Earnings Insight Template 2016

[Pages:29]John Butters, Senior Earnings Analyst jbutters@

October 18, 2019

Media Questions/Requests media_request@

Key Metrics

Earnings Scorecard: For Q3 2019 (with 15% of the companies in the S&P 500 reporting actual results), 84% of S&P 500 companies have reported a positive EPS surprise and 64% of S&P 500 companies have reported a positive revenue surprise.

Earnings Growth: For Q3 2019, the blended earnings decline for the S&P 500 is -4.7%. If -4.7% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year earnings declines since Q4 2015 through Q2 2016.

Earnings Revisions: On September 30, the estimated earnings decline for Q3 2019 was -4.0%. Five sectors have lower growth rates today (compared to September 30) due to downward revisions to EPS estimates.

Earnings Guidance: For Q4 2019, 9 S&P 500 companies have issued negative EPS guidance and 4 S&P 500 companies have issued positive EPS guidance.

Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.0. This P/E ratio is above the 5-year average (16.6) and above the 10-year average (14.9).

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Topic of the Week:

S&P 500 Reporting Year-Over-Year Decline in Net Profit Margin for 3rd Straight Quarter

For the third quarter, the S&P 500 is reporting a year-over-year decline in earnings of -4.7%, but year-over-year growth in revenues of 2.6%. Given the dichotomy in growth between earnings and revenues, there are concerns in the market about net profit margins for S&P 500 companies in the third quarter. Given this concern, what is the S&P 500 reporting for a net profit margin in the third quarter?

The blended net profit margin for the S&P 500 for Q3 2019 is 11.3%. If 11.3% is the actual net profit margin for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year declines in net profit margin since Q1 2009 through Q3 2009. Nine of the eleven sectors are reporting a year-over-year decline in their net profit margins in Q3 2019, led by the Energy (5.4% vs. 8.1%) and Information Technology (20.6% vs. 23.0%) sectors.

What is driving the year-over-year decrease in the net profit margin?

One factor is a difficult year-over-year comparison. In Q3 2018, the S&P 500 reported the highest net profit margin since FactSet began tracking this data in 2008. While nine sectors are reporting a year-over-year decline in net profit margins, only one sector (Health Care) is reporting a net profit margin below its 5-year average. Higher costs are likely another factor. Of the first 22 S&P 500 companies to conduct earnings calls for Q3, 7 (or 32%) discussed a negative impact from higher wages and labor costs and 5 (or 21%) discussed a negative impact from higher raw material or other input costs. Please see our previous article on this topic at this link:

Based on current estimates, the estimated net profit margins for Q4 2019, Q1 2020, and Q2 2020 are 11.1%, 11.3%, and 11.7%. Net profit margins are expected to increase on a year-over-year basis again in Q1 2020.

To maintain consistency, the earnings and revenue numbers used to calculate the earnings and revenue growth rates published in this report were also used to calculate the index-level and sector-level net profit margins for this analysis. In addition, all year-over-year comparisons for Q3 2019 to Q3 2018 (and all other year-over-year comparisons for historical quarters) reflect an apples-to-apples comparison of data at the company level.

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Q3 Earnings Season: By The Numbers

Overview

To date, 15% of the companies in the S&P 500 have reported actual results for Q3 2019. In terms of earnings, the percentage of companies reporting actual EPS above estimates (84%) is above the 5-year average. In aggregate, companies are reporting earnings that are 2.6% above the estimates, which is below the 5-year average. In terms of sales, the percentage of companies (64%) reporting actual sales above estimates is above the 5-year average. In aggregate, companies are reporting sales that are 1.0% above estimates, which is also above the 5-year average.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the third quarter is -4.7%, which is equal to the earnings decline of -4.7% last week. Positive earnings surprises reported by companies in the Health Care and Financials sectors were offset by downward revisions to estimates for companies in the Energy sector, resulting in no change in the overall earnings decline for the week. If -4.7% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year declines in earnings since Q4 2015 through Q2 2016. Four sectors are reporting (or are expected to report) year-over-year growth in earnings, led by the Real Estate and Utilities sectors. Seven sectors are reporting a year-over-year decline in earnings, led by the Energy, Information Technology, and Materials sectors.

The blended revenue growth rate for the third quarter is 2.6%, which is slightly below the revenue growth rate of 2.7% last week. Downward revisions to revenue estimates for companies in the Energy sector, partially offset by positive revenue surprises reported by companies in the Financials sector, were mainly responsible for the small decrease in the overall revenue growth rate during the week. If 2.6% is the actual growth rate for the quarter, it will mark the lowest revenue growth rate for the index since Q2 2016 (-0.2%). Eight sectors are reporting (or are projected to report) yearover-year growth in revenues, led by the Health Care sector. Three sectors are reporting a year-over-year decline in revenues, led by the Materials and Energy sectors.

