The one aspect to our earnings work that might not be readily apparent to readers is that sometimes there is little new or “value-added” to say about the weekly S&P 500 earnings data, that would be worth reading. At those times, we will pick specific data series, put them here on the blog, and share some thoughts for readers.
There are 3 key aspects to our earnings work where we think readers should pay particularly close attention:
1.) Weekly: The year-over-year growth rate of the “forward 4-quarter” S&P 500 estimate. After dropping the weekly data into our spreadsheets every weekend, immediately I check the year-over-year growth rate of the forward estimate. As long as that forward estimate is climbing (or at least stable), then the market P/E is likely to expand, which is where the majority of gains occur in a bull market anyway. As a caveat to readers, this aspect of the model failed me in 2008, which we’ve written about prior on this blog. The forward 4-quarter EPS estimate didn’t peak until early July, 2008, and then started to roll over, about 8 months after the S&P 500 peaked in October, 2007.
2.) Weekly: Changes in y/y growth estimates of the 10 S&P 500 sectors, particularly absolute changes in estimates, and trends relative to the other sectors as a whole. In the fall of 2012, we started noticing that the Financial sector y/y growth estimates were stable as the rest of the S&P 500 estimates were being reduced (at a rate that is typical with the pattern we see every quarter), so we went to a Financial sector overweight (and remain so) as we entered 2013. The trick to this analysis is that absolute changes in the growth rates are critical, but the relative changes are important as well, since outperformance of the S&P 500 (the so-called alpha every advisor seeks) is relative performance. (Confusing I know, but I hope the reader sees the point.)
3.) Quarterly: The actual dollar estimate of the S&P 500 “forward 4-quarter” series, at the first full week of the start of every quarter. We traditionally see a $3 – 4$ increase in the core EPS estimate of the S&P 500 as ThomsonReuters “rolls” into the next forward quarter of the “forward 4-quarter” series. As long as we continue to see the “bump” and the increase in the roll forward, then forward earnings should not be an issue for the market. (There could be other issues, as we saw on 9/11 and then in 2008, but in terms of the general health of corporate earnings, the “bump” is critical in terms of gauging the health of earnings (in our opinion);
So on to this week’s data, per ThomsonReuters as of 11/29/13:
The forward 4-quarter earnings estimate slipped $0.02 last week to $117.70;
The S&P 500 P/E ratio on the forward estimate rose to 15.3(x), still slightly ahead of the 10-year “average” P/E of 14(x) per the Factset data;
The earnings yield on the S&P 500 is 6.52% as of Friday 11/30/13 (some use the S&P 500 earnings yield as an equity risk premium (ERP) proxy). We use the earnings yield calculation as part of the Fed Model calculation. Either way you care to use it, either as a relative yield indicator, as an ERP measure or as an important metric of the Fed Model, it seems to be telling us that the S&P 500, despite the doom-and-gloomers, remains fairly valued, and certainly not at any extreme in terms of overvaluation.
The growth rate of the forward 4-quarter estimate stayed even with last week’s 7.57%, at 7.57% as of 11/29/13. The long run post WW II growth rate of S&P 500 earnings is 7%, so today S&P 500 earnings are growing about in-line with the historical average, and are certainly not the runaway, 40% growth we saw in technology in the late 1990′s.
Sector data: per Thomson, 2014 full year EPS estimates for the S&P 500 are expected in the 11% range, which would be stronger than 2013′s expected growth of 6% – 7%. Despite the Iran deal last week, and the ending of sanctions which could put more Iranian oil on the market, Energy estimates have shown the best upward revisions since July 1, in terms of 2014 estimates. By way of comparison, Energy sector earnings growth was the lowest of the 10 S&P 500 sectors in q3 ’13, and is also expected to be the lowest earnings growth of any 10 S&P 500 sectors in q4 ’13.
For Q4 ’13, Factset’s chart shows that Financials are expected to show -10% revenue growth for the quarter: I don’t have the detail in terms of why Financials are expecting 10% decline in revenue growth in Q4 ’13.
As we wrote about last week, Energy and Financials are still the two sectors that have seen upward revisions for full-year 2014 estimates as the rest of the S&P 500 sectors have seen slight downward revisions.
Not set in stone yet, but again we are paying attention to relative and absolute changes in the earnings data.
Which stocks have seen the greatest upward / downward revisions to Q4 ’13 estimates ?
This data from Factset is very useful. John Butters who is now writing Factset’s weekly Earnings Insight report is a former ThomsonReuters analyst, who wrote the weekly “This Week in Earnings” report.
- J.C. Penney (JCP) +18.2% (long JCP)
- Frontier Communications Corporation, (FTR) +13.6%
- Integrys Energy Group, (TEG) +10.6%
- News Corp A, (NWSA) +9.8%
- Deere & Company, (DE) +9.2%
- United States Steel Corporation, (X) +8.5% (long X)
- Duke Energy Corporation, (DUK) +8.3%
- CenterPoint Energy Inc, (CNP) +7.8%
- Progressive Corporation, (PGR) +7.3%
- Peabody Energy Corporation, (BTU) +6.5%
The above are the 10 companies with the highest upward change in the mean EPS estimate over last 4 weeks. (It is interesting that a number of these companies are commodity / energy related. Steel, Coal, and Grain (DE). 3 of the 10 are specifically energy companies).
The following are the 10 companies with the highest downward change in mean EPS estimate in the last 4 weeks:
- Rowan Companies plc, (RDC) -19.6%
- Mosaic Company, (MOS) -22.3%
- Intuit Inc, (INTU) -23.2%
- Ameren Corporation, (AEE) -24.6%
- WPX Energy Inc, (WPX) -26.1%
- Centene Corporation, (CNC) – 28.6%
- Teradyne Inc, (TER) – 32.1%
- Abercrombie & Fitch Company, (ANF) -36.5%
- Tenet Healthcare Corporation, (THC) -50.3%
- Vulcan Materials Company, (VMC) -100%
This is pretty good information detailed by Factset, but is just a starting point for more individual work on my part. For example, Deere (DE), and Caterpillar (CAT) are two big laggards in 2013, with an S&P 500 up almost 30% on the year. The fact that DE’s EPS estimate is starting to get revised higher, means it is time for me to do additional work on the company and stock (we have our spreadsheet already) and make sure the gain is operating driven, and not just GAAP or non-operating generated.
(We are long JCP and US Steel (X) within client accounts.)
Our attention is now turning to 2014 estimates and what might be the better sectors next year. We wont fully know 2013′s EPS and full-year earnings growth rate until the last day of March or first week of April 2014, given the lag in reporting.
Our assumptions remain the same:
Q4 ’13′s S&P 500 earnings growth will be close to 10% and the best quarterly growth rate in 2 years;
- 2014′s S&P 500 earnings growth will likely be stronger than 2013′s earnings growth. The key question is or will be the multiple assigned to that growth;
- The two sectors with upward earnings revisions already to 2014 estimates are Financials and Energy. It is still early in the game though;
- We are still awaiting revenue growth within the S&P 500 – very frustrating to watch. We think this is the prime reason employment growth is so lethargic;