Secular Bull Markets Led By Earnings Growth, P/E Expansion

Per ThomsonReuter’s “This Week in Earnings”, the forward 4-quarter earnings estimate for the S&P 500 fell slightly to $117.65 from $117.84.

The forward P/E ratio is now 15.5(x). The PEG ratio rose slightly last week to 1.93(x) from last week’s 2013 low of 1.88(x). (The PEG range in 2013 has been 3.70(x) in late May to last week’s 1.88(x).)

The earnings yield fell to 6.47%.

The year-over-year growth rate of the forward estimate remained stable at 8.02%, versus last week’s 8.02% and still at an annual high for the metric.

Q3 ’13 earnings will be finalized in the next 10 days, and year-over-year growth (ex-JP Morgan’s (JPM) litigation charge) is 8.5%, the strongest rate of growth since Q1 ’12.

Q4 ’13 earnings reports start just after January 1, ’14, with the current growth rate expected at 7.5%, which is the highest percentage growth expected at the start of a quarter in 2 years.

Perspective: With full year 2013′s S&P 500 earnings growth expected to come in at 7% – 8%, when the full-year 2013 is reported by March 31, ’14, the 30% return on the S&P 500 is somewhat of a surprise (to put it mildly) as the P/E ratio on the S&P 500 expanded from 12.89(x) as of 12/28/12, to this Friday’s 15.5(x). What is remarkable is how little P/E expansion that really is when you look at the long run history of the S&P 500. Trading at 15(x) the forward estimate, the S&P 500 is just a tad above its 10-year average P/E of 14(x) per Factset. In addition, the long-term earnings growth in 2013, which I expect to come in at 7% – 8%, is also just in line with the post WW II average earnings growth rate of the S&P 500 of 7%.

The point being that right now, in terms of the S&P 500′s valuation, earnings growth, and P/E ratio, today’s market is JUST average in its metrics.

Still, we are a bit more cautious about 2014′s expected return for the S&P 500 given the 2013 return, and the fact that the S&P 500 hasn’t had a 10% correction in well over a year.

Finally, Ford (F) shocked everyone last week, saying that while their 2014 unit sales for the industry should be 16 – 17 million cars, the company was guiding to lower pre-tax and auto margins. That was quite a shock for both shareholders and the market as given the F-150 sales, Ford looked to be ready to have a decent 2014. (To quote Jim Cramer on Thursday, 12/19, he was “baffled” by the guidance, and I can’t blame him.)

Ford does have a history of being dire, and guiding conservatively as they did in early 2013 about their European operations, when they were expecting a $2 bl or $0.50 per share loss, when in fact as of 9/30/13, Europe has lost just $1 bl or $0.25 per share in 2013, year-to-date.

Here is the detail on Ford’s revenue and EPS estimates both “pre” the 2014 guidance, and “post” the guidance.

We still think intrinsic value on the stock is between $22 – $25 per share, although the $18 – $19 has been a point of rejection for the stock technically now for the last 2 years. Ford currently sports a free-cash-flow “yield” of 10% (4Q trailing free-cash-flow divided by market cap) thus they have plenty of room on the dividend and even share buybacks (currently none) if they so desire.
 
They better be shareholder friendly given their guidance on Wednesday, 12/18, although when 2014 is in the books, my bet is that guidance was too conservative.