The rally in housing has been good news for earnings at banks (where mortgage volumes kept climbing in the fourth quarter) and home builders, and is pushing blended earnings growth estimates higher for the S&P 500.
Last week it was the turn of banks and other financial services companies to dominate the earnings news, with their reports accounting for nearly two-thirds of all S&P 500 index announcements. That proved to be good news for the blended earnings growth estimates for the S&P 500 index, which edged slightly higher in the wake of those reports. Although only 55% of the companies in the sector announced results that beat earnings estimates (below the sector’s long-term average of 62%), several among them posted positive surprises that were large enough to drive growth higher for the sector as a whole.
Goldman Sachs Group Inc (GS.N) was one of those outperformers, beating its $3.78 earnings estimate when it announced a fourth-quarter profit of $5.60. The company’s 204% surge in net income was due to the strong performance of Goldman’s investment banking and investment management divisions; in the latter case, the bank benefitted from higher performance fees. One of the most significant reasons for the impressive earnings surprise was a lower rate of compensation. As other companies across the economy have done, Goldman has emphasized cost reduction, and by reducing headcount and compensation as a percentage of its profits, the company was able to improve margins.
Another much-anticipated earnings announcement last week came from JPMorgan Chase & Co (JPM.N). Compared to the $1.16 a share that the bank earned in the fourth quarter of 2011, the profit of $1.39 a share it announced for the just-ended quarter looks healthy. The bank’s underlying businesses also look healthy, however, with mortgage volumes rising 33%, while the bank has witnessed a lower level of foreclosures and the associated legal expenses. Equity and fixed income trading also performed well, with revenues from these businesses 19% higher year-over-year in the fourth quarter. JPMorgan Chase, like most other large banks, continues to struggle to cope with net income margin compression in the current low interest rate environment, as the spread between the bank’s funding costs and the rates it earns loaning out its funds decreases.
The large banks weren’t the only ones announcing their fourth quarter results, or contributing to growth in the Financials sector. Of the five regional banks that reported earnings this week, four beat their estimates and all five of them had growth rates higher than 25%. Once again, the single largest contributor to profits at these regionals is home mortgage market growth, but they are also benefitting from improved credit on the part of their corporate customers.
Analysts expect the Consumer Discretionary sector to be another major contributor to overall earnings growth in the fourth quarter. Retailers companies can usually be counted on to drive earnings in the fourth quarter, but in this period, it is the homebuilders that analyst expect to post the highest rate of earnings growth, at 259%.
As the first homebuilder to report, Lennar Corporation (LEN.N) set the pace. Reporting earnings of 56 cents a share – well above the 44 cents a share that analysts had forecast it would earn – Lennar’s CEO, Stuart Miller, said he believes this is still only “the early stages” of a recovery in housing. If so, that recovery has delivered a big gain to Lennar already; that profit marks a 250% surge over year-earlier earnings of 16 cents a share. “The recovery began in micro markets across the country and it’s continued to spread to larger pockets,” Miller explained. “In the second half of this year, recovery had taken hold across the country and has readily been seen in spite of generally negative economic data.” It is demographic fundamentals that are kicking in, Miller added, suggesting that the pent-up demand for homes will continue driving business and profits “into 2013 and beyond.”