Looking ahead, analysts see low single-digit earnings growth in the fourth quarter followed by high single-digit earnings growth for both Q1 2020 and Q2 2020.

The forward 12-month P/E ratio is 17.0, which is above the 5-year average and above the 10-year average.

During the upcoming week, 126 S&P 500 companies (including 12 Dow 30 components) are scheduled to report results for the third quarter.

Scorecard: More Companies Beating EPS Estimates, But By Smaller Margins

Percentage of Companies Beating EPS Estimates (84%) is Above 5-Year Average

Overall, 15% of the companies in the S&P 500 have reported earnings to date for the third quarter. Of these companies, 84% have reported actual EPS above the mean EPS estimate, 4% have reported actual EPS equal to the mean EPS estimate, and 12% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (74%) average and above the 5-year (72%) average.

At the sector level, the Communication Services (100%), Consumer Discretionary (100%), Real Estate (100%), and Materials (100%) sectors have the highest percentages of companies reporting earnings above estimates, while the Energy (50%) sector has the lowest percentage of companies reporting earnings above estimates.

Earnings Surprise Percentage (+2.6%) is Below 5-Year Average

In aggregate, companies are reporting earnings that are 2.6% above expectations. This surprise percentage is below the 1-year (+5.2%) average and below the 5-year (+4.9%) average.

The Consumer Services sector (+26.6%) sector is reporting the largest positive (aggregate) difference between actual earnings and estimated earnings. Within this sector, Netflix ($1.47 vs. $1.03) has reported the largest positive EPS surprise.

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The Consumer Discretionary sector (+9.9%) sector is reporting the second-largest positive (aggregate) difference between actual earnings and estimated earnings. Within this sector, NIKE ($0.86 vs. $0.70) and Lennar ($1.59 vs. $1.31) have reported the largest positive EPS surprises.

Market Rewarding Earnings Beats

To date, the market is rewarding positive earnings surprises more than average and punishing negative earnings surprises less than average.

Companies that have reported positive earnings surprises for Q3 2019 have seen an average price increase of +1.9% two days before the earnings release through two days after the earnings. This percentage increase is above the 5year average price increase of +1.0% during this same window for companies reporting positive earnings surprises.

Companies that have reported negative earnings surprises for Q3 2019 have seen an average price decrease of -1.2% two days before the earnings release through two days after the earnings. This percentage decrease is smaller than the 5-year average price decrease of -2.6% during this same window for companies reporting negative earnings surprises.

Percentage of Companies Beating Revenue Estimates (64%) is Above 5-Year Average

In terms of revenues, 64% of companies have reported actual sales above estimated sales and 36% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year average (59%) and above the 5-year average (59%).

At the sector level, the Financials (92%) and Health Care (75%) sectors have the highest percentages of companies reporting revenues above estimates, while the Communication Services (0%) and Materials (0%) sectors have the lowest percentages of companies reporting revenues above estimates.

Revenue Surprise Percentage (+1.0%) is Above 5-Year Average

In aggregate, companies are reporting revenues that are 1.0% above expectations. This surprise percentage is above the 1-year (+0.9%) average and above the 5-year (+0.7%) average.

Revisions: No Change in Blended Earnings Decline this Week

No Change in Blended Earnings Decline This Week

The blended (year-over-year) earnings decline for the third quarter is -4.7%, which is equal to the earnings decline of -4.7% last week. Positive earnings surprises reported by companies in the Health Care and Financials sectors were offset by downward revisions to estimates for companies in the Energy sector, resulting in no change in the overall earnings decline for the week.

In the Health Care sector, the positive EPS surprises reported by Johnson & Johnson ($2.12 vs. $2.01) and UnitedHealth Group ($3.88 vs. $3.75) were positive contributors to earnings for the index during the week. As a result, the blended earnings growth rate for the Health Care sector improved to 3.2% from 2.3% over this period.

In the Financials sector, the positive EPS surprises reported by JPMorgan Chase ($2.64 vs. $2.45), Citigroup ($2.07 vs. $1.95), Bank of America ($0.56 vs. $0.54), and Morgan Stanley ($1.21 vs. $1.11) were positive contributors to earnings for the index during the week. As a result, the blended earnings decline for the Financials sector improved to -2.7% from -3.3% over this period.

In the Energy sector, downward revisions to estimates for Chevron (to $1.49 from $1.65), Exxon Mobil (to $0.67 from $0.70), and Occidental Petroleum (to $0.37 from $0.50) were negative contributors to earnings for the index during the week. As a result, the blended earnings decline for the Energy sector increased to -39.8% from -36.1% over this period.

