A Positive & Reassuring Earnings Picture

The bulk of the Q1 earnings season is now behind us, with results from only about 18% of the S&P 500 members still awaited. The Retail sector is the only one at this stage that has a sizable number of reports still to come, with a number of traditional retailers Macy’s (M), Nordstrom (NYSE:JWN) (JWN), and Kohl’s (KSS) on deck to report results this week. With another 43 index members reporting results this week, the Q1 earnings season will have come to an end for 91% of S&P 500 members by the end of the week.

As we have been saying all along since the start of this reporting cycle, the Q1 earnings season has turned out to be very good. Not only is growth very strong and the highest in many years, but a bigger proportion of companies have come out with positive surprises, particularly on the revenues front. Importantly, while estimates for the current period (2017 Q2) have come down, they aren’t falling by as much as has been the case in the comparable periods in other recent quarters.

All in all, the picture emerging from the Q1 earnings season has been positive and reassuring.

Key Earnings Reports for the Week of May 8th

This week brings in results from more than 700 companies, including 43 from the S&P 500 index. There is no shortage of big-name operators coming out with results this week, but we are featuring just a few here

NVIDIA (NVDA) shares have been laggards this year, down -2.7% in the year-to-date period vs. +4.1% gain for the Zacks Semiconductor industry and +12.6% gain for the Zacks Technology industry. The stock had literally been a tear prior to this year and that lead still shows up in its one-year performance of +194% gain (vs. +25.9% for the Tech sector and +45.2% for the industry). Quarterly earnings reports have historically been key catalysts for this maker of high-end graphics processor, with the Q1 earnings report after the market’s close on Tuesday May 9th expected to be no different. The company is expected to report $0.66 per share on $1.91 billion, up +69.5% and +46.4% from the year-earlier period, respectively. Given the stock’s recent underperformance and the modestly negative trend on the revisions front, expectations may be low enough for this earnings report to push the stock higher.

Disney (DIS) shares have broadly tracked the S&P 500 index this year (up +6.7% in the year-to-date period vs. +7% gain for the index) after lagging the index all of last year on persistent worries about the fate of its ESPN franchise in the current cord-cutting media environment. Over the past one year, the stock is up +5.4% while the S&P 500 index has gained +16.1%. Disney reports Q1 results after the market’s close on Tuesday May 9th, with the company expected to come out with $1.45 per share in earnings on $13.5 billion in revenues, up +6.5% and +3.9%, respectively. Results will likely be quite strong on the back of continued momentum in the studio business and likely positive traffic at the recently opened Shanghai Disneyland, but focus will remain on the ESPN franchise. The estimates trend has been modestly positive, with current Zacks Consensus EPS estimate for the quarter modestly going up over the past month.

Priceline (PCLN) has been a standout performer this year, with the stock up +30.6% in the year-to-date period vs. +24.2% for Expedia (NASDAQ:EXPE) and +29.5% gain for the Zacks e-commerce industry. The stock was up big following the last quarterly release (February 27th) when it handily beat estimates and guided higher and market participants will be looking for repeat performance when it reports Q1 results after the market’s close on Tuesday May 9th. The online travel leader is expected to report $8.80 in EPS on $2.43 billion in revenues, which represents year-over-year changes of -6% and +13.3%, respectively. Trends in estimate revisions has mostly been positive, though read-throughs from last week’s mixed Expedia (EXPE) earnings report is modestly on the negative side. TripAdvisor (TRIP) will also report after the market’s close on Tuesday.

Macy’s (M) shares have done modestly better than the department store space this year, but the stock as well as the group as a whole are some of the weakest in the entire market. The stock is down -18.3% in the year-to-date period (down -22.3% over the past year) vs. -21.3% decline for the Zacks department store industry (down -20.3% over the past year). This compares to +7% gain for the S&P 500 index this year and +16.1% over the past year. Driving this underperformance is the industry’s competitive landscape characterized by the secular shift of sales to the online medium that is showing up in falling traffic and same-store sales. The company has been trying to bring down its store count and we will likely hear more on that front as it reports Q1 results before the market’s open on Thursday May 11th. The company is expected to report $0.35 per share in earnings on $5.47 billion in revenues, down -11.9% and -5.2% from the year-earlier period, respectively. Kohl’s (KSS) will also report Thursday morning while Nordstrom (JWN) will report after the market’s close.

Q1 Earnings Scorecard

As of Friday, May 5th, we have Q1 results from 412 S&P 500 members that combined account for 85.7% of the index’s total market capitalization. Total earnings for these companies are up +14.2% from the same period last year on +7.3% higher revenues, with 73.3% beating EPS estimates and 67.7% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 52.9%.

The table provides the current earnings season scorecard, as of May 5th, 2017.

Comparing Q1 Results

The chart below provide a comparison of the growth performance thus far with what we have seen from this same group of 412 S&P 500 members in other recent periods.

As you can see, the Q1 growth pace is notably tracking above what we had seen from the same group of 412 index members in other recent periods. Importantly, the growth performance is broad-based and not narrowly concentrated. We got the leadership from the Finance space earlier in the reporting cycle, but the baton has since shifted to Tech and host of other areas, including Industrials, Basic Materials, and Energy.

Positive Revenue Surprises

The chart below compares the proportion of positive EPS and revenue surprises in Q1 thus far with what we had seen from the same group of 412 index members in other recent periods.

The proportion of Q1 companies beating EPS estimates is tracking above historical periods, with positive revenue surprises particularly coming out ahead of what we are used to seeing in the recent past. You can see the same in the chart below that compares the proportion of Q1 companies beating both EPS and revenue estimates with other recent periods.

Technology Sector Scorecard

For the Technology sector, we have Q1 results from 44 of the sector’s 62 operators in the S&P 500 index. Total earnings for these 44 Tech sector companies (accounting for 85.9% of the sector’s total market cap in the index) are up +16.5% from the same period last year on +6.4% higher revenues, with 77.3% beating EPS estimates and 79.5% beating revenue estimates.

The comparison charts below show how the sector’s Q1 results thus far compare with what we have been seeing from the same group of Tech companies in other recent periods.

As you can see, the sector’s growth performance is notably tracking above other recent periods, though the proportion of positive surprises is about in-line with recent history.

Expectations for Q1 As a Whole

Looking at Q1 as whole, combining the actual results from the 412 S&P 500 members that have come out with estimates for the still-to-come 88 index members, total earnings are expected to be up +12.7% from the same period last year on +6.2% higher revenues. This would follow +7.4% earnings growth in 2016 Q4 on +4.7%.

The table below shows the summary picture for Q1, contrasted with what was actually achieved in Q4.

Please note that the Q1 earnings season follows the strong showing on the earnings front in the preceding reporting cycle. Not only did 2016 Q4 growth reach the highest in two years, but total earnings for the quarter also reached a new quarterly record. The strong Q4 performance came after the first positive earnings growth in 2016 Q3, having declined in each of the preceding 5 quarters. The strong Q1 showing represents a notable acceleration in the growth momentum.

The chart below shows the Q1 earnings growth contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, this growth pace is expected to continue through the rest of the year.

Please note that the earnings backdrop has not changed in any meaningful way since the November elections, notwithstanding the market’s strong gains since then.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

Here is a list of the 712 companies including 43 S&P 500 members reporting this week.