Key Points:
- Third quarter reports starting to flood in. So far 126, or
25.2%, of S&P 500 reported. Total reported earnings growth of
12.1%. Ex-Financials, growth is 12.5% year over year. Total revenue
growth 8.37%, 8.83% ex-Financials. Median earnings surprise 2.78%
and median sales surprise 1.12%.
- For the vast majority (374) yet to report 12.3% growth
expected, 12.0% ex-Financials. Down from growth of 17.3%, 18.0%
ex-Financials growth in the second quarter. For Revenues, 6.23%
expected and 10.00% ex-Financials.
- Second quarter earnings beats top misses by 2.65 ratio,
sales beats top misses by 2.00 ratio, 65.1% of firms report
earnings beats, 66.7% beat on revenues. Growing earnings firms
outpaced declining earnings by 2.65 ratio, Revenues 3.67 growth
ratio.
- Full-year total earnings for the S&P 500 jumps 46.0% in
2010, expected to rise 14.3% further in 2011. Growth to continue in
2012 with total net income expected to rise 11.9%. Financials major
earnings driver in 2010. Excluding Financials, growth was 27.9% in
2010, and expected to be 17.8% in 2011 and 9.4% in 2012.
- Total revenues for the S&P 500 rise 7.89% in 2010,
expected to be up 5.48% in 2011, and 5.52% in 2012. Excluding
Financials, revenues up 9.28% in 2010, expected to rise 9.28% in
2011 and 5.71% in 2012.
- Annual Net Margins marching higher, from 5.88% in 2008 to
6.33% in 2009 to 8.57% for 2010, 9.28% expected for 2011 and 9.84%
in 2012. Margin expansion major source of earnings growth. Net
margins ex-Financials 7.79% in 2008, 6.99% in 2009, 8.18% for 2010,
8.82% expected in 2011 and 9.12% in 2012.
- Revisions ratio for full S&P 500 at 0.61 for 2011, at
0.36 for 2012 (both very bearish). Ratio of firms with rising to
falling mean estimates at 0.54 for 2011, 0.36 (both also very
bearish) for 2012. Total revisions activity past lows and rising
fast.
- S&P 500 earned $543.4 billion in 2009, rising to $793.4
billion in 2010, expected to climb to $907.0 billion in 2011. In
2012, the 500 are collectively expected to earn $1.015
Trillion.
- S&P 500 earned $56.98 in 2009: $83.25 in 2010 and
$95.10 in 2011 expected bottom up. For 2012, $106.43 expected. Puts
P/E’s at 14.60x for 2010, and 12.78x for 2011 and 11.42x for 2012,
very attractive relative to 10-year T-note rate of 2.19%. Top-down
estimates: $96.66 for 2011 and $105.34 for 2012.
The Earnings Picture
Third quarter earnings results are pouring in. So far I would
characterize the season as good, but not great. We have 126, or
25.2%, of the S&P 500 firms reporting so far. That sort of
understates things a bit, since those 25.2% of firms represent 39%
of all expected earnings for the quarter (provided that the
remaining 374 firms all report exactly in line with
expectations).
The year-over-year growth rate for the S&P 500 is 12.13%. That
is actually well above the 3.33% growth that those same 126 firms
posted in the second quarter. However, the second quarter was
distorted by some big hits to the financial sector, most notably
Bank of America (BAC). This time it reported
better-than-expected earnings and did not have the big “write off”
it did in the second quarter. That resulted in a $12 billion swing
in total net income between the second and third quarters.
If we exclude the financial sector, the year-over-year growth rate
is just a bit higher at 13.51%, but it represents a far bigger
slowdown from the second quarter, when growth was 22.71%. The
remaining 374 stocks are expected to growth their earnings 12.33%
over last year, down from 22.71% growth in the second quarter. If
we exclude the financials, the remaining growth in the third
quarter is expected to slow to 11.99% year over year from 17.99%.
Then again, at the beginning of earnings second quarter season,
growth of 9.7% was expected; 12.2% ex-financials.
We will need another season where positive earnings surprises far
outpace disappointments if we are going to match the second quarter
growth rate. If we combine the already reported results with the
expectations, it now looks like the final growth will come in at
12.25%.
Better than Expected
Relative to expectations, both earnings and revenues are doing
better than expected. Then again, having far more companies report
positive surprises than disappointments is entirely normal. The
current ratio of 2.65 (for the 126) is actually well below the
average experience of the last five years or so. The median
surprise is 2.78% and that is also below normal. Still, it is far
more positive surprises than disappointments.
Top-line surprises started off extremely strong, but faded over the
last week. The surprise ratio is now 2.00 for revenues with a 1.12
median surprise. Not bad, but not terrific either. Top line growth
so far has been 8.37%, and 8.83% ex-financials. The remaining 374
firms are collectively expected to grow their top lines by 7.20%,
or by 10.28% if we exclude the financials.
Expanding net margins have been one of the keys to earnings growth.
That is still the case, with reported net margins of 13.40% so far,
up from 12.95% a year ago, and 12.27% in the second quarter (for
those 126 firms). However, the mix of firms that have reported so
far is skewed towards higher-margin firms, and the BAC effect is
very big as far as the increase relative to the second quarter is
concerned. Excluding financials, net margins have come in at 9.99%
up from 9.58% a year ago, but down from 10.45% in the second
quarter.
Looking ahead, overall net margins are expected to be down only
slightly from the second quarter at 7.97% versus 8.00% in the
second quarter, but up from 7.61% a year ago. Excluding the
financials, though, it looks like the expanding net margin party
might be coming to an end, with only 7.17% expected, down from both
the 7.94% level of the second quarter, and 7.59% a year ago.
On an annual basis, net margins continue to march northward.
In 2008, overall net margins were just 5.88%, rising to 6.33% in
2009. They hit 8.57% in 2010 and are expected to continue climbing
to 9.28% in 2011 and 9.84% 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 6.99% in 2009, but have
started a robust recovery and rose to 8.18% in 2010. They are
expected to rise to 8.82% in 2011 and 9.12% in 2012.
