Corporate earnings expert at Estimize Christine Short reports on projected growth as the current reporting season unfolds.
As of mid-February, the fourth-quarter 2015 earnings season was winding down, with only a handful of retailers left to report. Quarterly results for earnings per share, revenues and other metrics being released this month can have big implications for a company’s stock. Our earnings estimate service, Estimize, can help provide a picture of the trends as the earnings season progresses. Here, I give a snapshot of what we were seeing as of February 12.
Unlike the other consensus estimate services, which only aggregate estimates from sell-side analysts, the Estimize platform also crowdsources expectations from buy-side analysts and independent research shops, as well as from non-professionals such as students and academics. By sourcing estimates from a diverse community of individuals, Estimize hopes to provide a more accurate and representative view of expectations. The Estimize platform is free and provides crowdsourced estimates on over 1,700 stocks as well as 26 economic indicators.
Overall Projected Growth Rates
The fourth-quarter 2015 season started out on a sour note, with turbulent U.S. markets, currency headwinds, plunging oil prices and a weakening Chinese economy all plaguing the large-cap companies within the S&P 500 index, and things have only gotten worse. As of February 12, 376 companies released results for the fourth quarter, and the Estimize expected growth rate for year-over-year profits stayed negative at –2.9%, with even lower revenue growth projection of –3.5%. Both of these numbers have fallen significantly from what was expected at the beginning of the season, with analysts initially calling for negative earnings per share (EPS) growth of –1.4% and revenues of –2.2%.
Taking a look at the beat rates [percentage of companies reporting earnings higher than the consensus] at this point gives us some clues. Only 53% of companies have been able to beat the Estimize consensus thus far, with an even steeper 41% beating on revenues. Both of these are far lower than historical averages.
Much has been made over the last year of an impending “earnings recession,” defined as three consecutive quarters of year-over-year profit declines for the S&P 500. However, earnings haven’t had an overall negative quarter since 2009, just barely eking out of the red last quarter with 0.6% growth.
Revenues, on the other hand, are heading for their fourth consecutive quarter of negative growth, meaning sales growth was technically in recession territory at the completion of the third quarter in 2015. Companies are able to manipulate their earnings numbers through cost-cutting initiatives, share buybacks and accounting methods, but don’t have that same ability on the sales front. Revenue growth falling well below earnings growth is a trend that we’ve seen since the third quarter of 2012, and it’s certainly cause for concern.
What the Sectors Are Revealing
Figure 1 shows the Estimize projected growth in earnings and revenues for each S&P sector group as of February 12. Sector leaders and laggards have held fairly steady throughout this reporting season, with health care holding the top spot, but information technology bumped out consumer discretionary for second place. On the opposite end, the energy and materials sectors remain the biggest laggards.
For health care, the Estimize community was calling for fourth-quarter profit growth of 7.8%, and even higher revenue growth of 9.4%. These numbers have crept up during the season on the heels of better-than-expected results. Leading the sector in projected earnings growth once again is biotechnology, with earnings anticipated to grow 21.2% from the year-ago quarter (Figure 2). This high-growth industry has seen large capital inflows and lots of merger and acquisition (M&A) activity in the past year. The darling of the space, Gilead Sciences Inc. (GILD), reported after the market close on February 2 to lots of fanfare. The maker of widely used hepatitis C drugs continued its run of high double-digit growth on the top-line and bottom-line.
The information technology sector was initially expected to post meager earnings growth of 3% for the quarter, but earnings growth has increased to 6.9% thanks to great results out of the Internet software & services industry in particular (Figure 3). Most of that upside can be attributed to incredible results reported by Facebook Inc. (FB) on January 27. The company massively beat both earnings and revenue expectations from Estimize, recording stellar year-over-year growth of 46% and 52% for each metric respectively. This is the highest sales growth in five quarters, an impressive feat for a company with a market capitalization of $320 billion.
As mentioned, the laggards this season are, not so surprisingly, the energy and materials sectors. The weakening Chinese economy continues to have a crushing impact on commodities, as it is the largest importer worldwide. Year-over-year revenue and earnings comparisons for these two sectors continue to dip lower as a result. As of February 12, earnings estimates for the energy sector are calling for a whopping year-over-year decline of 74%, with revenue expectations down 33%. Just when analysts thought the freefall in oil prices was slowing, Brent Crude dropped an additional 30% in the fourth quarter. Figure 4 gives the breakdown in projections for fourth-quarter earnings and revenue growth for the three industries that make up the energy sector.
Meanwhile, the materials sector’s earnings and revenues are expected to decline 15.5% and 18.6%, respectively. The main culprit here is the metals and mining industry due to a slowing global economy and cratering demand out of China (Figure 5).
With only 25% of the index left to report of February 12, it seems unlikely they’ll be able to turn the ship around, as a majority of market capitalization has already reported. The first half of February saw reports from the energy, technology and health care spaces. The retail earnings parade kicks off toward the end of the month and should give us a good update of the state of the U.S. consumer.
An update to Christine’s fourth-quarter earnings report will be available after March 1 in the Estimize article archive.
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