By Dirk Van Dijk, CFA at Zacks Research
- Focus now on third quarter earnings: 16.3% growth in total net income, 3.79% year-over-year revenue growth expected.? For the fourth quarter, 24.1% earnings, and 2.18% revenue growth expected.
- Just 22 reports in, but off to a good start (for what it’s worth). Surprise ratio 6.00 with a 8.96% median surprise. 81.8% of all firms beat expectations. Total net income grows 26.2%.
- Sales Surprise ratio at 1.10, median surprise 0.01%, 50.0% of all firms do better than expected on top line. Total revenue growth 11.1%.
- New Tables on Net Margins added. S&P 500 net margin expected to rise to 8.63% from 7.75% a year ago, but down from 9.05% in the second quarter.
- Total earnings for the S&P 500 expected to jump 39.0% in 2010, 15.6% further in 2011.? Revenues expected to rise 4.62% in 2010, 5.93% in 2011.
- Autos, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010. Construction expected to move from the red to the black. No sector expected to see earnings decline in 2010.
- Huge net margin expansion expected to continue in 2010 and 2011. Total net margins grow from 5.85% in 2008 to 6.42% in 2009, 8.61% expected for 2010, 9.31% for 2011.? Ex-Financials, net margins 6.63% in 2008, 7.58% for 2009, 8.72% expected for 2010, 10.51% for 2011.
- Revisions ratio for full S&P 500 at 1.04 for 2010, at 0.89 for 2011, an improvement from last week.?? Ratio of firms with rising to falling mean estimates at 1.11 for 2010, 0.79 for 2011.? Very small sample size, especially for some of the sectors, interpret revisions ratios with care
- S&P 500 firms earned a total of $546.5 billion in 2009, expected to earn $759.8 billion in 2010, $878.4 billion in 2011.
- S&P 500 earned $57.64 in 2009, $79.80 in 2010 and $92.78 in 2011 expected bottom up.? Puts P/E’s at 19.8x for 2009, 14.3x for 2010, and 12.3x for 2011.
- Top-Down estimates:? $79.93 for 2010, $92.01 for 2011.
The official kick-off for the third quarter earnings season starts later this week. We have had a few “preseason games” already, though. Just 22 firms have reported third quarter earnings so far — so it is not much to go on — but so far so good, with 18 beats and only three misses.
One thing to note is that for the Earnings and Revenue Scorecards, as well as the “Growth Reported” tables, are based on only those 22 firms, while the “expected growth tables are based on the other 478 firms. Your main attention should be focused on the “Growth Expected” tables.
The same is true for the new “Net Margin” tables, which I introduce in this edition. The quarterly reported table is only based on 22 firms, but the comparative data is also for just those firms as well. The “Expected” table is based on the remaining 478 firms. The “Annual Net Margin” table is based on all 500 firms.
Tougher Comps
As far as total net income is concerned, year-over-year growth is expected to decelerate to 16.28% growth from the 37.22% reported in the second quarter (among the 483). That is still a very healthy level of earnings growth. A big part of the slowdown can be traced to the fact that third quarter earnings in 2009 were significantly better than second quarter earnings in 2009. Thus we are facing tougher comparisons.
However, it is not all just tougher comps. Sequentially, earnings are expected to drop by 6.42% from the second quarter. In the second quarter, earnings were 8.93% higher than in the first quarter. As far as the sectors are concerned, the list of high-growth sectors in the third quarter (year over year) will pretty much the same as the high growth sectors in the second quarter.
The one exception is Aerospace, which was one of only two negative growth sectors in the second quarter, by will see more than a doubling of net income in the third quarter. The rest of the high-growth sectors are very cyclical, such as Construction, Autos and Transportation.
Early Peek at 4th Quarter
We also get an early peek at expectations for the fourth quarter. Somewhat surprisingly, the analysts are collectively expecting a bit of reacceleration in earnings growth, with total net income rising 24.1% over the fourth quarter of 2009.
Sequentially, earnings are expected to be 7.28% higher in the fourth quarter. The thousands of analysts tracking individual companies are thus not looking for a double-dip recession and implicitly see the third quarter slowdown as more of a pause in the economy rather than the start of a new downturn.
In the second quarter reports, arguably revenues were even more important than earnings. Firms that disappointed on the top line were spanked by the market, even if they did well on the bottom line. Year-over-year revenue growth is expected to decelerate sharply, growing just 3.79% down from 10.59% in the second quarter.
However, most of the deterioration in overall revenue growth is coming from the Financials. Revenue for Financials is notoriously flakey. A big part of it is interest income, which falls when interest rates are low. At the same time, though, interest expense also falls. Thus, don’t read too much into the revenue slowdown. This is one area where the trends in the individual sector are more important than what is going on with the S&P 500 as a whole.
On a sequential basis, revenues are expected to decline by 2.46%. Looking ahead to the fourth quarter, revenues are expected to climb 2.18% year over year and be up 4.62% sequentially. On a year-over-year basis, this implies continued very strong growth in net margins.
Three New Tables Introduced
I introduce three new tables in this issue: quarterly net margins reported, quarterly margins expected and net margins for the full year. Since we are tracking aggregate earnings and aggregate revenues, this seemed to be a logical addition to the coverage.
For the quarter, the firms that have not yet reported are expected to post net margins of 8.63% for the third quarter, up from 7.75% a year ago, but down from the 9.05% net margins they posted in the second quarter. The relative handful of firms that have actually reported have seen their margins expand to 9.78% from 8.72% a year ago, and from 9.03% in the second quarter. For the full year, net margins are expected to rise to 8.61% in 2010 from 6.42% in 2009, with a further rise to 9.31% in 2011. Excluding financials, margins are expected to rise from 7.58% in 2009 to 9.72% in 2010 to 10.51% in 2011.
For the full year, earnings are expected to grow 39.0% in 2010, with further growth of 15.6% in 2011. Next year we should once again set a new all-time record high for S&P 500 earnings. That will be long before employment returns to record levels. These results refer to the S&P 500, which are almost by definition “big businesses,” many of which get a majority of their earnings from overseas.