The expectations for the full year are very healthy, with total net
income for 2010 rising to $793.6 billion in 2010, up from $543.4
billion in 2009. In 2011, the total net income for the
S&P 500 should be $907.0 billion, or increases of 46.0% and
14.3%, respectively. The expectation is for 2012 to have total net
income passing the $1 Trillion mark to $1.015 Trillion, for growth
of 11.9%.
S&P "EPS" to Surpass $100
That will also put the “EPS” for the S&P 500 over the $100 “per
share” level for the first time at $106.43. That is up from $56.98
for 2009, $83.25 for 2010, and $95.10 for 2011. In an environment
where the 10-year T-note is yielding 2.19%, a P/E of 14.6x based on
2010 and 12.8x based on 2011 earnings looks attractive. The P/E
based on 2012 earnings is just 11.4x.
Estimate revisions activity is starting to rise again. We have seen
a little bit of a bounce in the ratio of upwards to downwards
revisions, especially for this year, but it is still far from
turning positive. To some extent, there is a mechanical reason for
upwards revisions to this year. After all, the third quarter is
part of the full year, so if a company beats by, say, a nickel, and
the analysts don’t increase their estimates for the firms by at
least that much, they are implicitly cutting their numbers for the
fourth quarter. With more than five positive surprises for every
disappointment, one should expect more upwards revisions than
cuts.
Even so, the ratio is still deep in negative territory at just
0.61, although that figure still includes a lot of estimate changes
that were made before the earnings reports came in (we track a four
week moving total). There is no mechanical effect when it comes to
the revisions for next year, and those remain even further in
negative territory at just 0.36, or almost three cuts for every
increase.
The net cuts are very widespread. For this year only five of 16
sectors are seeing more positive than negative revisions, and eight
sectors have more than two cuts for every increase. For next year,
every single sector has more cuts than increases, and cuts out
number increases by more than three to one in nine sectors. As the
principal argument in the bulls favor is the high level of
corporate earnings, and the low valuations relative to them, this
trend needs to reverse -- and soon.
I would look for those companies with solid dividends and for which
the analysts are still raising their estimates for next year, and
which are rated either #1 or #2 on the Zacks Rank. Some of
the names that meet those criteria are
DuPont
(DD),
Eaton (ETN) and
PPG
Industries (PPG).
Scorecard & Earnings Surprise
- Just 126 firms, or 25.2%, of the S&P 500 have reported
third quarter results. Total growth at 12.13%. We have a 2.65
surprise ratio, and 2.78% median surprise, both slightly below
normal. Positive surprises for 65.1% of all firms reporting.
- Positive year-over-year growth for 90, falling EPS for 34
firms, 2.65 ratio, 71.4% of all firms reporting have higher EPS
than last year.
- Bigger firms have reported early, 39.0% of all earnings in
(provided remaining firms report exactly in line with
expectations.
- Pay close attention to the % reported column in assessing the
significance of sector level data.
Historically, a “normal" earnings season will have a surprise ratio
of about 3:1 and a median surprise of about 3.0%. Thus in the early
going, we are doing much better than average on the median front,
and about average on the ratio front. Early on, the ratios and
medians can be very volatile, but it looks like an OK start to
things. Pay attention to the percent reporting in evaluating the
significance of the sector numbers.
Scorecard & Earnings Surprise 3Q
Reported
|
Income Surprises |
Yr/Yr
Growth |
%
Reported |
Surprise
Median |
EPS
Surp
Pos |
EPS
Surp
Neg |
#
Grow
Pos |
#
Grow
Neg |
Aerospace |
9.52% |
11.11% |
16.22 |
1 |
0 |
1 |
0 |
Industrial Products |
15.53% |
22.73% |
7.26 |
5 |
0 |
4 |
1 |
Consumer Discretionary |
7.88% |
25.81% |
6.16 |
5 |
2 |
7 |
1 |
Finance |
8.88% |
39.24% |
4.92 |
19 |
9 |
20 |
10 |
Conglomerates |
16.11% |
33.33% |
4.29 |
3 |
0 |
3 |
0 |
Auto |
48.67% |
28.57% |
3.76 |
2 |
0 |
2 |
0 |
Business Service |
27.93% |
15.79% |
2.86 |
3 |
0 |
3 |
0 |
Computer and Tech |
17.59% |
27.78% |
2.80 |
12 |
5 |
12 |
8 |
Retail/Wholesale |
8.93% |
31.91% |
2.70 |
9 |
3 |
12 |
2 |
Oils and Energy |
35.36% |
12.20% |
2.17 |
3 |
2 |
4 |
1 |
Consumer Staples |
13.01% |
25.00% |
1.98 |
6 |
3 |
6 |
3 |
Medical |
2.84% |
26.67% |
1.59 |
9 |
2 |
8 |
4 |
Transportation |
10.58% |
44.44% |
0.77 |
2 |
2 |
3 |
1 |
Construction |
-30.00% |
9.09% |
0.00 |
0 |
0 |
0 |
1 |
Utilities |
10.26% |
2.50% |
0.00 |
0 |
0 |
1 |
0 |
Basic Materials |
17.25% |
26.09% |
-0.12 |
3 |
3 |
4 |
2 |
S&P 500 |
9.52% |
25.20% |
2.78 |
82 |
31 |
90 |
34 |
Sales Surprises
- Strong revenue growth of 8.37% among the 126 that have
reported, median surprise 1.12 (strong), surprise ratio of 2.00.
Positive surprise for 66.7%. Way down from last week.
- Growing revenues outnumber falling revenues by ratio of 3.67,
78.6% have higher sales than last year.
- The ratios and medians are likely to change significantly as
more firms report.
- Pay close attention to the % reported column in assessing
significance of sector data.
