With Wal-Mart’s (NYSE:WMT) quarterly earnings report this past week, it is thought the “official” Q4 ’14 earnings season is now concluded.
With retail being the prime sector reporting in February, with a January quarter end, investors begin to get a feel for how 2015 has started.
By the numbers, the 4th quarter of 2014, in terms of S&P 500 earnings was pretty strong: of the 440-odd companies that have reported, Q4 ’14 earnings growth was 6.6% according to Thomson Reuters, and that includes the roughly 2% drag from the 21% y/y decline from the Energy sector.
Q4 ’14 revenue growth was 1.9%, a little better than expected at the start of the quarter.
Healthcare led the S&P 500 in terms of y/y earnings growth at 23%, while Energy was the worst at -21.7%. (No surprises there.)
Per Briefing.com’s late Friday night earnings commentary, excluding the Energy sector, S&P 500 earnings rose +7.2% in Q4 ’14 (I thought it was closer to 8% – 8.5%) and if Apple (NASDAQ:AAPL) is excluded, S&P 500 earnings are up just 2%, since AAPL is accounting for half of the S&P 500’s earnings growth per Briefing. (I suppose if both Energy and Apple were excluded from the Q4 ’14 results, S&P 500 earnings growth would be roughly 4% – 4.5%, a little less than the high single digit operating level we’ve seen.)
(Long WMT, AAPL and now a smidge of Energy exposure)
Here are the S&P 500 metrics for the week ending February 20, 2015:
- Forward 4-quarter estimate: $120.52, down from last week’s $120.83
- P/E ratio: 17.5(x)
- PEG ratio: 13.05(x) (adding back the 5.3% Energy drag for 2015, the adjusted PEG is just over 2(x).
- S&P 500 earnings yield: 5.71%
- Year-over-year growth rate of forward estimate: +1.34%, down from last week’s +1.35%
Analysis / conclusion: The problem with selectively excluding companies or sectors from the S&P 500 earnings growth analysis is that – well – the analysis becomes arbitrary and somewhat biased. In early 2012, Thomson Reuters started excluding AAPL’s earnings when it was growing revenues and earnings 70% y/y. I am giving readers expected growth “ex-Energy” since the Energy sector is having such a profound influence on the rest of the S&P 500. For full-year 2015, per the current estimate, Energy earnings are expected to decline a whopping 53% and if we estimate Energy’s market cap and earnings weight at 10%, then that is a 5.3% drag on the S&P 500, which can only be considered material.
From an earnings perspective, as of today, I am assuming the S&P 500 will grow operating earnings 8% – 10% in 2015, with the wildcards being interest rates and tax reform. Some kind of a tax bill or tax reform that allows US companies to repatriate cash in a shareholder-friendly manner, and 2015 earnings could spike appreciably from share repurchases.
At present, I see little risk of the “earnings recession”, or an economic recession.
This isn’t an S&P 500 that is all about P/E expansion either: I think the market action is driven by the slow, steady march higher of S&P 500 earnings.
Our largest client overweight remains Technology, and then Financials as we move through the first quarter of 2015.
This coming week, we hear from Home Depot (NYSE:HD) and Lowe's (NYSE:LOW), the two do-it-yourself home improvement retailers, Hewlett-Packard (NYSE:HPQ) as they await the company split scheduled to happen later this summer, Toll Brothers (NYSE:TOL), the high-end homebuilder, and JC Penney (NYSE:JCP), a retail turnaround story. Our largest client position of the names mentioned is HPQ, which is trading at just 4.5(x) cash-flow, and smaller positions in HD, LOW, and TOL. I do think HD and LOW are overvalued on a cash-flow basis.