With interest rates low, they are able to float bonds at very attractive interest rates. Small businesses have not been faring as well, and have had a hard time getting access to capital. An effort to aid small businesses through a package of loans and tax cuts was recently blocked by a filibuster in the Senate, even though many of the senators who voted to prevent a final vote on the bill were co-sponsors of the legislation. Since small businesses are the principal driver of job creation, one can only conclude that those U.S. senators want to keep unemployment as high as possible, at least through November (of 2010; 2012 is an open question).
Full-year revenue growth is expected to be 4.62%, which does not fully make up for the 6.75% decline in 2009. For 2010, a further 5.93% revenue growth is expected. However, revenues for financial firms are flakey, and distort the numbers significantly. Excluding the financials, revenues plunged 10.46% in 2009, but are expected to grow 8.35% in 2010 and 6.96% in 2011. With earnings growing much faster than revenues, it means that net margins are headed higher.
It is important to note, that when we say “2009” in this report, we mean the last full fiscal year to be reported, even if that year happens to end in June 2010. June is one of the largest non-December fiscal year-end months. Thus, as those firms “switch over,” not only the projections for 2010 can change, but so too can the “historical 2009” results.
Earnings Recovery by Mid-2011
Regardless of some of the technical timing issues, it means that earnings will have fully recovered by mid 2011, and that full-year 2011 earnings will be 8.5% above full-year 2007 earnings (before the Great Recession started). That is years before we are likely to see a full recovery in the job market.
Collectively the 500 firms in the S&P 500 earned $546.5 billion in “2009,” and that is going to grow to $759.8 billion this year and $878.4 billion in 2011. Translated into “EPS” for the index, earnings are expected to rise from $57.64 in 2009 to $79.80 in 2010 and $92.78 in 2011.
Stocks Remain Inexpensive
In other words, then, the S&P 500 is selling for 19.8x 2009 earnings, but just 14.3x 2010 and 12.3x 2011 earnings. By historical standards, that is quite cheap. Normally, when interest rates and inflation are low, P/E ratios are higher than average. Well, we currently have some of the lowest rates of inflation in decades, and interest rates are at near record lows.
It only costs the government 2.51% to borrow for 10 years. It is not hard to find good, solid blue chip companies that are providing dividend yields of more than that, and not just a bunch of electric utilities either. One thing is certain, the coupon on a 10-year T-note will not increase over the next 10 years. The odds of the likes of Merck (MRK – Analyst Report, 4.15%), Intel (INTC – Analyst Report, 3.26%) or Procter & Gamble (PG – Analyst Report, 3.20%) increasing their dividend in the next 10 years is pretty high.
Currently 139 S&P 500 stocks yield over 2.55%, and 88 of those have payout ratios of less than 60%. Earnings that are not paid out in dividends are reinvested for future growth, or are used to buy back stock, which also lifts earnings per share. Based on this year’s earnings, the earnings yield is 6.99% and based on next year it is 8.13%.
Scorecard & Earnings Surprise
- Only 22 firms have reported 3Q earnings, all with fiscal periods ending in August. The numbers are thus not particularly meaningful, but we present them anyway. Your focus should be on the “expected” tables, which cover the other 478 firms.
- For what it is worth, we are off to a strong start with a median surprise of 8.96, and a 6.00 surprise ratio.
- Positive year-over-year growth for 18, falling EPS for four firms, a 4.50 ratio.
- Total net income up 26.2%. Pay attention to the % reported in evaluating the significance of sector growth rates and surprise medians.
Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Thus this is a very positive earnings season. This is a big enough sample that it would be highly unusual for things to turn around and have the remaining firms turn around an on balance disappoint.
| Scorecard & Earnings Surprise | |||||||
|---|---|---|---|---|---|---|---|
| Income Surprises | Yr/Yr Growth | % Reported | Surprise Median | EPS Surp Pos | EPS Surp Neg | # Grow Pos | # Grow Neg |
| Construction | 181.08% | 9.09% | 166.67 | 1 | 0 | 1 | 0 |
| Finance | -11.03% | 1.28% | 34.29 | 1 | 0 | 0 | 1 |
| Consumer Discretionary | 18.92% | 6.06% | 12.56 | 2 | 0 | 2 | 0 |
| Retail/Wholesale | 20.10% | 15.56% | 11.11 | 7 | 0 | 7 | 0 |
| Industrial Products | -7.58% | 5.00% | 8.11 | 1 | 0 | 0 | 1 |
| Business Service | 6.45% | 5.26% | 5.88 | 1 | 0 | 1 | 0 |
| Computer and Tech | 44.35% | 7.14% | 2.86 | 3 | 1 | 5 | 0 |
| Consumer Staples | -1.47% | 7.89% | 1.59 | 2 | 1 | 1 | 2 |
| Transportation | 109.94% | 11.11% | -0.83 | 0 | 1 | 1 | 0 |
| Medical | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Auto | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Basic Materials | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Conglomerates | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Aerospace | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Oils and Energy | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Utilities | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| S&P | 26.21% | 4.40% | 8.96 | 18 | 3 | 18 | 4 |
Sales Surprises
- Sales Surprise ratio at 1.10, median surprise 0.01%, 50.0% of all firms do better than expected on top line. However, we are only talking about 17 stocks.
- Growing Revenues outnumber falling revenues by ratio of 10.0, 90.9% of firms have higher revenues than a year ago.