Sales Surprises 3Q Reported
|
Sales Surprises |
Yr/Yr
Growth |
%
Reported |
Surprise
Median |
Sales
Surp
Pos |
Sales
Surp
Neg |
#
Grow
Pos |
#
Grow
Neg |
Basic Materials |
17.43% |
26.09% |
4.206 |
5 |
1 |
6 |
0 |
Business Service |
18.96% |
15.79% |
2.551 |
3 |
0 |
3 |
0 |
Transportation |
16.08% |
44.44% |
1.72 |
4 |
0 |
4 |
0 |
Consumer Staples |
19.29% |
25.00% |
1.719 |
7 |
2 |
6 |
3 |
Consumer Discretionary |
11.97% |
25.81% |
1.563 |
6 |
2 |
7 |
1 |
Industrial Products |
10.03% |
22.73% |
1.533 |
5 |
0 |
5 |
0 |
Medical |
8.20% |
26.67% |
1.262 |
7 |
5 |
11 |
1 |
Construction |
-0.61% |
9.09% |
1.165 |
1 |
0 |
0 |
1 |
Conglomerates |
15.32% |
33.33% |
1.088 |
2 |
1 |
3 |
0 |
Retail/Wholesale |
8.97% |
31.91% |
0.937 |
13 |
2 |
14 |
1 |
Computer and Tech |
17.25% |
27.78% |
0.47 |
12 |
8 |
15 |
5 |
Finance |
-4.05% |
39.24% |
0.335 |
16 |
15 |
17 |
14 |
Oils and Energy |
33.42% |
12.20% |
-0.054 |
2 |
3 |
5 |
0 |
Utilities |
-0.33% |
2.50% |
-0.438 |
0 |
1 |
0 |
1 |
Auto |
11.91% |
28.57% |
-0.743 |
1 |
1 |
2 |
0 |
Aerospace |
11.75% |
11.11% |
-6.503 |
0 |
1 |
1 |
0 |
S&P 500 |
8.37% |
25.20% |
1.117 |
84 |
42 |
99 |
27 |
Reported Quarterly Growth: Total Net Income
- The total net income for the 126 that have reported so far is
12.13% above what was reported in the third quarter of 2010, up
sharply from 3.33% growth the same 126 firms reported in the second
quarter. Excluding Financials, growth of 13.51%, down sharply from
22.71% reported in the second quarter.
- Sequential earnings rise 11.71% for the 126 that have reported,
but fall 2.12% ex-Financials. A $12 billion sequential swing at BAC
behind the difference.
- Growth expected to slow further in the fourth quarter, to
6.38%, 7.88% ex-Financials.
- Total net income reported (126 firms) $91.82 billion, vs.
$81.89 billion year ago, and up from $82.19 billion in second
quarter.
- Sample sizes now large enough to be significant for most
sectors.
Quarterly Growth: Total Net Income Reported
|
Income Growth |
"Sequential Q4/Q3 E" |
"Sequential Q3/Q2 A" |
Year over Year 3Q 11 A |
Year over Year 4Q 11 E |
Year over Year 2Q 11 A |
Auto |
-43.92% |
-2.04% |
48.67% |
144.72% |
30.42% |
Oils and Energy |
-1.33% |
11.24% |
35.36% |
22.53% |
16.16% |
Business Service |
4.87% |
-5.87% |
27.93% |
10.25% |
20.24% |
Computer and Tech |
22.97% |
-5.86% |
17.59% |
13.56% |
34.59% |
Basic Materials |
-9.31% |
-43.52% |
17.25% |
-21.29% |
83.35% |
Conglomerates |
-1.23% |
5.72% |
16.11% |
10.51% |
12.05% |
Industrial Products |
-14.71% |
0.96% |
15.53% |
11.28% |
19.01% |
Consumer Staples |
-17.25% |
0.90% |
13.01% |
4.48% |
15.04% |
Transportation |
-2.89% |
-0.46% |
10.58% |
12.41% |
11.53% |
Utilities |
-6.11% |
0.89% |
10.26% |
3.83% |
-0.50% |
Aerospace |
8.80% |
21.05% |
9.52% |
7.25% |
-8.06% |
Retail/Wholesale |
-3.02% |
6.52% |
8.93% |
6.23% |
14.82% |
Finance |
-11.36% |
71.45% |
8.88% |
2.27% |
-38.57% |
Consumer Discretionary |
-41.91% |
100.48% |
7.88% |
-1.94% |
6.60% |
Medical |
-4.90% |
-0.83% |
2.84% |
-1.15% |
7.23% |
Construction |
59.40% |
50.00% |
-30.00% |
4.61% |
-65.00% |
S&P 500 |
-0.79% |
11.71% |
12.13% |
6.38% |
3.33% |
Excluding Financial |
3.50% |
-2.12% |
13.51% |
7.88% |
22.71% |
Expected Quarterly Growth: Total Net Income
- Total net income is expected (for the 374) to be 12.33% above
what was reported in the third quarter of 2010, down from 17.28%
growth in the second quarter. Excluding Financials, growth of
11.99%, down from 17.99% reported in the second quarter.
- Relative to the second quarter total net income to fall 4.51%,
ex-Financials to fall 4.88%.
- Construction to lead the way (low base in 2010), followed by
Energy and Materials.
- Four sectors see earnings accelerate from second quarter, 11
see slowing growth.
- Total expected net income of $143.82 billion versus $128.03
billion year ago, $150.6 billion in second quarter (374 firms). The
500 are to report $235.6 billion vs. $209.9 billion a year
ago.
