The Q4’13 earnings season has come to a close. Based on S&P data, the beat rate was 64.2% and the miss rate 24.7%. The beat rate was the worst observed since Q3’12. Taking out Financials (69.1%) and IT (75.4%), the beat rate was 61%.
Q4 earnings totalled $28.24 bringing 12-m trailing EPS to $107.29, up 10.8% YoY and up 5% from the end of Q3’13. The S&P 500 Index rose 30% and 9.9% during these two period respectively.
Adjusting for AT&T’s and Verizon’s pension adjustments (+$0.94 to the Q4’13 operating EPS vs -$1.26 in Q4’12), the YoY growth rate is +11.8% in Q4 (keep in mind that each aggregator has its own approach to earnings adjustments; I consistently use S&P data in my numbers, although I take into account others’ in my analysis).
Zacks Research has a good analysis of Q4 results:
The +9.4% ‘headline’ total earnings growth rate definitely looks fairly strong, particularly when compared to the growth rate for this same group of 489 companies in the last few quarters. Easy comparisons for three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV) – account for a big part of the strong Q4 earnings growth. Excluding these three companies, the earnings growth rate drops to +5.7%, which is comparable to what this same group of companies have achieved in recent quarters.
Revenue growth has been problematic for quite some time now, but it is almost non-existent in Q4 at this stage. The biggest drag on Q4 revenue growth is from the Finance and Energy sectors, revenues in Finance down -7.1% and -3.3% in the Energy sector. Excluding both of those sectors, revenue growth for the S&P 500 companies that have reported results start looking better – up +3.2%, modestly down from 2013 Q3 for the same group of companies (+3.4%) and up from the 4-quarter average of +2.5%.
Composite net margins in Q4, combining the results for the 489 companies that have come out with the 11 still to come, are expected to be up 73 basis points from the same period last year, with ex-Finance margins expected to be up 34 basis points.
Factset warns us that Q1 estimates have declined a fair bit since December 31 when they were seen rising 4.4%.
The estimated earnings growth rate for the first quarter is 0.5% this week, slightly below the estimated growth rate of 0.6% last week. Nine of the ten sectors have recorded a decline in expected earnings growth during this time frame, led by the Consumer Discretionary, Materials, Consumer Staples, and Information Technology sectors. The only sector that has seen an increase in projected earnings growth over this period is the Utilities sector.
All weather-related, of course. Factset continues:
At this stage of the quarter, 103 companies in the index have issued EPS guidance for the fourth quarter. Of these 103 companies, 86 have issued negative EPS guidance and 17 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 84% (86 out of 103). This percentage is well above the 5-year average of 63%. If the final percentage is 84%, it will mark the third consecutive quarter in which 80% or more of the companies that issued EPS guidance for the quarter issued negative EPS guidance.
The estimated revenue growth rate for Q1 2014 is 2.7%, below the growth rate of 3.2% estimated at the start of the quarter (December 31).
The estimated earnings growth rate for Q1 2014 is 0.5%. Seven of the ten sectors are expected to report higher earnings relative to a year ago, led by the Telecom Services, Utilities, and Consumer Discretionary sectors. On the other hand, the Energy sector is predicted to report the lowest earnings growth of all ten sectors.
However,
The Telecom Services sector is predicted to have the highest earnings growth rate at 23.0%. At the company level, Verizon Communications is the largest contributor to earnings growth for the sector. If Verizon is excluded, the earnings growth rate for the sector would drop to -2.8%.
Unfortunately, Factset did not calculate how the exclusion of VZ would impact total S&P 500 earnings. We know that it would turn growth negative, however.
Excluding Utilities which are truly benefiting from the weather, all other sectors are expected to report tepid results in Q1. If I were you, I would not bet heavily on Consumer Discretionary and Staples to show positive earnings growth in Q1. We know that they began the year with bloated inventories, that January and February sales have been poor and that, may I just confidentially mention in passing, Easter was moved from Q1 last year to Q2 this year. Analysts will no doubt eventually realize that.
In all, some chilly earnings headwinds will bug us over the next few months. Let’s hope the economic news does get better, you know, just to keep the faith high enough. Because the faith is wavering, to be honest. Unless valuations cross the “20” Rule of 20 fair value line, something they have refused to do so far in this bull market, equity returns will be negligible in coming months against a backdrop of rising economic, financial and political risks
While small investors are coming back to equities and borrowing to boost returns, corporate insiders are cashing in. Some scary charts from The Short Side of Long:
We are now registering a 15th monthly equity inflow in the row!
According to NYSE, investor leverage climbed to a new record
Corporate Insider activity (also known as smart money) shows that net selling has been increasing over the recent months. Corporate insiders have one of the most impeccable timing records out of all markets participants. As we can see in the chart above, over the last several years, Corporate Insiders have managed to time intermediate bottoms in March 2008, November 2008, March 2009, August 2010, August 2011 and June 2012. Not bad at all! At the same time, they have also been strong sellers during recent market peaks.
Lastly, we are all happy to welcome the arrival of spring weather. There is one problem with that, however, no more weather excuses.