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March 31, 2014

Earnings Roundup: First-Quarter Expectations Suffer From Weather, Negative Guidance

by Greg Harrison.

Utilities is the only sector whose earnings estimates increased throughout Q1. Fedex’s earnings and revenue were both below analyst consensus. Homebuilder Lennar had a 25% positive earnings surprise.

Throughout the first quarter, much has been made of the cold weather conditions throughout much of the United States and the expected impact on corporate earnings. These concerns, along with the overwhelmingly negative guidance sentiment, have led many analysts to cut their estimates for first-quarter earnings. Currently, earnings for the S&P 500 are expected to grow 2.1% over a year ago. This is down from the 6.5% growth that analysts anticipated at the beginning of the quarter. Likewise, growth estimates for nine of the ten sectors are lower now than they were on January 1, as shown below in Exhibit 1. The only sector to see estimates increase throughout the quarter is utilities, which is expected to benefit from increased energy consumption as a result of the cold weather.

EXHIBIT 1. S&P 500: Q1 2014 EARNINGS GROWTH ESTIMATES—BEGINNING OF QUARTER AND CURRENT

Earnings Round-Up 31-03

Source: I/B/E/S

Some companies have already begun reporting first-quarter results, and early signs are mixed. Of the 18 companies to report thus far, 9 have beaten consensus earnings estimates and 8 have posted positive revenue surprises. FedEx Corporation (FDX.N) reported earnings 15% below analyst consensus, its $1.23 EPS representing no growth over the same figure it reported a year ago. Revenue disappointed analysts also, although it was 3.2% higher than last year. The company cited poor weather as a major headwind during the earnings call. CEO Fred Smith explained, “Historically severe winter weather has been a factor in all of our lives these last several months and it has significantly affected our third-quarter earnings. In fact, it has been the toughest winter in which FedEx has ever operated.”

Lennar Corporation (LEN.N) had the largest positive earnings surprise to this point; it beat the consensus estimate of $0.28, reporting EPS of $0.35, a 25% surprise. Lennar’s earnings have been strong for several quarters as the housing market recovers, and the company’s outlook indicated that it expects this to continue. Even though mortgage rates have increased and many buyers have already entered the market, Lennar still sees room for growth. CEO Stuart Miller addressed this during the earnings call. He said, “We continue to believe that there remains a production deficit of both single-family and multi-family dwellings from underproduction during the economic downturn, and up to and including last year. This shortfall will continue to define the housing markets for the foreseeable future, and will drive the housing recovery forward. Accordingly, the builders of both multi- and single-family products will continue to increase production, as inventories have remained extremely low, and pent-up demand comes to the market.”

As the first-quarter earnings season gets under way, it will bear watching to see whether the negative effects of the weather outweigh the positive drivers of earnings, like consumer spending and the housing market rebound.

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