Quarterly Growth: Total Net Income Expected
|
Income Growth |
Sequential Q4/Q3 E |
Sequential Q3/Q2 E |
Year over Year 3Q 11 E |
Year over Year 4Q 11 E |
Year over Year 2Q 11 A |
Construction |
-24.94% |
13.71% |
64.56% |
52.35% |
-10.21% |
Oils and Energy |
-2.28% |
-6.94% |
49.80% |
25.70% |
42.34% |
Basic Materials |
-1.43% |
-18.27% |
30.56% |
20.04% |
36.68% |
Industrial Products |
-6.31% |
-3.29% |
19.11% |
12.38% |
27.66% |
Business Services |
9.26% |
7.04% |
16.42% |
15.20% |
13.69% |
Finance |
-1.00% |
-0.82% |
15.61% |
10.71% |
10.56% |
Consumer Discretionary |
23.06% |
-6.38% |
12.58% |
12.23% |
19.95% |
Transportation |
9.29% |
0.68% |
11.28% |
16.22% |
22.61% |
Auto |
-14.23% |
-23.84% |
8.49% |
21.49% |
14.42% |
Conglomerates |
14.00% |
-4.72% |
7.48% |
-8.93% |
21.07% |
Retail/Wholesale |
44.65% |
-13.83% |
3.48% |
3.96% |
9.00% |
Medical |
-2.51% |
-5.38% |
1.66% |
4.80% |
3.15% |
Utilities |
-37.77% |
28.10% |
1.62% |
3.79% |
7.63% |
Aerospace |
7.06% |
-5.54% |
0.86% |
-1.25% |
3.26% |
Consumer Staples |
2.57% |
0.39% |
-3.13% |
-0.07% |
9.77% |
Computer and Tech |
8.46% |
-7.99% |
-10.68% |
-5.70% |
8.56% |
S&P 500 |
2.00% |
-4.51% |
12.33% |
8.39% |
17.28% |
Excluding Financial |
2.31% |
-4.88% |
11.99% |
8.16% |
17.99% |
Quarterly Growth: Total Revenues Reported
- Revenue growth (for the 126 that have reported) strong at
8.37%, up from the 7.42% growth posted in the second quarter.
Growth ex-Financials 8.83%, up from 7.42%.
- Sequentially revenues 2.27% higher than in the second quarter,
up 2.39% ex-Financials.
- Eleven sectors reporting revenue growth over 10%, Finance,
Construction and Utilities weak.
- Revenue growth expected to slow in fourth quarter falling to
2.31%, 2.36% ex-Financials. Still a healthy level.
Quarterly Growth: Total Revenues Reported
|
Sales Growth |
"Sequential Q4/Q3 E" |
"Sequential Q3/Q2 A" |
Year over Year 3Q 11 A |
Year over Year
4Q 11 E |
Year over Year 2Q 11 A |
Oils and Energy |
3.87% |
7.63% |
33.42% |
26.85% |
26.80% |
Consumer Staples |
-18.17% |
1.90% |
19.29% |
-13.11% |
17.65% |
Business Service |
1.29% |
-0.86% |
18.96% |
6.47% |
17.89% |
Basic Materials |
-6.00% |
-6.79% |
17.43% |
6.48% |
29.80% |
Computer and Tech |
13.05% |
-0.69% |
17.25% |
13.11% |
24.19% |
Transportation |
-1.10% |
1.63% |
16.08% |
13.65% |
16.07% |
Conglomerates |
5.34% |
2.88% |
15.32% |
7.96% |
8.07% |
Consumer Discretionary |
-1.48% |
14.92% |
11.97% |
8.35% |
12.30% |
Auto |
-10.78% |
-0.13% |
11.91% |
8.24% |
13.64% |
Aerospace |
23.45% |
-4.87% |
11.75% |
5.53% |
17.82% |
Industrial Products |
-2.27% |
-0.08% |
10.03% |
7.49% |
12.05% |
Retail/Wholesale |
-2.70% |
6.86% |
8.97% |
6.43% |
7.83% |
Medical |
2.55% |
-0.95% |
8.20% |
4.93% |
8.90% |
Utilities |
0.96% |
-0.05% |
-0.33% |
1.33% |
2.23% |
Construction |
11.59% |
7.33% |
-0.61% |
6.40% |
-6.14% |
Finance |
-4.64% |
4.36% |
-4.05% |
-8.43% |
-11.57% |
S&P 500 |
-0.61% |
2.27% |
8.37% |
2.31% |
7.17% |
Excluding Financial |
-0.69% |
2.39% |
8.83% |
2.36% |
7.42% |
Quarterly Growth: Total Revenues Expected
- Revenue growth for the 374 yet to report expected to fall to
7.20%, from the 12.48% growth posted in the second quarter. Growth
ex-Financials 8.83%, up from 7.42% in 2nd quarter.
- Sequentially revenues 4.22% lower than in the second quarter,
down 2.01% ex-Financials.
- Five sectors expecting revenue growth over 10%, Finance to see
sharp 24.2% year-over-year drop in revenues.
- Revenue growth expected to slow sharply in fourth quarter
falling to -0.14%, 1.45% ex-Financials.
Quarterly Growth: Total Revenues Expected
|
Sales Growth |
Sequential Q4/Q3 E |
Sequential Q3/Q2 E |
Year over Year 3Q 11 E |
Year over Year 4Q 11 E |
Year over Year
2Q 11 A |
Oils and Energy |
-15.78% |
-8.22% |
22.47% |
-4.52% |
28.50% |
Industrial Products |
0.48% |
0.24% |
15.85% |
15.07% |
20.32% |
Consumer Discretionary |
8.26% |
-0.04% |
14.38% |
12.48% |
15.67% |
Basic Materials |
5.29% |
-8.93% |
13.04% |
10.09% |
22.50% |
Auto |
5.48% |
-7.86% |
11.13% |
7.56% |
11.83% |
Transportation |
5.07% |
0.88% |
9.97% |
10.16% |
9.89% |
Construction |
-3.29% |
4.52% |
9.35% |
11.51% |
2.52% |
Retail/Wholesale |
1.14% |
-0.38% |
8.36% |
-2.47% |
7.21% |
Utilities |
-9.74% |
13.11% |
7.06% |
4.14% |
7.39% |
Business Services |
3.68% |
1.40% |
6.58% |
5.85% |
7.50% |
Computer and Tech |
3.13% |
0.51% |
5.36% |
3.35% |
9.22% |
Medical |
2.19% |
-1.15% |
4.61% |
3.22% |
4.76% |
Conglomerates |
8.14% |
-1.51% |
1.83% |
-1.13% |
1.17% |
Consumer Staples |
4.52% |
-4.94% |
0.98% |
0.60% |
7.99% |
Aerospace |
8.83% |
4.73% |
0.25% |
4.77% |
-1.94% |
Finance |
28.10% |
-28.21% |
-24.18% |
-15.26% |
10.49% |
S&P 500 |
-0.09% |
-4.22% |
7.20% |
-0.14% |
12.48% |
Excluding Financial |
-1.99% |
-2.01% |
10.28% |
1.45% |
12.67% |
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 126 that have reported rise to 13.40% from
12.95% a year ago, and up from 12.27% in the second quarter. Net
margins ex-Financials fall to 7.01% from 7.02% a year ago and 7.64%
in the second quarter.