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Decrease in Blended Revenue Growth This Week Due to Energy

The blended (year-over-year) revenue growth rate for the third quarter is 2.6%, which is slightly below the revenue growth rate of 2.7% last week. Downward revisions to revenue estimates for companies in the Energy sector, partially offset by positive revenue surprises reported by companies in the Financials sector, were mainly responsible for the small decrease in the overall revenue growth rate during the week.

Energy Sector Has Seen Largest Decrease in Earnings since September 30

The blended (year-over-year) earnings decline for Q3 2019 of -4.7% is larger than the estimate of -4.0% at the end of the third quarter (September 30). Six sectors have recorded an improvement in earnings growth since the end of the quarter due to upward revisions to earnings estimates and positive earnings surprises, led by Health Care (to 3.2% from 2.2%) sector. Five sectors have recorded a decrease in earnings growth during this time due to downward revisions to earnings estimates and negative earnings surprises, led by the Energy (to -39.8% from -29.8%) sector.

Energy Sector Has Seen Largest Decrease in Revenues since September 30

The blended (year-over-year) revenue growth rate for Q3 2019 of 2.6% is smaller than the estimate of 2.8% at the end of the third quarter (September 30). Three sectors have recorded an improvement in revenue growth since the end of the quarter due to upward revisions to revenue estimates and positive revenue surprises, led by the Financials (to -0.7% from -1.6%) sector. Six sectors have recorded a decrease in revenue growth during this time due to downward revisions to revenue estimates and negative revenue surprises, led by the Energy (to -9.3% from -6.8%) sector. Two sectors (Consumer Staples and Information Technology) have recorded no change in revenue growth since September 30.

Year-Over-Year Earnings Decline: -4.7%

The blended (year-over-year) earnings decline for Q3 2019 is -4.7%, which is below the 5-year average earnings growth rate of 6.9%. If -4.7% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year declines in earnings since Q4 2015 through Q2 2016. It will also mark the largest year-over-year decline in earnings reported by the index since Q1 2016 (-6.9%).

S&P 500 companies with more international revenue exposure are reporting a much larger decline in earnings relative to S&P 500 companies with less international revenue exposure. For S&P 500 companies that generate more than 50% of revenue outside the U.S., the blended earnings decline is -9.8%. For S&P 500 companies that generate more than 50% of revenue inside the U.S., the blended earnings decline is -2.0%.

Four sectors are reporting (or are predicted to report) year-over-year earnings growth, led by the Real Estate and Utilities sectors. Seven sectors are reporting a year-over-year decline in earnings, led by the Energy, Information Technology, and Materials sectors.

Real Estate: Industrial REITs Sub-Industry Leads Year-Over-Year Growth

The Real Estate sector is reporting the highest (year-over-year) earnings (FFO) growth of all eleven sectors at 5.1%. At the sub-industry level, six of the eight sub-industries in this sector are reporting (or are projected to report) growth in earnings (FFO). Two of these six sub-industries are reporting double-digit growth: Industrial REITs (29%) and Office REITs (16%). On the other hand, two sub-industries are expected to report a year-over-year decline in earnings (FFO): Hotel & Resort REITs (-9%) and Real Estate Services (-2%).

Utilities: Gas Utilities Industry Leads Year-Over-Year Growth

The Utilities sector is expected to report the second highest (year-over-year) earnings growth of all eleven sectors at 4.8%. At the industry level, all five industries in this sector are projected to report growth in earnings. Two of these five industries are predicted to report double-digit earnings growth: Gas Utilities (19%) and Independent Power and Renewable Electricity Producers (14%).

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Energy: 2 of 6 Sub-Industries Expected to Report Year-Over-Year Decline of More than 50%

The Energy sector is reporting the largest (year-over-year) decline in earnings of all eleven sectors at -39.8%. Lower oil prices are helping to drive the decline in earnings for the sector, as the average price of oil in Q3 2019 ($56.44) was 19% lower than the average price of oil in Q3 2018 ($69.43). At the sub-industry level, three of the six sub-industries in the sector are expected to report a decline in earnings for the quarter: Integrated Oil & Gas (-51%), Oil & Gas Exploration & Production (-51%), and Oil & Gas Refining & Marketing (-18%). On the other hand, the other three subindustries in the sector are reporting growth in earnings for the quarter: Oil & Gas Drilling (33%), Oil & Gas Storage & Transportation (19%), and Oil & Gas Equipment & Services (2%).

Information Technology: Micron Technology Leads Year-Over-Year Decline

The Information Technology sector is reporting the second highest (year-over-year) earnings decline of all eleven sectors at -10.1%. At the industry level, four of the six industries in this sector are reporting (or are projected to report) a decline in earnings: Semiconductors & Semiconductor Equipment (-30%), Technology Hardware, Storage, & Peripherals (-14%), Electronic Equipment, Instruments & Components (-9%), and Communications Equipment ( ................
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