Q1 2013 Earnings Worries Grow

According to ThomsonReuters, the “forward 4-quarter” earnings estimate for the S&P 500 as of Friday, March 22nd, 2013 was $111.88, down from last week’s $111.96 and down exactly $2.00 from the start of the quarter, which actually – in terms of dollar erosion – is not too bad of a drop for the last 3 months, particularly given the sentiment around earnings.

In calendar Q4 ’12, the decline in the forward estimate from early October ’12, to late December, ’12 was close to $4, and for calendar Q3, ’12, the decline from start to finish of the quarter was $4 as well.

The “earnings yield” on the S&P 500 as of Friday, March 22nd was 7.19%.

The P/E ratio was 13.9(x).

The year-over-year growth (y/y) in the forward estimate was 5.67%.

Of the earnings releases the past week, Oracle (ORCL) and Fedex Corp (FDX) were clear disappointments, with both stocks getting hammered. Nike (NKE) was an upside surprise and margin expansion returned, and Tiffany (TIF) and Lennar Corp. (LEN) were both decent.

With 496 of the 500 S&P 500 companies having reported Q4 ’12 earnings, the final tally was 6.2% earnings growth and 3.6% revenue growth, both much better than expected, than when Q4 earnings reports started in mid-Januaryuary.

There are now serious worries about Q1, ’13 earnings which start in three weeks: per ThomsonReuters, the ratio of negative to positive preannouncements is 102 to 23, for a ratio of 4.4 / 1, the highest negative to positive (according to ThomsonReuters) since Q3, 2001. Obviously, we all know that 9/11 happened on Sept 11, 2001, or Q3, 2001 so earnings guidance right now is as bad as at the time of the collapse of the tech bubble and the biggest attack on American soil by a foreign enemy since Pearl Harbor. (T/R did not provide any color on which sectors or which market cap range was seeing the negative guidance cluster, if any. We’ll have to wait until we start seeing Q1 ’13 commentary from T/R in the next two weeks.)

Remember, though, as bad as that sounds, the strongest quarters of 2012 were the first two quarters of the year, so “comps” get easier as we move through 2013. In fact, according to ThomsonReuters data, Q1 ’13 is expected to be the slowest rate of y/y earnings growth for the S&P 500 for 2013, and get progressively stronger as we move through the calendar year.

Earnings Stat of the week:

As of Friday, March 22nd, here is the expected y/y growth progression for the S&P 500 for the rest of 2013:

Q1 ’13: +1.5%

Q2 ’13: +6.2%

Q3 ’13: +10.3%

Q4 ’13: 13.3%

With the exception of financials, every other sector of the S&P 500 has seen their expected Q1 ’13 earnings growth reduced since January 1, ’13. The expected earnings growth for the Financial sector is now 10.6%, versus 9.6% as of January 1, ’13. The sector with the biggest slashing of growth estimates was Consumer Discretionary, from 13% as of January 1, to 7.9% as of March 22, followed by Basic Materials, from 8.3% as of January 1 to +1.8% as of March 22nd.

Financials are a tangential housing play. That is one reason I think the sector continues to show good relative strength.

Frankly, I don’t think the last two quarters will be double digits, but I do think the end of the year will be high-single-digits, and the 4th quarter could be +10%. By mid-year 2013, a lot of what Washington could do in terms of radical policy changes will be in the rear-view mirror. The election, the fiscal-cliff, sequestration, the continuing resolution (CR), the gradual phasing in of ObamaCare, all will be discounted, and if Japan can continue to recover, not to mention a continued strong recovery in US housing, and if Europe can continue to stabilize, just a “normal” economy, might feel much better.

To conclude, as bad as the negative warnings look, the fact that the erosion in the “forward 4-quarter” dollar estimate isn’t dramatic and in fact is less than the past two quarters, portends positive for future earnings. We led the story with a negative headline, simply to be like the rest of the crowd. In fact, we are still optimistic and positive about forward earnings growth for the S&P 500. When Q1 ’13 earnings are all said and done by mid-June, ’13, we think readers will have seen +3% – 4% y/y earnings growth for the S&P 500.