- Net margins will swing significantly as more firms report and
mix shifts.
- 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.
Quarterly: Net Margins Reported
|
Net Margins |
Q4 2011 Estimated |
Q3 2011 Reported |
Q2 2011 Reported |
1Q 2011 Reported |
4Q 2010 Reported |
3Q 2010 Reported |
Computer and Tech |
23.54% |
21.64% |
22.82% |
20.78% |
23.44% |
21.57% |
Aerospace |
16.39% |
18.60% |
14.62% |
13.94% |
16.13% |
18.98% |
Oils and Energy |
15.87% |
16.70% |
16.16% |
15.05% |
16.43% |
16.47% |
Finance |
14.82% |
15.94% |
9.70% |
15.69% |
13.27% |
14.05% |
Consumer Discretionary |
8.38% |
14.22% |
8.15% |
7.36% |
9.26% |
14.75% |
Medical |
13.16% |
14.19% |
14.17% |
14.55% |
13.97% |
14.93% |
Consumer Staples |
13.29% |
13.14% |
13.27% |
12.17% |
11.05% |
13.87% |
Utilities |
10.70% |
11.51% |
11.40% |
10.91% |
10.45% |
10.40% |
Conglomerates |
8.45% |
9.02% |
8.77% |
7.74% |
8.26% |
8.95% |
Business Service |
8.96% |
8.65% |
9.11% |
8.19% |
8.65% |
8.05% |
Transportation |
8.37% |
8.52% |
8.70% |
6.53% |
8.46% |
8.94% |
Basic Materials |
7.86% |
8.14% |
13.44% |
14.27% |
10.63% |
8.16% |
Industrial Products |
7.08% |
8.11% |
8.03% |
6.93% |
6.84% |
7.73% |
Auto |
4.67% |
7.44% |
7.58% |
6.09% |
2.07% |
5.60% |
Retail/Wholesale |
3.40% |
3.41% |
3.42% |
4.15% |
3.41% |
3.41% |
Construction |
3.66% |
2.56% |
1.83% |
-1.97% |
3.72% |
3.64% |
S&P 500 |
13.38% |
13.40% |
12.27% |
13.19% |
12.87% |
12.95% |
Excluding Financial |
10.41% |
9.99% |
10.45% |
9.40% |
9.88% |
9.58% |
Quarterly Net Margins Expected
- Sector and S&P net margins are calculated as total net
income for the sector divided by total revenues for the sector. The
numbers on this table are only for the 374 yet to report.
- Net margins expected to rise to 7.97% from 7.61% a year ago,
but down from 8.00% in the second quarter. Net margins
ex-Financials expected to fall to 7.17% from 7.55% a year ago and
down from 7.94% in the second quarter.
- Nine sectors see year-over-year margin expansion, seven
expected to 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.
Quarterly: Net Margins Expected
|
Net Margins |
Q4 2011 Expected |
Q3 2011 Expected |
2Q 2011 Reported |
1Q 2011 Reported |
4Q 2010 Reported |
3Q 2010 Reported |
Business Service |
14.16% |
13.44% |
12.73% |
12.35% |
13.01% |
12.30% |
Medical |
12.11% |
12.69% |
13.26% |
13.49% |
11.92% |
13.06% |
Finance |
9.23% |
11.94% |
8.64% |
8.87% |
7.06% |
7.83% |
Consumer Staples |
10.17% |
10.36% |
9.81% |
9.55% |
10.24% |
10.80% |
Computer and Tech |
10.77% |
10.24% |
11.18% |
12.22% |
11.80% |
12.08% |
Conglomerates |
10.64% |
10.09% |
10.43% |
9.31% |
11.55% |
9.56% |
Consumer Discretionary |
10.31% |
9.07% |
9.69% |
9.68% |
10.34% |
9.22% |
Industrial Products |
7.95% |
8.53% |
8.84% |
9.08% |
8.14% |
8.30% |
Oils and Energy |
9.89% |
8.53% |
8.41% |
7.98% |
7.52% |
6.97% |
Utilities |
5.69% |
8.26% |
7.29% |
7.23% |
5.71% |
8.70% |
Transportation |
8.47% |
8.15% |
8.16% |
6.96% |
8.03% |
8.05% |
Basic Materials |
6.36% |
6.80% |
7.57% |
7.83% |
5.84% |
5.89% |
Aerospace |
6.06% |
6.16% |
6.82% |
6.09% |
6.42% |
6.12% |
Auto |
4.38% |
5.38% |
6.51% |
6.68% |
3.88% |
5.51% |
Construction |
2.66% |
3.43% |
3.16% |
1.27% |
1.95% |
2.28% |
Retail/Wholesale |
4.40% |
3.07% |
3.55% |
3.21% |
4.12% |
3.22% |
S&P 500 |
8.14% |
7.97% |
8.00% |
7.86% |
7.50% |
7.61% |
Excluding Financial |
8.04% |
7.71% |
7.94% |
7.76% |
7.55% |
7.59% |
Annual Total Net Income Growth
- Following rise of just 2.0% in 2009, total earnings for the
S&P 500 jumps 46.0% in 2010, 14.3% further expected in 2011.
Growth ex-Financials 27.9% in 2010, 17.8% in 2011.
- For 2012, 11.9% growth expected. 9.4%, ex-Financials.
- Fourteen sectors expected to see total net income rise in 2011
and all in 2012. Utilities only (small) decliner in 2010. Nine
sectors expected to post double-digit growth in 2011 and eleven in
2012. Only Utilities and Health Care expected to grow less than 5%
in 2012.
- Cyclical/Commodity sectors expected to lead in earnings growth
again in 2011 and into 2012. Materials and Energy expected to grow
almost 40% for second year.
- Sector dispersion of earnings growth narrows dramatically
between 2010 and 2012, only Construction and Financials (low base)
expected to grow more than 20% in 2012, eight grew more than 30% in
2010.
