THE EARNINGS SCORECARD
Thus far, 61 S&P 500 companies have reported earnings. 71% beat their forecasts even though 68% of all companies have reported lower or same revenues. The banks are skewing this data with their 11% average revenue increase thus far. Bear in mind that the banks are facing extraordinarily low comps. Where is the earnings power coming from? Yes, you’ve heard it before. COST CUTS. Do not fall in love with the upside in stocks here. Although I think the market can remain buoyant for weeks to come these are NOT strong earnings. Cost cuts are not organic and will not generate a rebound in corporate earnings. Do not be fooled by the earnings reports. It won’t get any easier going forward. The next few weeks are going to be dominated by materials, energy, regional banks and consumer related companies. Once the big tech and money center firms get out of the way this week and next it might be smart to begin paring back your equity exposure.
Reader Rob provides an excellent addition:
As earnings season started on April 1, 2009 the bottom-up estimate of operating earnings for the S&P 500 for Q1 2009 was $13.39. The top-down estimate was about $11.50. Operating earnings in Q1 ended up at $10.11 (including GM and probably about $10.75 excluding GM which had a huge loss and now been removed from the S&P 500). Operating earnings came in 25.5% BELOW bottom up estimates (per Howard Silverbatt of S&P). Operating earnings also came in more than 10% BELOW the more pessimistic (but somewhat more accurate) top-down estimates. As reported earnings came in at $7.52 (probably about $8.18 which GM) which was also considerably BELOW the top-down estimate of a little over $9.
Now come 2nd quarter earnings. Bottom-up operating earnings estimates are $14.06 and top down estimates are $11.05. (Bottom up are now higher than the original Q1 estimate and bottom up are actually lower than the Q1 estimates from April 1 even with an adjustment to exclude GM.) The current Q2 estimates predict an improvement on Q1 2009 of 39% (31% excluding GM) using bottom-up estimates and 9.2% (2.8% excluding GM) using top down estimates.
Based on the first 37 companies reporting and documented in the S&P analyst Howard Silverblatt’s spreadsheet, earnings appear to be up about 16% versus Q1 2009, but only 10% if Goldman Sachs blowout quarter is excluded and only 7% if both Goldman Sachs and Intel are excluded. (It also appears that the Q on Q decline Citicorp’s operatings earnings will largely offset the pop in Goldmans and Intel’s earnings, based on Bloombergs report of Citigroups operating earnings. S&P has not yet published what they consider to be Citigroup’s Q209 operating earnings.)
Interestingly the individual company estimates for Q209 quoted in the media (Bloomberg, Yahoo Finance, etc) appear to be running 4% below Q109 actuals (at least for the first 37 companies) with about half having estimates higher and half lower than Q1.)
Examples: Best Buy Q2 estimate $0.34, Q2 actual $0.43 but Q1 actual $1.65 (huge decline).
Intel Q2 estimate $0.08, Q2 Actual $0.18 but Q1 Actual $0.13. (40% QonQ increase)
JNJ Q2 estimate $1.11, Q2 Actual $1.15, but Q1 actual was $1.27 (decline)GE not included as one of the first 37 companies had Q2 estimate $0.24, Q2 actual $0.26 (beat) but Q1 actual $0.26 (flat to Q109) and with a rather negative outlook. I think GE is the closest to a bellweather company, not just for the US but with ties all over the world.
So far it appears that S&P 500 operating earnings are on track to slightly beat the top-down estimate (maybe coming in somewhere from $11.50 to $12.00 if the current trend continues), but most likely still miss the composite bottom-up estimates of $14.06. (Since individual company estimates seem to be in total a bit lower than Q1 actuals it is no surprise that there will be many favorable earnings surprises.)
Where earnings are going will certainly become much clearer next week with many more companies reporting. What this means for stocks no one knows. All we know is that we will constantly hear that earnings beat estimates, even if in the end earnings come in quite a bit under the composite estimate of $14.06 (that is used to calculate PE multiples for the S&P500). Same thing we heard all last quarter when earnings actually came in 25.5% BELOW estimates. If S&P 500 operating earning ultimately miss the bottom-up and top-down estimates by the same margin in Q2 2009 and they did in Q1 2009, then we are looking at S&P500 operating earnings of about $10.50.
By the way, the bottom up operating earnings estimate for Q4 2008 was about $13 at the end of December 2008. Those estimates were only missed by a full $13 as operating earnings came in at -$0.09.)
Now for a difficult comparison. Operating earnings in 2008 were $49.51. The current bottom up estimate for 2009 operating earnings is $55.47. The current top-down estimate for 2009 operating earnings is $44.56. Will 2009 be a better year than 2008? The first 9 months of 2008 were quite good for most non-financial companies. Things really only turned to crap after Lehman and AIG collapsed. Does anyone expect a return to that level any time soon with sales down significantly and U6 unemployment at 16.5%? Financials no doubt will be doing better for a while with all the free government money.
As reported GAAP earnings will no doubt be better in 2009 following the kitchen sink Q4 2008 write-offs of -$23.25 that is unless there is another kitchen sink quarter this year (backlog of residential foreclosures not yet recognized, commercial real estate, corporate and individual bankruptcies, etc). The current estimate of GAAP earnings for 2009 is $29.97 versus $14.88 in 2008.
For more details on the cost cuts and reasons for the “better than expected” earnings please see our June 21st piece.
One more thought:
If the stock market has any predictive power whatsoever, why did it not bottom in early to mid-2008 a full half a year before the first negative earnings every reported for the S&P500 as a whole? Interestly it bottomed in the first week of March 2009 just as earings season made it apparent that in fact Q4 2008 earnings were NEGATIVE. The stock market is reactive NOT predictive.
In December 2008, I heard no one predict that the S&P500 would have negative earnings for Q4 2008. The quarter was over. The insiders knew what the earnings were. The analysts had no clue.
Going back to 2001-2003, the stock market bottomed in Q3 2002. That was 5 quarters after the operating earnings trough in Q2 2001 (pre-9/11). Back then the market was more overvalued, but the decline in stock prices steadily improved each quarter from Q2 2001 to onward. The problem was the quarter on quarter increase in earnings was painfully slow. This time around the analysts are predicting earnings will rebound at the fastest rate in history (probably due to rising unemployment i.e. cost cutting).
I went back and looked at 2007. On October 11, 2007, in more normal times, bottom up analysts were expecting earnings for Q3 2007 of 22.86 and top down analysts predicted $21.70. Actual earnings came in at $20.87. Both sets of analysts were too optimistic overall. The quarter was already over. The underlying economic conditions were known. Yet bottom up analysts missed by 10%, much better than Q1 2009 when they were off by 25%, but still no cigar.