- Revenue growth healthy at 11.1% but still greatly lags earnings growth pointing to net margin expansion (see new margin tables below).
| Sales Surprises | |||||||
|---|---|---|---|---|---|---|---|
| Sales Surprises | Yr/Yr Growth | % Reported | Surprise Median | Sales Surp Pos | Sales Surp Neg | # Grow Pos | # Grow Neg |
| Finance | -16.69% | 1.28% | 3.958 | 0 | 0 | 0 | 1 |
| Construction | 14.42% | 9.09% | 2.91 | 1 | 0 | 1 | 0 |
| Business Service | 3.60% | 5.26% | 2.274 | 1 | 0 | 1 | 0 |
| Industrial Products | 3.59% | 100.00% | 0.977 | 1 | 0 | 1 | 0 |
| Computer and Tech | 43.48% | 7.14% | 0.592 | 3 | 2 | 5 | 0 |
| Retail/Wholesale | 6.58% | 15.56% | 0.339 | 5 | 2 | 7 | 0 |
| Transportation | 18.08% | 11.11% | -0.051 | 0 | 1 | 1 | 0 |
| Consumer Discretionary | 7.43% | 6.06% | -0.585 | 0 | 2 | 2 | 0 |
| Consumer Staples | -1.73% | 7.89% | -1.3555 | 0 | 3 | 2 | 1 |
| Medical | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Auto | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Basic Materials | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Conglomerates | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Aerospace | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Oils and Energy | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Utilities | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| S&P | 11.08% | 4.40% | 0.007 | 11 | 10 | 20 | 2 |
Reported Quarterly Growth: Total Net Income
- The first table shows the actual reported growth of those that have already reported, and the second table showing the expected growth for the firms that have yet to report.? The reported numbers are based on a very small sample size and do not reflect what the overall S&P 500 is likely to report.? See comment in the Earnings Scorecard section.
- The total net income of firms that have reported so far is 26.2% above what they reported in the second quarter of 2009. These same firms reported year-over-year growth of 30.9% in the first quarter. Sequential earnings growth is 9.3%.
- Sample sizes are small, and growth rates will shift wildly as more firms report.
- The numbers in the table (and Revenue growth table) below only refer to those firms which have already reported. Refer back to the % reporting in the scorecard to assess the significance of the sector growth numbers.
| Quarterly Growth: Total Net Income Reported | |||||
|---|---|---|---|---|---|
| Income Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 A | Year over Year 3Q 10 A | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Construction | -81.51% | -25.00% | 181.08% | 112.06% | 322.22% |
| Transportation | 9.78% | -9.31% | 109.94% | 20.91% | 109.50% |
| Computer and Tech | 7.72% | -26.02% | 44.35% | 20.72% | 39.49% |
| Retail/Wholesale | -10.47% | 14.22% | 20.10% | 8.41% | 7.25% |
| Consumer Discretionary | -66.83% | 143.67% | 18.92% | 10.13% | 3.20% |
| Business Service | -4.98% | 13.79% | 6.45% | -0.45% | 1.75% |
| Consumer Staples | 27.77% | 28.21% | -1.47% | -2.46% | -1.51% |
| Industrial Products | -3.77% | 12.96% | -7.58% | -2.16% | -6.90% |
| Finance | -24.93% | 39.46% | -11.03% | 125.21% | 315.12% |
| Medical | na | Na | Na | Na | Na |
| Auto | na | Na | Na | Na | Na |
| Basic Materials | na | Na | Na | Na | Na |
| Conglomerates | na | Na | Na | Na | Na |
| Aerospace | na | Na | Na | Na | Na |
| Oils and Energy | na | Na | Na | Na | Na |
| Utilities | na | Na | Na | Na | Na |
| S&P | -15.08% | 9.53% | 26.21% | 15.13% | 30.94% |
Expected Quarterly Growth: Total Net Income
- Total net income for the S&P 500 in the third quarter of 2010 is expected to rise 16.3% over third quarter of 2009 levels.
- This marks a slowdown from the 37.2% growth those same firms had in the second quarter. A rebound to 24.1% growth expected in the fourth quarter.
- Total third quarter net income expected to be 6.4% below second quarter levels. However, fourth quarter net income is expected to rise 7.3% over third quarter levels.
- Ten sectors expected to post double digit third quarter year over year growth, only? Conglomerates expected to have negative growth. Eight sectors expected to post growth over 30%. Cyclical sectors in the lead.
- Sequential picture much more downbeat, with only three sectors expected to actually have higher net income in this quarter than in the second quarter. When looking at growth, the base you are growing from matters as much as the levels you are growing to.
| Quarterly Growth: Total Net Income Expected | |||||
|---|---|---|---|---|---|
| Income Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 E | Year over Year 3Q 10 E | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Construction | -24.74% | -16.67% | 659.27% | 22.45% | 741.03% |
| Aerospace | 13.16% | -7.94% | 131.61% | -4.64% | -1.73% |
| Transportation | -0.25% | -0.12% | 49.66% | 28.14% | 69.56% |
| Auto | 2.06% | -39.71% | 41.56% | -6.24% | - to + |
| Oils and Energy | 3.54% | -8.05% | 39.64% | 29.90% | 95.23% |
| Industrial Products | -7.60% | -7.46% | 39.27% | 40.73% | 62.41% |
| Computer and Tech | 15.51% | 2.46% | 32.51% | 11.25% | 62.13% |
| Basic Materials | 24.76% | -20.09% | 30.54% | 48.20% | 114.14% |
| Finance | 11.87% | -16.61% | 13.10% | 180.39% | 39.45% |
| Business Service | 13.83% | -0.76% | 12.32% | 15.08% | 21.12% |
| Consumer Discretionary | 20.82% | -6.53% | 5.82% | 4.17% | 29.77% |
| Retail/Wholesale | 38.45% | -9.66% | 5.56% | 7.51% | 9.96% |
| Medical | 0.08% | -8.26% | 2.63% | 3.58% | 16.90% |
| Utilities | -22.05% | 16.06% | 1.58% | 6.36% | 6.87% |
| Consumer Staples | -6.04% | 1.87% | 0.27% | 1.51% | 7.32% |
| Conglomerates | 12.09% | -5.51% | -4.74% | 5.97% | -0.58% |
| S&P | 7.28% | -6.42% | 16.28% | 24.08% | 37.22% |
Quarterly Growth: Total Revenues Reported
- The shows the growth of the 17 firms that have actually reported. Your principal interest should be in the “growth expected tables, which cover the other 496 firms..? See comment in the Earnings Scorecard section.
