The Parade of Weak Earnings Reports Continues - Earnings Preview

2015 Q1 Earnings Scorecard

As of April 24th, we have seen Q1 result from 201 S&P 500 members that combined account for 50.8% of the index’s total market capitalization. Total earnings for these companies are up +8.7% on +0.3% revenue gains, with 68.3% beating EPS estimates and 44.1% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 201 index members that have reported results. Please note that the second-last column (Price Impact) tries to capture how the stock price has moved in response to the earning release. As the small note at the bottom of the table explains the price change is from the day before the earnings announcement to the day after. If we are looking at a stock that has reported that morning, then the day before price is compared to the intraday price on the release date.

Figure 1: 2015 Q1 Scorecard (as of 4/24/2015)

Please note that the second-last column (Price Impact) in the Scorecard table above tries to capture how the stock price has moved in response to the earning release. As the small note at the bottom of the table explains the price change is from the day before the earnings announcement to the day after. If we are looking at a stock that has reported that morning, then the day before price is compared to the intraday price on the release date.

Putting Q1 Results in Context

Figure 2 below shows the comparison of the results thus far with what we have been seeing from the same group of 201 companies in other recent quarters.

Figure 2: 2015 Q1 Results Compared

The left-hand side chart compares the earnings and revenue growth rates for these 201 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2014 Q4). The right-hand side chart does the same comparison for these 201 S&P 500 members, but compares only the earnings and beat ratios.

Here are the takeaways from looking at this chart

The Finance Effect

Total earnings for the 61.6% of the Finance sector’s market cap that has reported results are up +19.3% on +1.1% higher revenues, with 61.9% beating EPS estimates and 42.9% coming ahead of top-line expectations. This is better growth performance than we have seen from this group of Finance sector companies in other recent quarters.

Figure 3 below compares the Finance sector results thus far with what we have been seeing from the same group of companies in other recent quarters.

Figure 3: Finance Sector Q1 Results Compared

Please keep in mind that a big part of the +19.3% earnings growth for the sector at this stage is thanks to easy comparisons for Bank of America (BAC). Exclude Bank of America and the earnings growth rate drops to +9.5%. But even this +9.5% growth rate compares favorably to what we have been seeing from this group in other recent quarters.

The right-hand side chart above shows the Finance sector’s EPS and revenue beat ratios is very interesting. We have the same weak revenue surprises in Finance as elsewhere in the index. But even the EPS beat ratio is lower than what we saw from the same group in 2014 Q4 and just about in-line with the 4-quarter average.

Bottom line, the Finance sector’s strong numbers didn’t come as a surprise to investors; they were already priced in. No doubt the ‘Price Impact’ column in the Scorecard table above shows that the stock-price impact of the earnings announcements has been negative, at least at this stage.

Comparing the ex-Finance Results

Given this discussion of Finance sector results, it would probably make sense to look at the results thus far on an ex-Finance basis. Figure 4 below recasts the earlier Figure 2 on an ex-Finance basis.

Figure 4: Q1 Results Outside of Finance compared

Comparing Figure 4 with Figure 2 shows -

The Composite Picture for Q1

Figure 5 below presents the composite summary picture for Q1 contrasted with what companies actually reported in the 2014 Q4 earnings season. What this means is that the data below is presenting Q1 as a whole, combining the actual results from the 201 S&P 500 members that have reported results with estimates from the still-to-come 299 companies.

Figure 5 – The Composite Summary Picture

As you can see in the above summary table, total Q1 earnings are expected to be down -0.4% from the same period last year on -5.1% lower revenues, with Finance as a big boost and Energy as major drag on the growth rate. Excluding the Finance sector, total earnings in Q1 would be down -4.5% on -5.6% lower revenues. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up a decent enough +8.3% on +1.5%. Among the major sectors, Transportation, and Autos are big growth contributors this quarter, with Transportation earnings expected to be up +37.9% and Autos earnings up +27.8%. Finance up +16.9%, Medical up +13.5%.  

We should keep in mind however that a small number of companies are accounting for most of the growth in Finance and Medical. We mentioned earlier how easy comparisons for Bank of America was helping the Finance sector’s growth picture. Gilead Sciences (GILD) and Actavis (ACT) are playing a similar role in the Medical sector.

Will Q1 be the Low Point for the Year?

We haven’t had much earnings growth lately and the growth rate for Q1 is expected to turn negative. Not only is the growth rate for Q1 so low, but the overall level of total earnings for the S&P 500 index are also expected to be the lowest in two years. This will be a material change from the last two quarters when aggregate earnings for the index reached all-time record levels.

The chart below shows the earnings totals for 2015 Q1 (shaded orange bar - $259.1 billion) contrasted with the actual earnings for the preceding four quarters as well estimates for the following three quarters. The hopes are that Q1 will be the low point for the year, with aggregate earnings moving back into record territory towards the end of the year. Recent history tells otherwise. If history is our guide, then the likely result will be revisions to those lofty estimates in the coming days.

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Note: For a complete analysis of 2015 Q1 estimates, please check out our weekly Earnings Trends report.

Here is a list of the 949 companies reporting this week, including 159 S&P 500 members.