Annual Total Net Income Growth
|
Net Income Growth |
2009 |
2010 |
2011 |
2012 |
Oils and Energy |
-54.95% |
50.58% |
37.87% |
6.03% |
Basic Materials |
-48.29% |
61.86% |
36.54% |
12.53% |
Industrial Products |
-35.12% |
36.60% |
32.02% |
17.53% |
Consumer Discretionary |
-15.01% |
15.59% |
28.16% |
14.19% |
Computer and Tech |
-4.61% |
46.67% |
22.49% |
10.95% |
Business Service |
1.46% |
13.61% |
17.93% |
13.28% |
Auto |
-109.79% |
1470.14% |
17.39% |
6.71% |
Conglomerates |
-23.61% |
11.25% |
11.64% |
11.43% |
Retail/Wholesale |
2.62% |
14.66% |
11.19% |
13.27% |
Consumer Staples |
5.36% |
11.74% |
8.85% |
7.99% |
Medical |
2.53% |
10.37% |
6.52% |
4.75% |
Aerospace |
-17.10% |
21.38% |
4.58% |
11.70% |
Utilities |
-14.20% |
-0.64% |
3.50% |
4.44% |
Construction |
-81.46% |
623.88% |
1.48% |
46.44% |
Finance |
-138.22% |
316.22% |
-1.83% |
26.02% |
Transportation |
-30.21% |
81.24% |
-5.34% |
18.46% |
S&P 500 |
2.03% |
46.04% |
14.30% |
11.93% |
Annual Total Revenue Growth
- Total S&P 500 Revenue in 2010 rises 8.57% above 2009
levels, a rebound from a 6.36% 2009 decline.
- Total revenues for the S&P 500 expected to rise 5.48% in
2011, 5.52% in 2012.
- Materials 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, but only
Construction, Tech and Industrials seen in double digits.
- Aerospace the only sector to post lower top line for 2010.
Revenues for Financials, Construction and Conglomerates were
virtually unchanged.
- The widespread revenue gains are not consistent with the idea
of a double-dip recession, particularly in a low inflation
environment.
- Revenue growth significantly different if Financials are
excluded, down 10.56% in 2009 but growth of 9.28% in 2010, 9.28% in
2011 and 5.71% in 2012.
Annual Total Revenue Growth
|
Sales Growth |
2009 |
2010 |
2011 |
2012 |
Basic Materials |
-16.96% |
11.22% |
18.64% |
7.14% |
Industrial Products |
-20.96% |
12.34% |
18.12% |
11.66% |
Oils and Energy |
-34.24% |
23.74% |
17.02% |
0.13% |
Auto |
-21.40% |
8.53% |
14.80% |
8.82% |
Consumer Discretionary |
-10.97% |
3.87% |
14.03% |
8.27% |
Computer and Tech |
-3.19% |
15.56% |
13.27% |
12.03% |
Transportation |
7.25% |
10.70% |
12.96% |
9.56% |
Business Service |
-3.61% |
4.81% |
8.98% |
6.97% |
Retail/Wholesale |
1.40% |
4.08% |
6.46% |
6.60% |
Medical |
6.25% |
11.45% |
4.78% |
2.84% |
Construction |
-15.92% |
0.47% |
4.63% |
12.91% |
Utilities |
-6.24% |
2.13% |
4.47% |
3.05% |
Conglomerates |
-13.30% |
0.94% |
4.36% |
4.52% |
Aerospace |
6.51% |
-0.34% |
0.31% |
6.02% |
Consumer Staples |
-0.52% |
4.79% |
-2.00% |
5.47% |
Finance |
21.57% |
0.11% |
-17.77% |
4.02% |
S&P 500 |
-6.36% |
7.89% |
5.48% |
5.52% |
Excluding Financial |
-10.56% |
9.28% |
9.28% |
5.71% |
Annual Net Margins
- Net Margins marching higher, from 5.88% in 2008 to 6.33% in
2009 to 8.57% for 2010, 9.28% expected for 2011. Trend expected to
continue into 2012 with net margins of 9.84% expected. Major source
of earnings growth.
- Financials significantly distort overall net margins. Net
margins ex-Financials 7.78% in 2008, 6.99% in 2009, 8.18% for 2010,
8.82% expected in 2011. Expected to grow to 9.12% in 2012.
- Financials net margins soar from -8.42% in 2008 to 15.83%
expected for 2012.
- All sectors but Medical and Utilities saw higher net margins in
2010 than in 2009. Fourteen sectors expected to post higher net
margins in 2011 than in 2010. Widespread margin expansion currently
expected for 2012 as well with 14 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.
Annual Net Margins
|
Net Margins |
2009A |
2010E |
2011E |
2012E |
Computer and Tech |
11.91% |
15.12% |
16.35% |
16.20% |
Medical |
13.09% |
12.96% |
13.18% |
13.42% |
Finance |
2.63% |
10.95% |
13.07% |
15.83% |
Business Service |
10.07% |
10.92% |
11.82% |
12.51% |
Consumer Staples |
9.75% |
10.40% |
11.55% |
11.82% |
Conglomerates |
8.17% |
9.00% |
9.63% |
10.27% |
Consumer Discretionary |
7.44% |
8.28% |
9.30% |
9.81% |
Oils and Energy |
5.99% |
7.29% |
8.59% |
9.10% |
Industrial Products |
6.08% |
7.40% |
8.27% |
8.70% |
Transportation |
5.80% |
9.50% |
7.96% |
8.61% |
Basic Materials |
4.72% |
6.86% |
7.90% |
8.29% |
Utilities |
8.07% |
7.85% |
7.78% |
7.88% |
Aerospace |
4.93% |
6.00% |
6.26% |
6.59% |
Auto |
0.36% |
5.23% |
5.35% |
5.24% |
Retail/Wholesale |
3.00% |
3.31% |
3.46% |
3.67% |
Construction |
-0.51% |
2.67% |
2.59% |
3.36% |
S&P 500 |
6.33% |
8.57% |
9.28% |
9.84% |
Excluding Financial |
6.99% |
8.18% |
8.82% |
9.12% |
Earnings Estimate Revisions: Current Fiscal Year
The Zacks Revisions Ratio: 2011
- Revisions ratio for full S&P 500 at 0.61, up from 0.47 last
week, still very bearish. Past seasonal low in activity, change in
revisions ratio driven more by new estimates being added, not old
ones falling out (higher significance to changes in the revisions
ratio).
