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September 23, 2013

Earnings Roundup: Second Half Of 2013 Earnings No Longer Expected To Balance Out Weak Start To The Year

by Greg Harrison.

For Q3, analysts expect both the financials and consumer discretionary sectors to show strong earnings growth. Earnings for the materials and energy sectors are expected to decline overall in Q3.

Throughout 2013, analyst estimates called for slow growth in the first half of the year, balanced out by strong growth in the second half. As the third-quarter earnings reporting season approaches, growth estimates have declined to a more modest 4.8%, down from the 8.5% projection from the beginning of the quarter, as seen below in Exhibit 1. Looking ahead to the fourth quarter, the current estimate is for 11.1% earnings growth, which appears optimistic, given projections for only 1.3% revenue growth.

Exhibit 1. S&P 500: Q3 2013 Earnings Growth Estimates, Current and Beginning of Quarter

Similar to the second quarter, analysts expect the financials sector to lead the way in third-quarter earnings growth, with a 10.4% increase expected. Within the sector, the big banks look to be driving earnings, as they benefit from gains in financial markets. Furthermore, many of these companies’ results will be flattered by weak results from a year ago. This is especially true in the investment banking & brokerage sub-industry, which is expected to report 477% earnings growth, primarily as a result of losses in the year-ago quarter from Morgan Stanley (MS.N) and E*TRADE Financial Corporation (ETFC.O).

Strength in the housing market has benefitted the financials sector in recent quarters; however, rising interest rates and more difficult comparisons are expected to provide challenges for third-quarter earnings results for companies with significant exposure to mortgages. Analysts estimate that the thrifts & mortgages sub-industry will undergo a 7% earnings decline, while the regional banks sub-industry will see profits fall by 17%, making it the weakest sub-industry within financials.

The other sector expected to be a major driver of earnings growth in the third quarter is consumer discretionary, with estimated growth of 7.3%. Even though mortgage refinancing is slowing, earnings from the homebuilders sub-industry are expected to be strong, with 23% growth, and other associated sub-industries like home improvement retailers (21% growth estimate) and home furnishing retailers (17% growth estimate) are expected to benefit from housing as well.

Analysts expect two sectors, materials and energy, to report aggregate earnings declines in the third quarter. The materials sector has had estimates slashed since the beginning of the quarter, when earnings were estimated to grow 16.2%—now analysts expect a 0.2% decline. This is a reflection of declining commodity prices and lower demand, particularly within the gold (-66% growth estimate) and steel (-49% growth estimate) sub-industries. Energy earnings are expected to decline 0.7%, with coal & consumable fuels (-94% growth estimate) and oil & gas refining & marketing (-50% growth estimate) pulling down growth for the sector.

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