Q1 ’13 Earnings Estimates Are Getting Reduced Pretty Sharply

The pundits in the financial media now calling for a correction has hit unheard of levels, but still the SP 500 seems to find a bid on every sharp pullback, frustrating the general market wisdom.

According to ThomsonReuters, the “forward 4-quarter” estimate for the SP 500 as of Friday, February 15th, was $112.37, down $0.04 from last week, and down about $1.00 over the past 5 weeks.

The earnings yield on the SP 500 is 7.39%, and the year-over-year (y/y) growth for the forward estimate now stands at 5.97%, up from last week’s 5.91%. If our readers are wondering how the forward estimate could be falling but the y/y growth rate rising, it is because the forward 4-quarter estimate one year ago was being reduced at a faster rate. Last year at this time, AAPL had reported a monster quarter and was still in the process of generating a very strong fiscal Q2 ’12 (remember, AAPL’s fiscal year-end is 9/30) ended March 31. For this reason (a very tough comparison), we think AAPL will be a back half of 2013 story.

Our earnings premise is that 2013 will be the opposite of 2012 in terms of earnings growth: 2013 will be softer in the first two quarters and finish the year stronger. 2012′s earnings pattern was decent y/y growth in the first and second quarters, and then tapered off in the back half of the year.

With roughly 80% of the SP 500 companies having reported Q4 ’12 results, actual y/y earnings growth is +5.6%, while revenue growth is +4%.

The one red flag that we see is Q1 ’13 earnings estimates which are now expected to grow just +1.6%, down from 4.3% as of Jan 1, ’13, and +7% as of October 1.

Stat of the week:
The first column is the SP 500 sector, the 2nd column is the “expected” y/y growth rate as of Feb 15, the 3rd column is the expected growth rate as of Jan 1, and the last column is the expected sector earnings growth rate as of Oct 1, 2012:

Consumer discretionary: +9.5%, +13%, +16%;

Consumer staples: +4.4%, +4.7%, +7%;

Energy: -5.1%, -3%, +0.3%;

Financials: +9.3%, +9.6%, +8.4%;

Health Care: -2.8%, +1.7%, +2.3%;

Industrials: -0.9%, +1.7%, +6.7%;

Materials: +0.9%, +8.3%, +15.6%;

Technology: -1.6%, +2.7%, +9.0%;

Telecom: +7.5%, +9.8%, +4.1%;

Utilities: +1.4%, +4.2%, +4.5%;

SP 500 +1.6%, +4.3%, +7.1%;

So what is this telling us? Financials continue to be a safe haven if you are looking for a sector where earnings growth is relatively stable, which is something given the sharp downward revisions in the other sectors. Telco looks pretty solid too as a place to put money between today and mid-April, when q1 ’13 earnings reports start.

The two sectors with the sharpest negative revisions are materials, which has seen a 1,500 basis point (bp) slashing, most of it since Jan 1, and technology which saw most its revisions between Oct 1 and Jan 1, and you have to figure a lot of that was Apple and the PC -related businesses.

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Just from perusing the numbers and noting these patterns over the last 10 years, my guess is Q1 ’13 will probably turn out a lot like Q4 ’12: low expectations, slashing of estimates, and then when we start to see the numbers in mid-April, the world will probably look a little better.

We are watching that “forward 4-quarter” estimate though, as well as the 10-year Treasury yield. Those are our key tells in terms of what happens with the sequester and the always-evolving drama in Washington, and whether that forward estimate starts to reflect real economic weakness.

Security / Sector / Market commentary:
Wal-Mart (WMT) reports their fiscal 4th quarter financial results Thursday morning, Feb 21, before the open. The poor price action on Friday in WMT had to with leaked memo’s from Wal-Mart corporate detailing a weak start to February revenues. In my opinion, WMT is the best real-time economic indicator we have since the company is the USA’s single largest employer, and represents about 10% of total US retail sales. We have an earnings preview coming up shortly but at 8(x) cash-flow, I am prepared to buy weakness for client accounts. I really do think WMT is the best run and best managed business in America today, decade in and decade-out. These guys are a retailing and merchandising juggernaut. That being said, the payroll tax reinstatement and higher healthcare costs hits both their client base or low to middle income demographic, as well as their corporate cost structure given how many people they employ. We are prepared to 7-week SP 500 win streak .

Wal-Mart (WMT), DELL and HPQ will be the higher profile earnings reports in the coming week. Wal-mart (WMT) is by far the most important tell of the 3 in terms of the state of the general economy and the consumer. Nordstrom is a look at general merchandising retail, and they report Thursday.

For the next 6 weeks we get a smattering of retail earnings, but the big flood is over. By the end of this coming week we’ll see about 90% of companies reporting. Earnings and revenues were a pleasant surprise for Q4 ’12 and despite all the hand-wringing, we think the same will happen in Q1 ’13. Stay overweight in financials – the positive and stable earnings estimates portend good things.

Written By: Brian Gilmartin