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April 7, 2014

Earnings Roundup: Earnings Preseason Results Reinforce Expectations For Slow Growth

by Greg Harrison.

The 52% current beat rate is the lowest since Q4 2010’s preseason. Walgreen Co. reported EPS below analyst consensus. Carnival had a positive surprise and broke even for the quarter, and Micron Technology generated a large positive surprise with an 85-cent profit.

The traditional start to earnings season is next week, as Alcoa Inc. (AA.N) is scheduled to release its financial results on Tuesday. Analysts have low expectations for the company, on average estimating 5 cents per share. This would be a 55% decline from the 11 cents per share the company earned a year ago.

Looking at the companies that report before Alcoa, in the earnings preseason, the news isn’t much better. Only 52% of the companies that have reported so far have exceeded analyst earnings estimates, which is well below average. Historically, when fewer companies than average beat estimates, the trend continues throughout the full earnings season, and vice versa. Although the last two quarters have been exceptions, the current 52% beat rate is the lowest since the Q4 2010 preseason, as seen below in Exhibit 1.

Exhibit 1. S&P 500: Earnings Estimate Beat Rates—Preseason and Full Season

Earnings Roundup

Source: Thomson Reuters I/B/E/S

Walgreen Co. (WAG.N) reported earnings per share of 91 cents, below the analyst consensus of 93 cents and the 96 cents the company earned a year ago. Management cited poor weather and increased promotions on front-end merchandise as hurting revenue and profit margins.

Carnival Corporation (CCL.N) had a positive surprise, but a -100% earnings growth rate, as it broke even for the quarter after earning 8 cents per share in the first quarter of 2013. Still, this was better than the 8-cent loss that analysts had forecast. Carnival is also operating in a promotional environment, boosting revenue at the expense of margins. CFO David Bernstein addressed this trend during the earnings call. “Turning to our recent booking trends and yield expectations for the remainder of 2014, as we indicated in the press release, fleetwide booking volumes during this year’s wave season have been running almost 20% ahead of the prior year, significantly outpacing capacity, albeit at lower prices. This pattern is the same for both our North American and EAA brands in all three quarters,” he said.

One of the largest positive surprises was Micron Technology, Inc. (MU.N), which beat consensus EPS estimates by 11.8%, in a continuation of the turnaround in its business. The 85-cent profit comes on top of a 28-cent loss a year ago. Micron has benefitted from increased smartphone adoption, which requires more expensive memory. During the earnings call, President Mark Adams described how the company’s products are being adopted by lower end phones as well. He explained, “Inventory of mobile products in the market remains tight, and demand signals from our customers are strong. Coming out of Mobile World Congress, we saw continued impressive memory growth in the low- and mid-range priced phone segments, as a number of customers announced products with 2 GB of mobile DRAM, a density historically found only in high-end smartphones.”

First-quarter earnings have gotten off to a slow start. While it is still too early to draw any firm conclusions, history suggests that we may not see the high percentages of companies beating estimates that we have seen over the past several quarters. Although earnings expectations are very low, factors like poor weather throughout the quarter and a promotional retail environment may make it difficult for companies to surprise analysts as they have in the past.


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