- The S&P 500 reported revenues up 11.1% year over year in 3Q, up from 10.9% revenue increase the same firms showed in the 2Q. This is a very healthy level of revenue growth, but the sample size is small and un-representative.
| Quarterly Growth: Total Revenues Reported | |||||
|---|---|---|---|---|---|
| Sales Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 A | Year over Year 3Q 10 A | Year over Year 4Q 10 E | Year over Year 2Q 09 A |
| Computer and Tech | 5.53% | -10.52% | 43.48% | 36.04% | 36.43% |
| Transportation | 1.68% | 0.31% | 18.08% | 13.49% | 20.07% |
| Construction | -23.76% | 1.35% | 14.42% | -11.60% | -8.74% |
| Consumer Discretionary | -12.44% | 16.07% | 7.43% | 7.54% | 7.98% |
| Retail/Wholesale | 16.95% | 2.76% | 6.58% | 5.52% | 7.20% |
| Business Service | 1.16% | 4.44% | 3.60% | 2.62% | 0.00% |
| Industrial Products | -2.38% | 1.65% | 3.59% | 3.50% | 3.41% |
| Consumer Staples | 6.93% | -3.82% | -1.73% | 0.67% | -3.52% |
| Finance | -39.56% | -7.41% | -16.69% | -65.45% | -14.39% |
| Medical | na | Na | Na | Na | Na |
| Auto | na | Na | Na | Na | Na |
| Basic Materials | na | Na | Na | Na | Na |
| Conglomerates | na | Na | Na | Na | Na |
| Aerospace | na | Na | Na | Na | Na |
| Oils and Energy | na | Na | Na | Na | Na |
| Utilities | na | Na | Na | Na | Na |
| S&P | 0.65% | 0.63% | 11.08% | 7.55% | 10.92% |
Quarterly Growth: Total Revenues Expected
- Total revenue for the S&P 500 expected to grow 3.79% from a year ago, a sharp slowdown from the 10.6% year over year growth posted in the second quarter. A further slowdown to 2.2% growth expected for the fourth quarter.
- Revenue for the Financials is the principal source of the revenue slowdown.? Low interest rates depress interest income, which is a major part of financials revenue, but also reduce interest expense. As a result, revenues at Financials are notoriously flakey.
- Five sectors expected to post double-digit revenue growth in the third quarter. The same five also posted double-digit growth in the second quarter and are expected to do so again in the fourth quarter. High revenue growth in Energy and Materials is largely a function of commodity prices.
| Quarterly Growth: Total Revenues Expected | |||||
|---|---|---|---|---|---|
| Sales Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 E | Year over Year 3Q 10 E | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Oils and Energy | 1.22% | 5.79% | 21.21% | 14.69% | 27.70% |
| Industrial Products | -2.39% | -0.04% | 20.54% | 16.54% | 20.20% |
| Transportation | 3.11% | 1.48% | 16.27% | 12.68% | 20.25% |
| Computer and Tech | 7.78% | 2.75% | 16.21% | 10.03% | 21.25% |
| Basic Materials | 4.61% | -4.73% | 12.62% | 11.18% | 18.54% |
| Medical | 2.63% | -0.16% | 8.96% | 2.65% | 10.09% |
| Business Service | 5.00% | 0.89% | 6.24% | 5.15% | 7.06% |
| Utilities | -0.72% | 10.73% | 4.91% | 5.06% | 0.60% |
| Consumer Discretionary | 9.16% | 2.81% | 3.01% | 4.43% | 7.94% |
| Aerospace | 6.45% | 3.07% | 2.95% | 2.83% | -2.25% |
| Conglomerates | 5.50% | -0.28% | 2.33% | 1.08% | 2.10% |
| Construction | -4.16% | -2.79% | 1.77% | -3.54% | 8.78% |
| Retail/Wholesale | 14.28% | -2.08% | 1.52% | 4.02% | 3.87% |
| Auto | 4.21% | -12.30% | -1.26% | -8.21% | 26.09% |
| Consumer Staples | 2.84% | -7.73% | -2.87% | -4.20% | 7.88% |
| Finance | 1.17% | -21.08% | -21.11% | -18.91% | 3.85% |
| . | 4.64% | -2.46% | 3.79% | 2.18% | 10.59% |
Quarterly Net Margins Reported
- This is only for the 22 firms that have already reported, calculated as total net income for the sector divided by total revenues for the sector. As more firms report, both the reported and estimated net margins are expected to change significantly.
- Net margins for S&P 500 expand to 9.78% from 8.72% a year ago, and 9.03% reported by these same firms in the second quarter.
- Eight of nine sectors with firms reporting seeing year-over-year increase in margins, six of nine see sequential improvement.
- Some sectors will see bigger seasonal swings in margins than others.
- Most focus should be on the “margins expected” table at this point.
| Quarterly: Net Margins Reported | ||||||
|---|---|---|---|---|---|---|
| Net Margins | Q4 2010 Estimated | Q3 2010 Reported | 2Q 2010 Reported | 1Q 2010 Reported | 4Q 2009 Reported | 3Q 2009 Reported |
| Business Service | 24.59% | 25.48% | 23.39% | 24.21% | 25.35% | 24.80% |
| Consumer Discretionary | 7.64% | 19.64% | 9.36% | 8.57% | 7.46% | 17.75% |
| Computer and Tech | 18.75% | 18.68% | 22.59% | 19.49% | 21.13% | 18.56% |
| Finance | 21.81% | 16.79% | 11.14% | -7.21% | 3.35% | 15.72% |
| Consumer Staples | 10.37% | 9.35% | 7.01% | 8.05% | 10.70% | 9.32% |
| Industrial Products | 6.41% | 6.60% | 5.94% | 5.68% | 6.78% | 7.40% |
| Transportation | 4.28% | 4.02% | 4.44% | 2.75% | 4.01% | 2.26% |
| Retail/Wholesale | 3.36% | 3.78% | 3.40% | 4.88% | 3.27% | 3.35% |
| Construction | 0.69% | 3.64% | 4.91% | -1.22% | -5.03% | -5.13% |
| S&P 500 | 8.37% | 9.78% | 9.03% | 7.79% | 7.88% | 8.72% |
Quarterly Net Margins Expected
- Net margins (among the 478 yet to report) expected to rise to 8.83% from 7.75% a year ago.
