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As the 1Q Earnings Train Barrels Towards Us, We Take a Quick Look at Expectations

Apr 09, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • It’s that time of the year again... Earnings Season!   Surprise?  Disappoint?  There's usually lots of both, plenty to go around....
  • There was a HUGE swing in expectations as the quarter progressed, and not for the better
  • Analysts began the last quarter expecting a 4.3% hike in profits but by the end of the quarter the expectation was for a 3.6% drop in profits
  • The cut to earnings estimate is the greatest in almost 3 years.  Such a dramatic cut would suggest expectations are too pessimistic and that market may possibly see a pop from earnings beats over the next few months.  
  • Amid this heightened time of uncertainty in global markets, let Quantamize be the steady hand that steers the ship with our individual stock research reports and portfolios that outperform the market in all kinds of environments! 
  • Stock earnings season is beginning to kick off with 4 S&P 500 companies reporting their quarterly financials on Friday. Thus far, 23 S&P 500 companies have reported CY1Q2019 earnings.
     
  • Below we provide the expected y/y earnings and revenue growth for S&P 500 sectors based on consensus analyst estimates for CY1Q2019.

CY1Q2019 Growth Expectations for S&P 500 Sectors

Name Expected y/y Sales Growth Expected y/y Earnings Growth
S&P 500 Consumer Discretionary Index 9.69% 3.39%
S&P 500 Consumer Staples Index -7.47% -3.96%
S&P 500 Information Technology Index 6.57% 10.73%
S&P 500 Financials Index 4.52% 11.23%
S&P 500 Health Care Index 22.90% 49.27%
S&P 500 Industrials Index 4.39% 6.41%
S&P 500 Energy Index 2.43% -12.01%
S&P 500 Utilities Index -2.91% -23.71%
S&P 500 Materials Index 4.19% -2.08%
S&P 500 Communication Services Index -47.58% -38.53%
Total S&P 500 Index 5.06% 9.64%

Source: Capital IQ

 

  • As can be seen in the table above, analysts expect mixed earnings results depending on the sector. In S&P 500 sectors like Communication Services and Utilities, analysts expect a sharp pull-back in earnings. In sectors like Health Care and Financials, on the other hand, analysts are projecting double-digit bottom-line growth. For the overall S&P 500 Index, analysts project modest y/y revenue growth of 5.06% and more robust bottom-line EPS growth of 9.64%. 
     
  • As we discussed in our Morning Markets Preview today, analysts have lowered their earnings estimates for S&P 500 Index companies by 7.9% over the last 3 months, more than twice the average quarterly earnings reduction over the last 5 years of 3.5% and the steepest pull-back in 3 years. The sharper-than-usual cut in earnings expectations may signal a high possibility that expectations are overly pessimistic, which would enable S&P 500 companies to benefit from earnings beats, according to Canaccord Genuity LLC Chief Market Strategist Tony Dwyer.  
     
  • S&P 500 sectors with cheap trading multiples and strong profitability and return metrics may be among those to benefit the most from earnings beats in CY1Q2019. We provide this data for S&P 500 sectors below.

S&P 500 Sector Index Multiples, Yields, and Projected EPS Growth

Name Fwd 12M P/E Ratio T12M P/E Ratio T12M EBIT/EV T12M FCF Yield FWD 12M EPS Growth (%) 3 Year Fwd EPS CAGR
S&P 500 Consumer Discretionary Index 20.68x 23.91x 4.22% 3.92% 15.63% 12.82%
S&P 500 Consumer Staples Index 18.72x 19.75x 4.98% 3.56% 5.52% 5.41%
S&P 500 Information Technology Index 18.89x 21.21x 5.53% 4.87% 12.33% 10.00%
S&P 500 Financials Index 11.53x 13.07x 8.25% 9.52% 13.42% 8.90%
S&P 500 Health Care Index 15.58x 20.82x 4.31% 4.49% 33.65% 16.44%
S&P 500 Industrials Index 15.83x 17.49x 5.15% 3.33% 10.46% 9.59%
S&P 500 Energy Index 17.46x 16.69x 5.81% 3.68% -4.40% 5.47%
S&P 500 Utilities Index 18.37x 19.59x 4.01% -1.76% 6.63% 5.24%
S&P 500 Materials Index 15.31x 13.94x 5.07% 3.06% -8.94% 2.47%
S&P 500 Communication Services Index 16.74x 19.18x 5.11% 4.00% 14.56% 11.74%
Total S&P 500 Index 16.70x 18.90x 5.28% 4.40% 13.19% 10.08%

Source: Capital IQ

 

  • The S&P 500 Financials sector could benefit the most from better-than-expected earnings in CY1Q2019. As can be seen above, the S&P 500 Financial sector trades at the cheapest forward and trailing multiples among S&P 500 sectors. Additionally, the S&P 500 Financials sector maintains the second-most attractive operating margin and net profit margin among S&P 500 sectors.
     
  • It is worth noting, however, that analysts expect the second-most robust y/y EPS growth in CY1Q2019 from the S&P 500 Financials sector among S&P 500 sectors. Could the expectations for S&P 500 Financials companies be too high? Additionally, economists expect the US Fed to hold interest rates steady, or potentially lower interest rates, through the course of 2019. This type of environment is not one that supports financials companies.

S&P 500 Sector Index ROE Dupont Breakdown

Name T12M ROE T12M Operating Margin T12M Net Profit Margin T12M Sales / Assets Assets / Equity
S&P 500 Consumer Discretionary Index 28.47% 8.20% 6.37% 1.02x 4.30x
S&P 500 Consumer Staples Index 24.93% 9.21% 6.69% 1.11x 3.18x
S&P 500 Information Technology Index 32.43% 23.85% 19.76% 0.58x 2.74x
S&P 500 Financials Index 12.36% 22.56% 18.87% 0.07x 8.12x
S&P 500 Health Care Index 15.37% 8.97% 6.51% 0.83x 2.73x
S&P 500 Industrials Index 21.10% 10.68% 7.42% 0.71x 3.88x
S&P 500 Energy Index 11.50% 9.11% 7.83% 0.89x 1.56x
S&P 500 Utilities Index 8.99% 16.54% 9.99% 0.24x 3.56x
S&P 500 Materials Index 12.39% 12.06% 8.28% 0.60x 2.32x
S&P 500 Communication Services Index 17.57% 18.79% 15.48% 0.44x 2.48x
Total S&P 500 Index 16.13% 13.21% 10.23% 0.33x 4.44x

Source: Capital IQ

 

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