yield more than even the 30 year bond (3.25%).
Keep in mind that 114 or 22.8% of the S&P 500 stocks pay no dividend at all, so no matter how far the market falls, they will still have a 0.0% dividend yield. Many of those companies, such asApple (AAPL - Analyst Report) with its $76 billion cash hoard, could easily pay a dividend if they wanted to. Of the 386 dividend-paying stocks, 62.7% yield more than the 10-year and 89.3% yield more than the five year. Those sorts of numbers have not been seen since the early 1950’s.
One thing is absolutely certain, the coupon payment on those notes will never go up, while companies have been raising their dividends at a rapid pace of late. Nearly one quarter of the firms (124) in the S&P 500 (and almost a third of those paying a dividend) have raised their dividend at more than a 10% per year rate over the last five years, and those five years include the worst economic downturn since the 1930’s. Only 72 have lower dividends than they had five years ago, and 34 of those are Financials.
Market Pricing-In a New Recession
At these levels it is clear to me that the market is pricing in not just slower growth, but an outright recession, either underway or just about to get underway. If it turns out that we avoid an outright recession, and the decline in profits that usually comes with one, then the market should rally from here. As I noted above, the expectations are starting to come down, particularly for 2012, but the vast majority of stocks, and every economic sector is expected to earn more in 2012 than in 2011.
The decline in the revisions ratio is mostly driven right now by the drying op of new estimate increases, rather than a flood of new estimate cuts. It is entirely normal at this point seasonally for overall revisions activity to slow down dramatically. The decline in activity lessens the significance of the drop in the revisions ratio, but it remains something to be concerned about. If it continues to drop, or even stays at the current depressed levels, it starts to cut into one of the most important bullish arguments.
Europe a Major Debacle In Waiting
The economy remains very fragile, and is thus very susceptible to any outside shocks. There is a potential 8.5 on the Richter scale looming in Europe’s problems. There is a very real chance that the Euro will not even exist in a few years. If it does, it could well be a diminished version where the common currency only applies to Germany and the Netherlands, and perhaps France. The Greeks and the Italians would go back to having Drachma and Lira.
A top official at the European Central Bank resigned this week, and the Greek bailout seemed to run into yet more trouble, even though the German equivalent of the Supreme Court ruled that it was OK for Germany to participate in the bailout.
Getting from here to there has the potential for enormous dislocations, and hence big damage to the European economy. That would inevitably spill over to the U.S. The Greek bailout is in very serious trouble, and the yield on the Greek two-year note soared to new highs, hitting over 55%. That is way beyond junk and in the realm of radioactive waste.
The economy of Greece in particular — but also for the rest of the periphery of Europe — continue to weaken, and with that weakness tax revenues are drying up even more, and the country is missing the fiscal targets it agreed to just a few months ago.
Fiscal policy may have to be consolidated in Europe as a whole (meaning the individual countries will have to give up most of their sovereignty, though given historical, cultural and language differences, that seems unlikely to happen). This would also mean that people in Germany and the Netherlands would see a big part of their tax dollars flowing to Greece and Spain, just like people in Connecticut and New Jersey see a big part of their tax dollars flowing to Mississippi and Alaska.
If that doesn’t happen, the common Euro currency has to fall apart. Italy and Greece, unlike the U.S., do not have their own printing press (hence when they get downgraded, their interest rates soar, not sink like here). They have to rely on the printing press of the ECB, and that is largely controlled by the Germans. The process of unscrambling the Euro egg and going back to Drachmas and Lira would be a very messy one, and will result in huge dislocations, and thus potentially cause economic collapse.
Most of the proposals that would integrate Europe fiscally would take a long time, and would probably require not just passage by each of the 17 parliaments that use the Euro, but probably changes in their constitutions as well. That is not going to happen overnight. It also means that it is highly unlikely that the Euro, the second most important currency in the world, is going to strengthen dramatically against the dollar.
European banks are heavily invested in the bonds of the PIIGS, and there is a real threat to the stability of the European banking system. If the European banking system goes down, ours will follow as night follows day (or at the very least we will need to see “Son of TARP”). This is not a problem caused here, and is not the fault of Obama, or Bush, or Congress or even the Tea Party, for that matter. It is a mess of the Europeans’ own making, but its effects will be felt here, just as the effects of the mortgage mess of our making were felt there.