- Sequentially, margins expected to fall from 9.05% in the second quarter but rebound in the fourth quarter.
- Tech, Staples and Business Service consistently have double-digit net margins.
- Twelve sectors expected to see year-over-year growth in margins, four see declines.
- Only four expected to see sequential improvement in margins, twelve see declines.
- Construction, Aerospace and Finance to see largest year-over-year increases.
| Quarterly: Net Margins Expected | ||||||
|---|---|---|---|---|---|---|
| Net Margins | Q4 2010 Estimated | Q3 2010 Estimated | 2Q 2010 Reported | 1Q 2010 Reported | 4Q 2009 Reported | 3Q 2009 Reported |
| Computer and Tech | 17.87% | 15.74% | 15.51% | 15.17% | 16.39% | 13.56% |
| Consumer Staples | 11.45% | 12.33% | 11.04% | 10.75% | 10.51% | 11.81% |
| Finance | 13.61% | 12.00% | 11.51% | 11.22% | 3.89% | 8.49% |
| Business Service | 13.21% | 11.65% | 11.80% | 11.37% | 11.49% | 10.97% |
| Medical | 9.36% | 9.35% | 10.17% | 10.17% | 9.03% | 9.93% |
| Transportation | 9.18% | 9.20% | 9.35% | 7.15% | 7.83% | 7.15% |
| Utilities | 6.85% | 8.69% | 8.39% | 8.03% | 6.82% | 9.08% |
| Conglomerates | 9.17% | 8.19% | 8.64% | 7.36% | 8.29% | 8.79% |
| Consumer Discretionary | 9.79% | 8.13% | 8.91% | 9.32% | 8.99% | 7.89% |
| Industrial Products | 6.82% | 7.35% | 7.98% | 6.47% | 5.79% | 6.39% |
| Oils and Energy | 7.16% | 6.92% | 7.96% | 7.31% | 6.25% | 6.01% |
| Aerospace | 6.87% | 6.07% | 6.79% | 5.94% | 6.96% | 2.70% |
| Basic Materials | 7.49% | 6.00% | 7.15% | 7.39% | 5.37% | 5.18% |
| Auto | 4.39% | 4.31% | 6.26% | 5.12% | 4.13% | 3.00% |
| Retail/Wholesale | 5.08% | 3.52% | 3.98% | 3.69% | 4.30% | 3.53% |
| Construction | 2.32% | 3.09% | 3.60% | 1.89% | 1.91% | 0.41% |
| S&P 500 | 9.31% | 8.63% | 9.05% | 8.66% | 7.33% | 7.75% |
Annual Total Net Income Growth
- Total S&P 500 Net Income in 2009 was 2.3% above 2008 levels, following a 34.0% plunge in 2008.
- Total earnings for the S&P 500 expected to jump 39.0% in 2010, 15.6% further in 2011.
- Earnings recovery to happen by mid 2011, full year 2011 earnings to be 8.5% above 2007 levels. In other words, the recovery in earnings will occur far before the recovery in jobs, as we are unlikely to return to 2007 job levels until late 2013 at the earliest.
- Autos, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010.
- Construction expected to move from the red to the black. No sector expected to see earnings decline in 2010.
- Retail, Medical and Business Service the only sectors to post positive earnings growth in every year from 2008 through 2011.
- Ten sectors expected to grow slower in 2011 than 2010, only six to see growth accelerate (all relatively slow growers in 2010).
| Annual Total Net Income Growth | ||||
|---|---|---|---|---|
| Net Income Growth | 2008 | 2009 | 2010 | 2011 |
| Construction | + to - | - to - | - to + | 92.21% |
| Auto | + to - | - to + | 1577.62% | 35.43% |
| Finance | + to - | - to + | 316.95% | 24.71% |
| Basic Materials | -4.86% | -49.89% | 69.26% | 19.73% |
| Oils and Energy | 20.80% | -56.30% | 49.79% | 13.66% |
| Transportation | 1.03% | -30.14% | 39.87% | 19.27% |
| Computer and Tech | 15.50% | -4.24% | 32.80% | 18.25% |
| Industrial Products | 5.33% | -36.71% | 30.73% | 22.26% |
| Consumer Discretionary | 6.28% | -15.84% | 18.58% | 15.99% |
| Aerospace | 13.37% | -14.63% | 13.65% | 10.34% |
| Retail/Wholesale | 1.39% | 2.62% | 12.05% | 13.57% |
| Consumer Staples | -7.73% | 5.64% | 9.58% | 10.37% |
| Business Service | 27.32% | 1.06% | 7.09% | 17.38% |
| Medical | 9.29% | 2.19% | 6.47% | 6.95% |
| Utilities | -1.29% | -13.51% | 1.77% | 6.23% |
| Conglomerates | -9.23% | -23.84% | 0.00% | 15.22% |
| S&P | -34.02% | 2.33% | 39.04% | 15.60% |
Annual Total Revenue Growth
- Total S&P 500 revenue in 2009 6.75% below 2008 levels.
- Total revenues for the S&P 500 expected to rise 4.62% in 2010, 5.93% in 2011.
- Energy to lead 2010 revenue race, Tech and Transports to take silver and bronze, but Materials and Industrials have a chance to make it on to the medal stand.
- All sectors expected to show positive top-line growth in 2011.
- Financials the biggest drag on 2010 revenue growth, Staples the only other sector expected to post lower top line for the year. Revenues for Financials are notoriously flakey — low interest rates depress interest income (but also interest expense).
