by Greg Harrison.
In total, 70% of companies reporting over the past week exceeded the analyst consensus for earnings. All nine IT companies that reported beat earnings estimates; SanDisk’s $1.59 EPS represents a 231% increase in earnings from a year ago.
After a soft beginning to the third-quarter earnings season, in which just more than half of companies exceeded their earnings estimates, the S&P 500 companies that reported this week announced impressive results. Exhibit 1, below, shows the earnings performance of the companies that reported over the past week. In total, 70% of these 56 companies beat the analyst consensus for earnings, which was significantly higher than both the long-term average of 63% and the 64% overall beat rate this quarter. This higher rate of companies beating estimates comes despite estimates that have not been significantly revised downward since last week. Even though the earnings growth rate decreased this week to 2.1%, the change is attributable to the large legal reserve expense incurred by JPMorgan Chase & Co. (JPM.N). Excluding JPM, earnings growth actually improved to 4.7%.
Revenue results, however, were the same, with 55% of companies this week reporting positive surprises, matching the overall rate for the quarter. These struggles on the top line suggest that companies are still cutting costs to beat earnings targets. Margins have increased throughout the year as companies have strived for greater efficiency and cost control, and analysts expect higher margins in seven out of the ten sectors compared to last quarter.
It was a strong week for information technology companies, with all nine beating earnings estimates. Yahoo! Inc. (YHOO.O) was the only tech company this week to report an earnings decline, but its 34-cent profit was still higher than the 33 cents that analysts predicted. SanDisk Corporation (SNDK.O) reported EPS of $1.59, beating the $1.32 consensus by 21%. This represented 231% growth over the earnings from a year ago. Increased adoption of the company’s solid-state hard drives contributed to the 28% increase in revenue. During the earnings call, CEO Sanjay Mehrotra explained that increased adoption of solid-state drives in smartphones and traditional laptops and PCs put the company “on a trajectory to exceed our 2013 goal to deliver 15% of our revenue from SSDs and remain on track to deliver 25% of our revenue from SSDs in 2014.”
Google Inc. (GOOG.O) posted positive surprises on the top and bottom lines, growing revenue by 31% and earnings per share by 19%, sending the stock price soaring. Increased advertising revenue in mobile devices, along with the company’s growing array of advertising outlets, is providing a source of growth, with analysts expecting 36% growth in the fourth quarter and double-digit growth throughout 2014.
With several prominent companies in the information technology sector slated to report earnings next week, the question will be whether the impressive results seen so far will continue. The technology companies that have reported to this point have grown earnings by 14.2%; however, many of the companies with the highest expected growth have already reported. The remaining companies in the sector have an aggregate earnings growth estimate of -0.9%. Even if they were to post a similar aggregate surprise to the 3.7% seen to this point, earnings for the remainder of the sector would lag behind those that we saw this week.