Stay Invested, but Don’t Shoot for the Stars
On balance I remain bullish. I am, however, pulling back on my year-end target price for the S&P 500. I had been looking for about 1400 by the end of the year (since December). With the slower economy, and the turmoil on both sides of the Atlantic, something more on the order of 1325 now looks more realistic.
Getting there is going to be a bumpy ride. Strong earnings should trump a dicey international situation and the dramas in DC. Valuations on stocks look very compelling, with the S&P trading from just 12.3x 2011, and 11.2x 2012 earnings.
Put in terms of earnings yields, we are looking at 8.10% and 8.92%, while T-notes are only at 1.91%. The old “Fed Model” suggested that the forward earnings yield (call it 8.45%) should be in line with the 10-year note. Instead we have the dividend yield on the S&P 500 higher than the 10-year note. Since the early 1950’s that has happened only twice, in early November of 2008 and in March of 2009. The second incident was followed by a doubling of the S&P 500. From a long-term perspective, stocks look extremely undervalued to me.
Long-term investors should start to take advantage of the current valuations. However, I would not be shooting fro the stars. Look for those companies with solid dividends (say, over 2.5%), low payout ratios, solid balance sheets and a history of rising dividends, which are still seeing analysts raise their estimates for 2012. I don’t know if you will be happy doing so next week or even next month, but I am pretty sure that you will be quite satisfied five years from now.
Scorecard & Earnings Surprise
- Another great earnings season about done. So far, 499 (99.8%) reports in. Total growth looks low at 11.85% but that is entirely due to a handful of financials). We have a 3.43 surprise ratio, and 3.01% median surprise. Positive Surprises for 69.3% of all firms reporting.
- Positive year-over-year growth for 376, falling EPS for 119 firms, 3.16 ratio, 75.4% of all firms reporting have higher EPS than last year.
- Only one stock – Kroger’s (KR - Analyst Report) — left to report.
- Autos, Discretionary and Tech lead in surprise; Transports, Industrials lag, but every sector has more positive surprises than disappointments.
|Computer and Tech||24.53%||100.00%||5.21||51||16||54||18|
|Oils and Energy||41.07%||100.00%||4.17||28||11||33||8|
- Strong revenue growth of 11.00% among the 499 that have reported, median surprise 1.80 (very strong), surprise ratio of 2.48. Positive surprise for 70.5%.
- Growing revenues outnumber falling revenues by ratio of 5.16; 83.8% have higher sales than last year.
- Autos and Energy have biggest median surprises, but Energy surprise ratio is below average.
- Aerospace only sector with more disappointments than positive surprises.
|Oils and Energy||28.47%||100.00%||5.101||28||13||36||5|
|Computer and Tech||16.11%||100.00%||1.261||49||23||62||10|
Reported Quarterly Growth: Total Net Income
- The total net income is 11.85% above what was reported in the second quarter of 2010, down from 17.05% growth the same 499 firms reported in the first quarter. Excluding financials, growth of 19.42%, up slightly from 19.08% reported in the first quarter. Financials hit by a $12 billion negative swing at Bank of America for mortgage settlement.
- Sequential earnings growth is 2.48% for the 499 that have reported, 9.52% ex-financials.
- Materials, Energy, Industrials and Tech all report over 20% growth; Construction and Finance only sectors with negative growth.
- Eight sectors see earnings accelerate from first quarter, 8 see slowing growth.
- Final net income $231.9 billion versus $207.4 billion.
|Income Growth||“Sequential Q3/Q2 E”||“Sequential Q2/Q1 A”||Year over Year 2Q 11 A||Year over Year 3Q 11 E||Year over Year 1Q 11 A|
|Oils and Energy||-5.99%||15.84%||41.07%||49.40%||40.52%|
|Computer and Tech||-7.93%||9.75%||24.53%||4.91%||24.48%|
Quarterly Growth: Total Revenues Reported
- Revenue growth very strong at 11.00%, up from the 8.84% growth posted (499 firms) in the first quarter. Growth ex-financials 11.32%, up from 9.58%.
- Sequentially revenues 5.03% higher than in the first quarter, up 5.61% ex-financials.
- Energy, Materials, Tech and Industrials all reporting revenue growth over 15%, five more in double digits.