- Revenue growth ex-financials: -10.46% in 2009, 8.35% in 2010, 6.96% in 2011.
- Medical, Retail and Aerospace only sectors to have positive revenue growth for all three years.
- Looking out to 2011, Energy is the only sector expected to see double-digit revenue growth, although four other sectors expected to have revenue growth over 8%.
| Annual Total Revenue Growth | |||
|---|---|---|---|
| Sales Growth | 2009 | 2010 | 2011 |
| Oils and Energy | -34.49% | 21.01% | 11.92% |
| Computer and Tech | -6.22% | 17.99% | 8.10% |
| Transportation | -13.65% | 13.55% | 8.11% |
| Basic Materials | -19.30% | 13.13% | 7.22% |
| Industrial Products | -19.55% | 12.70% | 9.76% |
| Medical | 6.06% | 9.21% | 3.20% |
| Consumer Discretionary | -9.55% | 6.17% | 5.29% |
| Business Service | -2.35% | 5.89% | 5.94% |
| Retail/Wholesale | 1.25% | 5.21% | 5.46% |
| Utilities | -5.87% | 4.28% | 2.59% |
| Auto | -21.36% | 3.29% | 9.93% |
| Conglomerates | -13.27% | 0.97% | 2.32% |
| Aerospace | 6.30% | 0.46% | 6.31% |
| Construction | -15.92% | 0.20% | 6.87% |
| Consumer Staples | -2.13% | -2.38% | 4.31% |
| Finance | 21.18% | -19.17% | 2.31% |
| S&P | -6.75% | 4.62% | 5.93% |
Annual Net Margins
- Net Margins marching higher, from 5.85% in 2008 to 6.42% in 2009 to 8.61% expected for 2010, 9.31% expected for 2011. Major source of earnings growth.
- Financials significantly distort overall net margins. Net margins ex-financials 6.63% in 2008, 7.58% in 2009, 9.72% expected for 2010, 10.51% in 2011.
- Financials net margins soar from -9.00% in 2008 to 15.39% expected for 2011.
- Thirteen sectors seeing higher net margins in 2010 than in 2009. All sectors expected to post higher net margins in 2011 than in 2010.
| Annual Net Margins | |||||
|---|---|---|---|---|---|
| Net Margins | 2008A | 2009A | 2010E | 2011E | |
| Computer and Tech | 12.36% | 12.62% | 15.15% | 15.54% | |
| Finance | -9.00% | 2.45% | 12.64% | 15.39% | |
| Business Service | 10.77% | 11.14% | 11.42% | 12.49% | |
| Consumer Staples | 9.26% | 9.99% | 10.59% | 11.87% | |
| Medical | 10.16% | 9.79% | 9.65% | 9.89% | |
| Consumer Discretionary | 8.06% | 7.50% | 8.53% | 9.23% | |
| Conglomerates | 9.31% | 8.18% | 8.09% | 9.12% | |
| Utilities | 8.76% | 8.04% | 7.85% | 8.13% | |
| Oils and Energy | 9.13% | 6.09% | 7.54% | 7.66% | |
| Transportation | 7.30% | 5.91% | 7.47% | 8.03% | |
| Industrial Products | 7.48% | 5.88% | 6.91% | 7.60% | |
| Basic Materials | 7.19% | 4.47% | 6.78% | 7.46% | |
| Aerospace | 6.81% | 5.47% | 6.21% | 6.42% | |
| Auto | -2.77% | 0.25% | 4.12% | 4.94% | |
| Retail/Wholesale | 3.55% | 3.59% | 3.88% | 4.12% | |
| Construction | -2.32% | -1.03% | 1.99% | 3.60% | |
| S&P 500 | 5.85% | 6.42% | 8.61% | 9.31% | |
Revisions: Earnings
The Zacks Revisions Ratio: 2010
- Revisions ratio for full S&P 500 at 1.04, up from 0.93 last week, still neutral.
- Retail and Transports very strong, more than six increases per cut. Industrials also strong.
- Seven sectors with positive revisions ratios, nine below 1.0.
- Aerospace, Materials and Energy weak.
- Ratio of firms with rising to falling mean estimates at 1.11, up from 0.99 last week, still neutral reading.
- Total number of revisions (4 week total) down to 1,462 from 1,325 (10.3%).
- Increases down to 744 from 637 (16.8%), cuts up to 718 from 688 (4.4%).
- Total Revisions activity passing seasonal low. They are likely to more than triple from current levels over the next six weeks. Changes in the revisions ratios will be more driven by new estimates being made rather than old estimates dropping out.
| The Zacks Revisions Ratio: 2010 | |||||||
|---|---|---|---|---|---|---|---|
| Sector | %Ch Curr Fiscal Yr Est – 4 wks | # Firms Up | # Firms Down | # Ests Up | # Ests Down | Revisions Ratio | Firms up/down |
| Retail/Wholesale | 0.62 | 25 | 10 | 182 | 28 | 6.50 | 2.50 |
| Transportation | 0.38 | 7 | 0 | 31 | 5 | 6.20 | 9,999.99 |
| Industrial Products | 0.41 | 8 | 5 | 31 | 10 | 3.10 | 1.60 |
| Business Service | 0.12 | 8 | 6 | 41 | 18 | 2.28 | 1.33 |
| Consumer Discretionary | -0.25 | 16 | 8 | 50 | 25 | 2.00 | 2.00 |
| Construction | 4.57 | 6 | 5 | 14 | 8 | 1.75 | 1.20 |
| Conglomerates | -0.29 | 6 | 2 | 3 | 2 | 1.50 | 3.00 |
| Finance | 0.07 | 36 | 27 | 110 | 118 | 0.93 | 1.33 |
| Computer and Tech | -0.76 | 24 | 31 | 106 | 138 | 0.77 | 0.77 |
| Medical | 0.02 | 23 | 18 | 26 | 34 | 0.76 | 1.28 |
| Utilities | -0.19 | 17 | 18 | 30 | 49 | 0.61 | 0.94 |
| Auto | 0.10 | 1 | 5 | 4 | 7 | 0.57 | 0.20 |
| Consumer Staples | -0.17 | 13 | 16 | 27 | 54 | 0.50 | 0.81 |
| Oils and Energy | -3.27 | 11 | 26 | 69 | 161 | 0.43 | 0.42 |
| Basic Materials | -4.05 | 11 | 10 | 17 | 45 | 0.38 | 1.10 |
| Aerospace | -0.40 | 3 | 7 | 3 | 16 | 0.19 | 0.43 |
| S&P | -0.42 | 215 | 194 | 744 | 718 | 1.04 | 1.11 |
Revisions: Earnings
The Zacks Revisions Ratio: 2011
- Revisions ratio for full S&P 500 at 0.89 down from 0.77, now in neutral territory.
