Earnings Roundup: Consumer Discretionary Sector Surprises Analysts

Companies in the S&P 500 index continued reporting generally better than expected results for the week ended Oct. 23, with 69% of companies exceeding analyst estimates, as seen in the exhibit below. With 114 companies reporting, the third quarter earnings season has passed the one-third point.

The blended EPS growth rate continues to improve, with the estimate now at -2.8%, up from -3.9% last week. Revenue results, however, continue to disappoint. Only 39% of companies reporting this week posted positive surprises, and the revenue growth rate fell to -4.0% from -3.7% a week ago.

Exhibit 2A.  S&P 500: Q3 2015 Earnings vs. Expectations – Companies Reporting October 19-23

Source: I/B/E/S data

Amazon and GM

One of the standout sectors this week was Consumer Discretionary, as 69% of companies in the sector beat their estimates. Consumer Discretionary has one of the highest growth rates, at 13.2%, and several companies posted impressive earnings results.

Amazon.com Inc. (AMZN.O) reported 17 cents per share profit, beating analyst estimates of a 13 cents loss. After an extended period of heavy long term investment at the expense of short term margins, Amazon is switching focus to profitability rather than exclusively pursuing top line growth.

CFO Brian Olsavsky discussed the company’s approach during the earnings call, saying “The other dynamic in our company though is definitely working on cost reductions and efficiency. I think you see a lot of that in this quarter’s P&L and in our capital efficiency, both in the warehouse world and also in infrastructure. So we will continue to work on costs. The good thing about 30% revenue growth is it gives you a lot more cost to work on as well. So we will — I would say it is not as much as a pendulum as maybe it’s been portrayed, it is more of a constant. The investment will, it sometimes ebbs and flows but the cost reductions will be a constant presence and the increase in customer experience and shortening the time to delivery in making the customer experience better.” Analysts agree, with the consensus projecting EPS of $1.58 for the fourth quarter.

General Motors Corp. (GM.N) reported EPS of $1.50, representing 55% growth and a 26% surprise relative to analyst expectations. Revenue actually declined by 1%, but much-improved margins drove the increased profitability.

CEO Mary Barra discussed the contributions of the various markets to the company’s profitability during the earnings call. She said, “As strong as the third quarter performance was though, we do understand and we are working to mitigate the headwinds that are in several areas around the globe. South America continues to be very challenging. The Brazil market is down 27% in the third quarter versus a year ago and there is really no clear economic recovery in sight. As we talk about China, it is quickly maturing and we now expect average annual industry growth to be about 3% to 5% for the next few years and the China slowdown is not only affecting our business in China but also in the other international operation markets outside of China because these economies are so dependent on China. This means growth will remain slow.”