- Revenue growth expected to slow sharply in third quarter falling to 5.85%, 6.04% ex-financials. Still a healthy level.
|Sales Growth||“Sequential Q3/Q2 E”||“Sequential Q2/Q1 A”||Year over Year 2Q 11 A||Year over Year
3Q 11 E
|Year over Year 1Q 11 A|
|Oils and Energy||-7.74%||13.19%||28.47%||22.91%||25.06%|
|Computer and Tech||-0.07%||5.86%||16.11%||10.87%||17.02%|
Quarterly Net Margins Reported
- Sector and S&P net margins are calculated as total net income for the sector divided by total revenues for the sector.
- Net margins for the 499 that have reported rise to 9.17% from 9.10% a year ago, but down from 9.40% in the first quarter. Net margins ex-financials rise to 8.53% from 7.95% a year ago and 8.23% in the first quarter.
- Thirteen sectors see year-over-year margin expansion, only three see contraction.
- Margin expansion the key driver behind earnings growth. Due to seasonality, it is best to compare to a year ago, particularly at the individual company and sector levels. Mix of companies reporting will lead to big changes in both the reported and expected net margin tables from week to week.
Net Margins Already Reported
|Net Margins||Q3 2011 Estimated||Q2 2011 Reported||1Q 2011 Reported||4Q 2010 Reported||3Q 2010 Reported||2Q 2010 Reported|
|Computer and Tech||15.62%||16.95%||16.35%||17.54%||16.51%||15.81%|
|Oils and Energy||8.74%||8.57%||8.38%||7.72%||7.19%||7.81%|
Annual Total Net Income Growth
- Following rise of just 2.0% in 2009, total earnings for the S&P 500 jumps 45.9% in 2010, 15.5% further expected in 2011. Growth ex-financials 27.7% in 2010, 18.6% in 2011.
- For 2012, 10.1% growth expected. 9.4% ex-Financials.
- All sectors expected to see total net income rise in 2011 and in 2012. Utilities only (small) decliner in 2010. Ten sectors expected to post double-digit growth in 2011 and eleven in 2012. Health Care only sector expected to grow less than 5% in 2012.
- Cyclical/Commodity sectors expected to lead in earnings growth again in 2011 and into 2012. Matterials expected to grow over 40% for second year.
- Sector dispersion of earnings growth narrows dramatically between 2010 and 2012, only two sectors expected to grow more than 20% in 2012, seven grew more than 35% in 2010.
|Net Income Growth||2009||2010||2011||2012|
|Oils and Energy||-55.04%||49.92%||39.94%||8.76%|
|Computer and Tech||-4.86%||46.67%||21.85%||9.87%|
|Auto||- to +||1469.69%||18.83%||9.46%|
|Construction||- to -||- to +||1.68%||47.27%|
|Finance||- to +||313.18%||1.60%||13.92%|
Annual Total Revenue Growth
- Total S&P 500 revenue in 2010 rises 7.78% above 2009 levels, a rebound from a 6.33% 2009 decline.
- Total revenues for the S&P 500 expected to rise 6.68% in 2011, 6.14% in 2012.
- Energy to lead revenue race in 2011. Six other sectors (all cyclical) also expected to show double-digit revenue growth in 2011.
- All sectors but Staples and Finance expected to show positive top-line growth in 2011, but five sectors expected to show positive growth below 5%. All sectors see 2012 growth.
- Aerospace the only sector to post lower top line for 2010. Revenues for Financials, Construction, and Conglomerates were virtually unchanged.
- Three sectors expected to post double-digit top-line growth in 2012, led by Construction and Industrials. No sector expected to post falling revenues.
- Revenue growth significantly different if Financials are excluded, down 10.56% in 2009 but growth of 9.16% in 2010, 11.30% in 2011, and 5.37% in 2012.
|Oils and Energy||-34.41%||23.15%||23.91%||5.13%|
|Computer and Tech||-6.24%||15.53%||13.37%||9.68%|
Annual Net Margins
- Net Margins marching higher, from 5.88% in 2008 to 6.37% in 2009 to 8.62% for 2010, 9.27% expected for 2011. Trend expected to continue into 2012 with net margins of 9.69% expected. Major source of earnings growth.
- Financials significantly distort overall net margins. Net margins ex-financials 7.78% in 2008, 7.04% in 2009, 8.23% for 2010, 8.77% expected in 2011. Expected to grow to 9.11% in 2012.
- Financials net margins soar from -8.42% in 2008 to 14.35% expected for 2012.
- All sectors but Medical and Utilities saw higher net margins in 2010 than in 2009. All sectors but Utilities and Construction expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well, with all sectors expected to post expansion in margins.