- Industrials, Retail and Transportation have at least three increases per cut.
- Several sector revisions ratios based on very thin samples, so treat these with care.
- Eleven sectors with negative revisions ratios, five with ratios above 1.0.
- Ratio of firms with rising estimate to falling mean estimates at 0.79 up from 0.72, still a negative reading.
- Conglomerates and Aerospace sector look very weak for 2011, five or more cuts per increase, but on a very thin sample.
- Total number of revisions (4-week total) at 1,473, up from 1,343 (9.7%).
- Increases up to 692 from 585 (18.3%) cuts rise to 781 from 758 (3.7%).
| The Zacks Revisions Ratio: 2011 | |||||||
|---|---|---|---|---|---|---|---|
| Sector | %Ch Next Fiscal Yr Est – 4 wks | # Firms Up | # Firms Down | # Ests Up | # Ests Down | Revisions Ratio | Firms up/down |
| Transportation | 0.50 | 8 | 0 | 23 | 5 | 4.60 | 9,999.99 |
| Retail/Wholesale | 0.43 | 21 | 18 | 122 | 31 | 3.94 | 1.17 |
| Industrial Products | 0.57 | 12 | 3 | 34 | 9 | 3.78 | 4.00 |
| Consumer Discretionary | -0.12 | 12 | 13 | 48 | 28 | 1.71 | 0.92 |
| Business Service | 0.08 | 7 | 6 | 27 | 17 | 1.59 | 1.17 |
| Finance | -0.63 | 30 | 37 | 110 | 119 | 0.92 | 0.81 |
| Medical | -0.01 | 22 | 19 | 39 | 45 | 0.87 | 1.16 |
| Computer and Tech | -1.36 | 21 | 35 | 110 | 133 | 0.83 | 0.60 |
| Consumer Staples | -0.32 | 14 | 19 | 31 | 39 | 0.79 | 0.74 |
| Basic Materials | -0.09 | 10 | 11 | 22 | 31 | 0.71 | 0.91 |
| Auto | -0.79 | 2 | 3 | 4 | 6 | 0.67 | 0.67 |
| Oils and Energy | -3.50 | 10 | 28 | 80 | 172 | 0.47 | 0.36 |
| Utilities | -0.86 | 13 | 25 | 28 | 77 | 0.36 | 0.52 |
| Construction | -6.64 | 2 | 8 | 8 | 23 | 0.35 | 0.25 |
| Conglomerates | -0.57 | 2 | 7 | 2 | 11 | 0.18 | 0.29 |
| Aerospace | -0.71 | 3 | 7 | 4 | 35 | 0.11 | 0.43 |
| S&P | -0.79 | 189 | 239 | 692 | 781 | 0.89 | 0.79 |
Total Income and Share
- S&P 500 earned $546.5 billion in 2009, expected to earn $759.8 billion in 2010, $878.4 billion in 2011.
- Finance share of total earnings moves from 5.8% in 2009 to 17.3% in 2010, 18.8% in 2011, regains total earnings crown from Tech.
- Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 12.3% in 2011.
- Market cap shares of Construction, Retail, Transportation, Industrials and Business Service sectors far exceed both 2010 and 2011 earnings shares.
- Finance, Energy and Autos have rising earnings shares and market cap shares well below 2011 earnings shares.
- Staples, Utilities and Medicals’ shares of total net income falling rapidly.
| Total Income and Share | |||||||
|---|---|---|---|---|---|---|---|
| Sector | Total Net Income $ 2009 | Total Net Income $ 2010 | Total Net Income $ 2011 | % Total S&P Earn 2009 | % Total S&P Earn 2010 | % Total S&P Earn 2011 | % Total S&P Mkt Cap |
| Finance | $31,745 | $132,358 | $165,061 | 5.81% | 17.42% | 18.79% | 15.81% |
| Computer and Tech | $92,708 | $123,120 | $145,588 | 16.96% | 16.20% | 16.57% | 18.02% |
| Medical | $94,652 | $100,778 | $107,777 | 17.32% | 13.26% | 12.27% | 10.86% |
| Oils and Energy | $62,732 | $93,963 | $106,797 | 11.48% | 12.37% | 12.16% | 10.46% |
| Consumer Staples | $57,414 | $62,915 | $69,441 | 10.51% | 8.28% | 7.91% | 8.94% |
| Retail/Wholesale | $51,411 | $57,607 | $65,426 | 9.41% | 7.58% | 7.45% | 8.59% |
| Utilities | $49,742 | $50,623 | $53,777 | 9.10% | 6.66% | 6.12% | 6.54% |
| Consumer Discretionary | $23,219 | $27,534 | $31,936 | 4.25% | 3.62% | 3.64% | 4.33% |
| Conglomerates | $26,275 | $26,275 | $30,273 | 4.81% | 3.46% | 3.45% | 3.76% |
| Basic Materials | $13,459 | $22,781 | $27,276 | 2.46% | 3.00% | 3.11% | 3.20% |
| Aerospace | $13,054 | $14,835 | $16,369 | 2.39% | 1.95% | 1.86% | 1.68% |
| Industrial Products | $10,622 | $13,886 | $16,976 | 1.94% | 1.83% | 1.93% | 2.30% |
| Business Service | $11,532 | $12,350 | $14,496 | 2.11% | 1.63% | 1.65% | 2.07% |
| Transportation | $8,202 | $11,472 | $13,682 | 1.50% | 1.51% | 1.56% | 1.94% |
| Auto | $471 | $7,908 | $10,710 | 0.09% | 1.04% | 1.22% | 1.00% |
| Construction | ($742) | $1,443 | $2,774 | -0.14% | 0.19% | 0.32% | 0.49% |
| S&P | $546,494 | $759,847 | $878,360 | 100.00% | 100.00% | 100.00% | 100.00% |
P/E Ratios
- Trading at 14.3x 2010, 12.3x 2011 earnings, or earnings yields of 6.99% and 8.13%, respectively.