- Just five sectors with revisions ratio at or above 1.0. Eight
sectors with two or more cuts per increase. Sample sizes growing
adding to the significance of the ratios.
- Ratio of firms with rising to falling mean estimates at 0.54,
up from 0.43 last week, still a very bearish reading.
- Total number of revisions (4-week total) climbing off of
seasonal lows at 2,666, up from 2,113 last week (26.2%). Increases
at 1,006 up from 671 (49.9%), cuts at 1,660, up from 1,442
(15.1%).
The Zacks Revisions Ratio: 2011
|
Sector |
%Ch
Curr Fiscal Yr
Est - 4 wks |
#
Firms
Up |
#
Firms
Down |
#
Ests
Up |
#
Ests
Down |
Revisions
Ratio |
Firms
up/down |
Aerospace |
0.06 |
4 |
5 |
19 |
7 |
2.71 |
0.80 |
Consumer Discretionary |
-0.18 |
14 |
11 |
76 |
56 |
1.36 |
1.27 |
Business Service |
-0.04 |
7 |
11 |
33 |
26 |
1.27 |
0.64 |
Retail/Wholesale |
-0.32 |
25 |
19 |
141 |
113 |
1.25 |
1.32 |
Auto |
-0.41 |
2 |
5 |
21 |
20 |
1.05 |
0.40 |
Computer and Tech |
-1.63 |
23 |
41 |
171 |
193 |
0.89 |
0.56 |
Medical |
-0.46 |
23 |
20 |
110 |
135 |
0.81 |
1.15 |
Conglomerates |
0.15 |
3 |
5 |
11 |
19 |
0.58 |
0.60 |
Industrial Products |
-0.85 |
6 |
16 |
30 |
63 |
0.48 |
0.38 |
Finance |
-2.69 |
22 |
54 |
195 |
441 |
0.44 |
0.41 |
Oils and Energy |
-3.4 |
8 |
33 |
108 |
249 |
0.43 |
0.24 |
Utilities |
-0.85 |
14 |
15 |
25 |
61 |
0.41 |
0.93 |
Transportation |
0.4 |
1 |
7 |
18 |
61 |
0.30 |
0.14 |
Consumer Staples |
-0.71 |
5 |
30 |
30 |
127 |
0.24 |
0.17 |
Basic Materials |
-3.96 |
3 |
19 |
16 |
77 |
0.21 |
0.16 |
Construction |
-1.39 |
1 |
7 |
2 |
12 |
0.17 |
0.14 |
S&P 500 |
-1.37 |
161 |
298 |
1006 |
1660 |
0.61 |
0.54 |
Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2012
- Revisions ratio for full S&P 500 at 0.36, up from 0.32 from
last week, deep in bearish territory, sample sizes growing and
becoming more significant.
- While better than in recent weeks, the failure of the revisions
ratio to rise more significantly as activity has picked up is a
very worrisome sign.
- All sectors have negative revisions ratio (below 1.0). Thirteen
sectors with more than two cuts per increase. Seven sectors more
than 4 to 1.
- Ratio of firms with rising estimate to falling mean estimates
at 0.32, up from 0.31, still deep in bearish territory.
- Total number of revisions (4-week total) at 2,703, up from
2,094 last week (29.1%).
- Increases at 709 up from 505 last week (40.4%), cuts rise to
1,994 from 1,589 last week (25.5%).
The Zacks Revisions Ratio: 2012
|
Sector |
%Ch
Next Fiscal Yr Est - 4 wks |
#
Firms Up |
#
Firms Down |
#
Ests Up |
#
Ests Down |
Revisions
Ratio |
Firms up/down |
Retail/Wholesale |
-0.18 |
21 |
24 |
107 |
113 |
0.95 |
0.88 |
Consumer Discretionary |
-0.69 |
9 |
19 |
55 |
80 |
0.69 |
0.47 |
Computer and Tech |
-1.98 |
20 |
45 |
124 |
211 |
0.59 |
0.44 |
Medical |
-0.80 |
16 |
29 |
87 |
181 |
0.48 |
0.55 |
Business Service |
-0.84 |
3 |
15 |
18 |
38 |
0.47 |
0.20 |
Aerospace |
-0.26 |
3 |
6 |
11 |
26 |
0.42 |
0.50 |
Auto |
-1.79 |
2 |
5 |
9 |
23 |
0.39 |
0.40 |
Industrial Products |
-2.21 |
5 |
17 |
23 |
75 |
0.31 |
0.29 |
Oils and Energy |
-6.57 |
9 |
32 |
88 |
309 |
0.28 |
0.28 |
Construction |
-4.66 |
1 |
8 |
3 |
13 |
0.23 |
0.13 |
Finance |
-3.37 |
18 |
59 |
111 |
516 |
0.22 |
0.31 |
Consumer Staples |
-1.31 |
6 |
28 |
29 |
137 |
0.21 |
0.21 |
Utilities |
-1.21 |
7 |
20 |
16 |
76 |
0.21 |
0.35 |
Basic Materials |
-4.76 |
3 |
19 |
17 |
84 |
0.20 |
0.16 |
Conglomerates |
-1.41 |
1 |
7 |
4 |
40 |
0.10 |
0.14 |
Transportation |
-1.49 |
0 |
9 |
7 |
72 |
0.10 |
0.00 |
S&P 500 |
-2.19 |
124 |
342 |
709 |
1994 |
0.36 |
0.36 |
Total Income and Share
- S&P 500 earned $543.4 billion in 2009, rising to earn
$793.6 billion in 2010, $907.0 billion expected in 2011.
- The S&P 500 total earnings expected to hit the $1 Trillion
mark in 2012 at $1.015 Trillion.
