Apple Earnings Boost S&P Growth, But Watch Energy Sector

Following a negative start to the week, Apple Inc.’s (AAPL.O) blowout quarter drove the Q4 2014 S&P 500 earnings growth rate to 5.1%. Heavily impacted by earnings growth expectations for the energy sector, growth rates could see a shift after energy companies report.

Twenty one percent of the S&P 500’s constituents report Q4 2014 earnings this week. On Jan. 27, Apple reported a revenue increase of 29.5% to $74.6 billion and net income of $18.0 billion. Its earnings per share of $3.06, up 47.8%, blew away analysts’ consensus of $2.60.

It should be noted that the beat was predicted by our proprietary models in the Alpha Now story “Will Apple beat earnings expectations?” With a $671.7 billion market cap, Apple is the most influential company in the S&P 500 and now represents 6.5% of the index’s preferred earnings. Apple’s beat helps boost the S&P 500’s earnings growth expectations for Q4 2014 to 5.1%. If AAPL were excluded expectations would decline to a gain of 3.0%.

The impact of Apple earnings on the S&P 500’s earnings growth rate expectations highlight the direct influence a highly weighted company or sector can have on these growth rates. The energy sector is expected to see year-over-year earnings growth decrease by 23% (Q4 2014), 57% (Q1 2015), 56% (Q2 2015), and 49% (Q3 2015).

These dramatic downward shifts weigh heavily on the current S&P 500’s earnings growth rate estimates. For example, if the energy sector is excluded, growth for the fourth quarter would increase 3.6 percentage points to 8.6%. As the major energy companies on the index report earnings this week, they have the potential to create a dramatic shift in growth expectations.

EXHIBIT 1. S&P 500 EARNINGS GROWTH RATES VS. EX-ENERGY SECTOR EARNINGS GROWTH RATES

Source: I/B/E/S data

Volatile energy environment

So far, 75% of the S&P 500 companies within the energy sector have beaten Q4 2014 earnings expectations. While companies may be doing better than expected, many have seen year over year growth suffer. Hess Corp (HES.N) reported the largest decline to date with earnings of $0.18 per share, down 81%. The Oil & Gas Exploration & Production sub-industry’s Murphy Oil Corp. (MUR.N) posted earnings of $0.39 per share, 50% above expectations, but a 59% decline from the prior year. Murphy also announced roughly a 33% in its 2015 capital budget. Capital spending cuts were echoed when ConocoPhllips (COP.N) announced a 20 percent cut. The company beat earnings with $0.60 per share, down 57% from Q4 2013, and missed on revenue by $1.1 billion after posting $11.85 billion for the quarter.

While the energy sector’s impact on the S&P 500 earnings has an impact on the index, conclusions on the U.S. economy derived from these growth rates could be overly pessimistic. A comparison of S&P 500 earnings growth to ex-energy sector growth shows that since Q1 2012, with the exception of Q2 2014, the energy sector did not directly improve overall earnings growth. As more companies report, it will be important to look for the indirect impacts of lower oil prices on other sectors to see how spending cuts will weigh against lower gas prices for consumers. Or perhaps we should focus on the fact that 73% of companies have beat earnings estimates, well above the long term average of 63%, while revenue beats of below 57% are below the long term average of 61% and question if companies can continue to maintain this path.

EXHIBIT 2. S&P 500: Q4 2014 EARNINGS SCORECARD

Source: I/B/E/S data

Lining up earnings

Through Jan. 29, 39% of the S&P 500 companies have reported earnings for Q4 2014. Of these 194 companies, 73% reported earnings above analyst expectations, 9% reported earnings in line with analyst expectations and 18% reported earnings below analyst expectations. In a typical quarter (since 1994), 63% of companies beat estimates, 16% match and 21% miss estimates. Over the past four quarters, 69% of companies beat the estimates, 10% matched and 22% missed estimates.

In aggregate, companies are reporting earnings that are 3.7% above estimates, which is above the 2.9% long-term (since 1994) average surprise factor, and below the 3.9% surprise factor recorded over the past four quarters. Excluding the energy sector, reported earnings for the S&P 500 are 3.5% above estimates.

The Q4 2014 blended earnings growth rate for the S&P 500 is 5.1%, which is below the long-term (since 1994) average earnings growth of 8.9%, and below the 6.8% trailing four quarter average earnings growth. Excluding the energy sector, the blended earnings growth rate is 8.6%.

In aggregate the actual earnings growth rate for the S&P 500 companies that have reported revenue for Q4 2014 is 6.4%. Excluding the energy sector, the actual earnings growth rate is 7.8%.

EXHIBIT 3. S&P 500: Q4 2014 REVENUE SCORECARD

Source: I/B/E/S data

Energy weighs heavily

Through Jan. 29, 39% of the S&P 500 companies have reported revenue for Q4 2014. Of these 194 companies, 57% reported revenue above analyst expectations, 0% reported revenue in line with analyst expectations and 43% reported revenue below analyst expectations. In a typical quarter (since 2002), 61% of companies beat estimates and 39% miss estimates. Over the past four quarters, 59% of companies beat estimates and 41% missed estimates

In aggregate, companies are reporting revenue that are 1.0% above estimates, which is below the 1.1% long-term (since 2002) average surprise factor, and above the 0.5% surprise factor recorded over the past four quarters.

The Q4 2014 blended revenue growth rate for the S&P 500 is 1.1%, which is below the long-term (since 1998) average earnings growth of 6.5%, and below the 3.2% trailing four quarter average earnings growth. Excluding the energy sector, the blended revenue growth rate is 4.3%.

In aggregate, the actual revenue growth rate for the S&P 500 companies that have reported revenue for Q4 2014 is 2.5%. Excluding the energy sector, the actual revenue growth rate is 4.3%.

The S&P 500’s energy sector is clearly weighing down both earnings and revenue growth. The outlook for the sector will become clearer after integrated oil & gas sub-industry giants Chevron Corp. (CVX.N) and Exxon Mobil Corp. (XOM.N) report, Jan. 30 and Feb. 2 respectively. Combined, the two heavy hitters account for 39% of the S&P 500’s Q4 2014 preferred earnings. It will be important to see the extent that benefits to their downstream operations, such as refining, can dampen the negatives to the upstream business.

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