- Earnings yields extremely attractive relative to 10-year T-note rate of 2.51%.
- Medical has lowest P/E based on 2010 earnings. Autos, Finance, Energy, Medical cheapest based on 2011 earnings.
- Construction has highest P/E for 2010 and 2011.
- Auto and Finance high 2009 P/Es to fall dramatically in 2010 and 2011.
- S&P 500 earned $57.64 in 2009: $79.80 in 2010 and $92.78 in 2011 expected.
| P/E Ratios | ||||
|---|---|---|---|---|
| P/E | 2008 | 2009 | 2010 | 2011 |
| Medical | 12.7 | 12.4 | 11.7 | 10.9 |
| Oils and Energy | 7.9 | 18.1 | 12.1 | 10.6 |
| Aerospace | 11.9 | 14.0 | 12.3 | 11.1 |
| Finance | -17.8 | 54.0 | 12.9 | 10.4 |
| Auto | -16.0 | 228.7 | 13.6 | 10.1 |
| Utilities | 12.3 | 14.2 | 14.0 | 13.2 |
| Basic Materials | 12.9 | 25.8 | 15.2 | 12.7 |
| Consumer Staples | 17.8 | 16.9 | 15.4 | 14.0 |
| Conglomerates | 11.8 | 15.5 | 15.5 | 13.5 |
| Computer and Tech | 20.2 | 21.1 | 15.9 | 13.4 |
| Retail/Wholesale | 18.6 | 18.1 | 16.2 | 14.2 |
| Consumer Discretionary | 17.0 | 20.2 | 17.0 | 14.7 |
| Industrial Products | 14.9 | 23.5 | 18.0 | 14.7 |
| Busines Service | 19.7 | 19.5 | 18.2 | 15.5 |
| Transportation | 17.9 | 25.6 | 18.3 | 15.3 |
| Construction | -26.9 | -71.9 | 37.0 | 19.2 |
| . | 20.3 | 19.8 | 14.3 | 12.3 |
Biggest FY1 Revisions
The table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. To qualify there must be more than 3 estimates for FY1, and have a mean estimate of more than $0.50. In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year’s earnings is shown.
Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit. On the other hand, if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.
| Biggest FY1 Revisions | |||||||
|---|---|---|---|---|---|---|---|
| Company | Ticker | %Ch Curr Fiscal Yr Est – 4 wks | %Ch Next Fiscal Yr Est – 4 wks | # Up-Dn/Tot %Ch Curr Fiscal Yr Est – 4 wks | # Up-Dn/Tot %Ch Next Fiscal Yr Est – 4 wks | P/E using Curr FY Est | P/E using Next FY Est |
| Discover Fin Sv | DFS | 22.67% | 8.59% | 0.79 | 0.75 | 17.80 | 9.54 |
| Textron Inc | TXT | 11.85% | -3.53% | 0.17 | -0.27 | 41.22 | 15.55 |
| Carmax Gp (Cc) | KMX | 10.25% | 11.06% | 1.00 | 1.00 | 17.40 | 16.41 |
| Eastman Chem Co | EMN | 9.38% | 6.81% | 1.00 | 0.67 | 10.56 | 10.41 |
| Comerica Inc | CMA | 9.26% | -1.35% | 0.17 | -0.05 | 45.32 | 16.93 |
| Pall Corp | PLL | 6.87% | 5.16% | 1.00 | 0.56 | 17.09 | 15.14 |
| Archer Daniels | ADM | 4.37% | 5.94% | 0.44 | 0.57 | 10.30 | 9.71 |
| Best Buy | BBY | 4.27% | 2.90% | 0.96 | 0.68 | 11.40 | 10.44 |
| Altera Corp | ALTR | 4.23% | 4.00% | 1.00 | 0.83 | 12.79 | 12.86 |
| Nike Inc-B | NKE | 4.15% | 3.44% | 0.84 | 0.68 | 18.32 | 16.33 |
| Autozone Inc | AZO | 4.01% | 3.36% | 0.84 | 0.40 | 13.27 | 11.78 |
| Carnival Corp | CCL | 3.90% | 3.66% | 0.72 | 0.71 | 15.72 | 13.56 |
| Family Dollar | FDO | 3.57% | 4.69% | 0.77 | 0.39 | 14.50 | 12.57 |
| Oracle Corp | ORCL | 3.49% | 2.41% | 0.83 | 0.76 | 14.36 | 12.84 |
| Saic Inc | SAI | 3.34% | 0.05% | 0.71 | -0.08 | 11.16 | 10.67 |
| Adobe Systems | ADBE | 3.07% | -0.57% | 0.67 | 0.07 | 16.84 | 14.65 |
With more than 25 years of experience as an analyst and portfolio manager, Dirk is Zacks’ Chief Equity Strategist. He regularly authors market strategy reports and articles, and appears on many investment TV programs. He specializes in blending long-term vision with the short-term Zacks Rank system that, since 1988, has averaged gains of +27% per year.
To get today’s four Zacks #1 Rank “Strong Buy” stocks for free, click here >>
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