- Finance share of total earnings moves from 5.9% in 2009 to
18.0% in 2010, dip to 15.4% expected for 2011; rebound to 17.4% in
2012, but still well below 2007 peak of over 30%. Energy share also
rising, going from 11.9% in 2009 to 14.0% in 2012.
- Medical share of total earnings far exceeds market cap share
(index weight), but earnings share expected to shrink from 17.3% in
2009 to 11.1% in 2012, down each year.
- Market Cap shares of Construction, Staples, Retail,
Transportation and Business Service sectors far exceed earnings
shares of any of the years from 2010 through 2012.
- Earnings shares of Energy, Finance, Autos, Materials and
Medical well above market cap shares.
- As a general rule, one should try to overweight sectors with
rising earnings shares, underweight falling earnings shares, but
also over weight sectors where earnings shares exceed market cap
shares.
Total Income and Share
|
Income ($ Bill) |
Total
Net
Income
$ 2010 |
Total
Net
Income
$ 2011 |
Total
Net
Income
$ 2012 |
% Total
S&P Earn
2010 |
% Total
S&P Earn
2011 |
% Total
S&P
Earn
2012 |
% Total
S&P Mkt
Cap |
Computer and Tech |
$134,690 |
$164,977 |
$183,043 |
16.97% |
18.19% |
18.03% |
18.74% |
Finance |
$142,515 |
$139,910 |
$176,319 |
17.96% |
15.43% |
17.37% |
14.12% |
Oils and Energy |
$97,412 |
$134,301 |
$142,400 |
12.28% |
14.81% |
14.03% |
11.64% |
Medical |
$100,818 |
$107,387 |
$112,490 |
12.70% |
11.84% |
11.08% |
10.38% |
Consumer Staples |
$62,903 |
$68,471 |
$73,939 |
7.93% |
7.55% |
7.28% |
9.15% |
Retail/Wholesale |
$58,300 |
$64,821 |
$73,421 |
7.35% |
7.15% |
7.23% |
9.30% |
Utilities |
$47,911 |
$49,586 |
$51,787 |
6.04% |
5.47% |
5.10% |
6.38% |
Basic Materials |
$23,781 |
$32,470 |
$36,539 |
3.00% |
3.58% |
3.60% |
3.18% |
Conglomerates |
$28,602 |
$31,931 |
$35,582 |
3.60% |
3.52% |
3.50% |
3.52% |
Consumer Discretionary |
$24,162 |
$30,967 |
$35,361 |
3.04% |
3.41% |
3.48% |
3.95% |
Industrial Products |
$16,694 |
$22,039 |
$25,902 |
2.10% |
2.43% |
2.55% |
2.45% |
Business Service |
$14,288 |
$16,850 |
$19,088 |
1.80% |
1.86% |
1.88% |
2.43% |
Aerospace |
$13,874 |
$14,509 |
$16,206 |
1.75% |
1.60% |
1.60% |
1.38% |
Transportation |
$14,604 |
$13,824 |
$16,376 |
1.84% |
1.52% |
1.61% |
1.87% |
Auto |
$11,087 |
$13,015 |
$13,888 |
1.40% |
1.43% |
1.37% |
1.02% |
Construction |
$1,932 |
$1,961 |
$2,871 |
0.24% |
0.22% |
0.28% |
0.48% |
S&P 500 |
$793,572 |
$907,019 |
$1,015,213 |
100.00% |
100.00% |
100.00% |
100.00% |
P/E Ratios
- Trading at 14.60x 2010, 12.78x 2011 earnings, or earnings
yields of 6.85% and 7.82%, respectively. P/E for 2012 at 11.42x or
earnings yield of 8.76%.
- Earnings Yields still very attractive relative to 10-year
T-Note rate of 2.19%.
- Autos and Energy have lowest P/E based on 2011 and 2012
earnings. Aerospace and Finance also have single digit P/E’s for
2012.
- Construction has highest P/E for all three years by wide
margin.
- S&P 500 earned $56.98 in 2009 rising to $83.25 in 2010.
Currently expected to earn $95.10 in 2011 and $106.43 for
2012.
P/E Ratios
|
P/E |
2009 |
2010 |
2011 |
2012 |
Auto |
167.74 |
10.68 |
9.10 |
8.53 |
Oils and Energy |
20.85 |
13.85 |
10.05 |
9.47 |
Aerospace |
13.99 |
11.52 |
11.02 |
9.86 |
Medical |
13.16 |
11.93 |
11.20 |
10.69 |
Basic Materials |
25.11 |
15.51 |
11.36 |
10.10 |
Finance |
47.79 |
11.48 |
11.70 |
9.28 |
Conglomerates |
15.88 |
14.28 |
12.79 |
11.48 |
Industrial Products |
23.23 |
17.01 |
12.88 |
10.96 |
Computer and Tech |
23.65 |
16.13 |
13.17 |
11.87 |
Consumer Discretionary |
21.87 |
18.92 |
14.76 |
12.93 |
Utilities |
15.34 |
15.44 |
14.92 |
14.28 |
Consumer Staples |
18.83 |
16.85 |
15.48 |
14.33 |
Transportation |
26.90 |
14.84 |
15.68 |
13.23 |
Retail/Wholesale |
21.20 |
18.49 |
16.63 |
14.68 |
Business Service |
22.41 |
19.72 |
16.72 |
14.76 |
Construction |
NM |
29.02 |
28.59 |
19.53 |
S&P 500 |
21.33 |
14.60 |
12.78 |
11.42 |
Data in this report, unless stated otherwise, is through the
close on Thursday 10/20/2011.
We use the convention of referring to the next full fiscal year to
be completed as 2011, not all firms are on December fiscal years,
this can cause discontinuities in the data. The data is based on
FY1, not based on 2011, even though I may call it 2011 in the
report. All numbers, including historical ones, reflect the current
composition of the S&P 500, thus some historical numbers may
differ from those reported by S&P which are based on the
composition of the index at the time of the reports.
BANK OF AMER CP (BAC): Free Stock Analysis Report
DU PONT (EI) DE (DD): Free Stock Analysis Report
EATON CORP (ETN): Free Stock Analysis Report
PPG INDS INC (PPG): Free Stock Analysis Report
Zacks Investment Research
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