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June 17, 2013

Earnings Roundup: Modest Second-Quarter Earnings Estimates Mirror Guidance

by Greg Harrison.

The first S&P 500 companies have begun to report second-quarter results, with 10 more scheduled to do so in the week ahead. As has been the pattern over the last several quarters, they will be doing so in an environment of low expectations. Currently, analysts expect earnings to grow by 3.4% over last year’s second quarter. Revenue estimates are even weaker, with 1.9% growth expected. These low expectations are due in part to the very negative guidance sentiment. To this point, there have been 96 negative preannouncements and only 14 positive ones. As seen below in Exhibit 1, the recent decline in growth estimates has coincided with the negative guidance that companies have issued in their outlooks for the second quarter.

Exhibit 1. S&P 500: Q2 Growth Rate Estimate Trend and Weekly Preannouncements (Right Axis)
Exhibit 1
Source: I/B/E/S

The materials sector saw the largest drop in its estimated growth rate throughout the quarter, falling 13.8 percentage points to the current -2.9% forecast. With companies in the sector providing seven negative preannouncements and two positive ones, guidance in the sector is less negative than the index overall, with an N/P ratio of 3.5. This 3.5 ratio is still more bearish than the long-term average N/P ratio of 2.4. Slow economic growth is hurting earnings in the sector, with the steel sub-industry expected to see a 74% decline in earnings. Analysts also project that the diverse metals and mining and gold sub-industries will experience double-digit earnings declines.

Industrials companies saw aggregate growth estimates fall by 4.5 percentage points since the beginning of the calendar second quarter in April. Currently, analysts forecast that profits for the sector will fall by 2.5% from last year. Among this group, there were 13 negative preannouncements and no positive ones. Slowing growth and industrial activity in the Chinese market is hurting earnings in the sector. This is particularly the case in the construction & farm machinery & heavy trucks sub-industry, which is expected to see a 19% decline in earnings.

With 6.0% earnings growth expected, the consumer discretionary sector has the third-highest expected earnings growth of the 10 sectors for the second quarter. This estimate, however, has fallen by 4.1 percentage points since the beginning of April. Companies in the sector have been far more bearish about their earnings prospects than have the analysts covering the companies. For each company announcing that it expects to exceed its analyst earnings estimate, 10.5 companies have stated they expect to fall short. The majority of negative preannouncements in the sector have been issued by retailers. Among retailers, some dismal results are expected, with computer and electronics retailers expected to see a 60% earnings decline, while analysts expect profits to shrink at department stores and general merchandise retailers by 3% and 2%, respectively. On the other hand, the apparel retailers, home improvement retailers, and Internet retailers sub-industries all have double-digit positive growth rates expected.

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