- Six sectors to boast double-digit net margins in 2012, up from just three in 2009.
- Sector net margins are calculated as total net income for sector divided by total revenues. However, there are generally fewer revenue estimates than earnings estimates for individual companies.
|Computer and Tech||11.98%||15.20%||16.08%||16.37%|
|Oils and Energy||6.23%||7.59%||8.57%||8.87%|
Earnings Estimate Revisions: Current Fiscal Year
The Zacks Revisions Ratio: 2011
- Revisions ratio for full S&P 500 at 0.65, down from 0.97 last week, now bearish. Past seasonal high in activity, change in revisions ratio driven more by old estimates falling out, not new ones being added (lower significance to revisions ratio).
- Only Auto sector with revisions ratio at or above 2.0. Retail and Utilities only other sectors with positive revisions ratios, Thirteen negative (below 1.0). Five sectors with more than three cuts per increase. Sample sizes getting thin.
- Ratio of firms with rising to falling mean estimates at 0.71, down from 0.85 last week, now a bearish reading.
- Total number of revisions (4-week total) passed peak at 1,624, down from 2,166 last week (-25.0%). Increases at 640 down from 1,067 (-40.0%), cuts at 984, down from 1,099 (-10.5%).
Curr Fiscal Yr
Est – 4 wks
|Oils and Energy||-1.01||14||27||64||122||0.52||0.52|
|Computer and Tech||-1.59||16||46||78||227||0.34||0.35|
Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2012
- Revisions ratio for full S&P 500 at 0.42, down from 0.67 from last week, deep in bearish territory, but sample size is getting thin for many sectors.
- Only Retail has more increases than cuts.
- Fifteen sectors have negative revisions ratio (below 1.0). Nine sectors with more than three cuts per increase. Construction, Auto and Conglomerates 10 to 1 or more.
- Ratio of firms with rising estimate to falling mean estimates at 0.41, down from 0.52, deep in bearish territory.
- Total number of revisions (4-week total) at 1,819, down from 2,289 last week (-20.5%).
- Increases at 541 down from 918 last week (-41.1%), cuts fall to 1,278 from 1,371 last week (-6.8%).
Next Fiscal Yr Est – 4 wks
|Oils and Energy||-1.72||16||24||78||161||0.48||0.67|
|Computer and Tech||-2.42||9||54||48||239||0.20||0.17|
Total Income and Share
- S&P 500 earned $543.6 billion in 2009, rising to earn $793.0 billion in 2010, $916.1 billion expected in 2011.
- The S&P 500 total earnings expected to hit the $1 Trillion mark in 2012 at $1.009 Trillion.
- Finance share of total earnings moves from 5.9% in 2009 to 18.1% in 2010, dip to 15.9% expected for 2011; rebound to 16.4% in 2012, but still well below 2007 peak of over 30%. Energy share also rising going from 11.9% in 2009 to 14.6% in 2012.
- Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.1% in 2012, down each year.
- Market cap shares of Construction, Staples, Retail, Transportation, Industrials and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2012.
- Earnings shares of Energy, Finance, Autos and Medical well above market-cap shares.
- As a general rule, one should try to overweight sectors with rising earnings shares, underweight falling earnings shares, but also overweight sectors where earnings shares exceed market-cap shares.
|Income ($ Bill)||Total
|Computer and Tech||$135,634||$165,265||$181,581||17.10%||18.04%||18.00%||18.19%|
|Oils and Energy||$96,665||$135,270||$147,120||12.19%||14.77%||14.58%||11.75%|
- Trading at 14.27x 2010, 12.35x 2011 earnings, or earnings yields of 7.07% and 8.10%, respectively (As of Thursday close, lower after Friday). P/E for 2012 at 11.21x or earnings yield of 8.92%.
- Earnings yields still very attractive relative to 10-year T-Note rate of 1.91% (Friday).
- Autos and Energy have lowest P/E based on 2011 and 2012 earnings. Aerospace, Materials and Finance also have low P/Es for 2012.
- Construction has highest P/E for all three years by wide margin.
- S&P 500 earned $56.90 in 2009 rising to $83.12 in 2010. Currently expected to earn $96.02 in 2011 and $105.79 for 2012.
|Oils and Energy||20.63||13.76||9.83||9.04|
|Computer and Tech||22.26||15.18||12.45||11.34|
Data in this report, unless stated otherwise, is through the close on Thursday 9/8/2011.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.