Accenture (ACN) reports this week, another leading indicator for IBM (IBM). IBM dropped on Oracle’s report this week, since ORCL is thought to be a good leading indicator for IBM’s software biz. Watch $212 for Big Blue. It needs to hold the October ’12 high after breaking out this past two weeks. IBM has not made a substantial new high in 6 months now. Starting to lag.

Some of our VERY bad trades: Selling Google (GOOG) in August ’12 just shy of $600, caught the bottom in the stock, and then watched it start its most recent run to $800. Bought some back near $700. Selling Applied Materials (AMAT) after earnings in November ’12, near $10.15, also right near the low, and then watching the stock run to $13. Sold our Best Buy (BBY) under $20, watched it fall to $13, then rallied all the way back. Not sure we will repurchase. As Bernard Baruch once said (I think it was BB), the big money is not in the buying and selling, but in the waiting.

Is Cyprus a big deal? if Europe hadn’t been in the news so much in the last few years, and driven such nasty mid-year selloffs in 2010 and 2011 in the S&P 500, I would have said yes. From small countries can come big problems, and all you have to do is recall the Malaysian ringgit and Thai baht devaluations in the summer of 1997. The devaluations destabilized South East Asia and the Asian Tigers, and decimated economic growth for two years. The devaluation ultimately culminated in the Long-Term Capital Crisis of July, August, 1998 here in the US.

Just because it is a small country, doesn’t mean the macro ramifications can’t be large. That said, I think Europe will continue to fade as a crisis point as these “crises” flash and burn quickly. The EU seems to be holding, but that is just one opinion. I think that ultimately the EU will emerge as a regional economic power when the debt restructurings and recapitalizations are concluded, (like Ireland) which will take a few more years.

Technically, the S&P 500 continues to test its October 2000 high near 1,550 and the October, ’07 high near 1,565. We closed Friday at 1,556. It may take Q1 ’13 earnings to break us out of this consolidation near old highs. We do think Q1’13 earnings won’t be as bad as the pessmists expect. Maybe it is me, but have the majority of Wall Street analysts today even seen a bull market and P/E expansion ?

Contrary to Bernard Baruch, there is an opportunity cost to sitting on an underperforming stock within a client account. We’ll be out with more after the April quarter starts. The constant tension continues between a cheap valuation and underperformance.

Apple (AAPL) had a good week, +4%. The stock has bottomed, but how much it can rally is another question. Lapping two monster quarters from December ’11 and Q1 ’12. Introduction of Siri and iPhone 4s. Old chart from Norm Conley, but shows how AAPL is so important to tech – Norm’s chart is dated March 7th. APPL’s low trade at $419 was March 4th. We bought a VERY little bit between $419 – $420. Very tough to catch bottoms in a stock like that.

Gary Morrow, an excellent technician, wrote on Lennar’s chart this week. Stock couldnt break out on the week, despite a solid earnings report on Wednesday morning. Homebuilder’s looking like they are trying to consolidate the 2012 gains. I have to tell you, we love to model and follow our holdings from a fundamental basis, and these homebuilders are gamey for sure. Not much cash-flow (yet) along with other issues. More later – cycle is early in housing as housing starts are still below the 1.25 million annual average for the last 50 years, coming in recently at 950,000.

Per ISI Group, which does some of the best research on the Street, Equity mutual fund flows now on track to be $73 billion in March. Like housing, the equity fund flow tide has reversed. May be one reason that S&P 500 earnings have diminished in importance, i.e. the negative pre-announcements don't mean as much. With the huge stock repurchase plans, more dollars chasing fewer shares.

Like Facebook (FB), Bank of America (BAC) and Micron (MU) here. All charts posted earlier in the week.

We were about to wrap-up and noticed the chart of the iShares S&P National AMT-Free Municipal Bond Index ETF (MUB). Looks like a double-bottom. With all the new tax increases, you would think muni’s would have found a better bid the last few months, but they have been weak. Will update the MUB chart in this forum early this week. I think it is good for a trade. (none yet).

Love to write for readers, so don’t hesitate to reach out and let me know what you'd like to see.

Disclosure: Author is long FDX, ORCL, NKE (small position), Toll Brothers (TOL) and LEN. We bought more Oracle on Friday, adding smaller positions to more accounts. Long IBM, GOOG, AAPL, FB, BAC and MU