U.S. EquityStrategyNovember 16, 2012Page 2
Q3/12 Earnings Recap – A Focus on Earnings Growth
The Q3 earnings season is beginning to wind down and we wanted to provide our assessment of the quarter and highlightthe key trends that stood out. Overall, reported revenues disappointed while earnings results came in better-than-expected. Highlights for Q3 include:
The percentage of companies within the S&P 500 that beat consensus revenue estimates declined from 66%in Q1/12 to 40% in Q3/12, which is the lowest ‘beat rate’ for reported revenues during this recovery (Exhibit2). The utilities sector reported the lowest beat rate (9.7%), with only 3 of the 31 companies in the indexreporting better-than-expected revenues. Materials and industrials also faired quite poorly, with a beat rate of 25.8% and 28.1%, respectively. Financials was the stand-out sector, posting a 64.6% beat rate on revenues.
S&P 500 Y/Y revenue growth is projected to be flat in Q3/12 with energy (-14.7%) and materials (-6.4%)posting the weakest growth rates, while financials (+6.7%) and information technology (+6.2%) expected toreport the strongest revenue growth rates.
While companies had a difficult time beating revenue estimates, they fared a lot better on the bottom-line with71% of companies that reported beating earnings estimates, which is above the long-term average of 62%. Admittedly, the bar had been lowered going into the quarter with many companies pre-announcing and, inturn, analysts revising their numbers lower; nonetheless, the 71% earnings beat was a positive surprise. Froma sector perspective, health care and financials were the positive outliers, with beat rates of 87.5% and77.8%, respectively.
Q3/12 earnings are projected to be up modestly at 1-1.5% Y/Y, which is tracking about 3% higher than earlier estimates. Financials are accounting for the bulk of the upside earnings surprise with financials posting a25.7% Y/Y increase in earnings for the quarter. Not surprisingly, materials and energy posted the weakestearnings growth rates of -26.8% and -20.6%, respectively. All told we would give the Q3/12 earnings season a C+ rating, with the weaker top-line results overshadowing the better-than-expected earnings results. With profit growth slowing to a stall speed, the question is whether this will continue or reverse and see a reacceleration of earnings growth into 2013? Our hope is for the later, but our belief is in the former. Onthe following pages we will outline why corporate earnings expectations may be a bit lofty and why focusing on qualitygrowth is an important investment factor during these periods.
Exhibit 2: Top-Line Revenues Were Weak in Q3/12 While Bottom-Line EPS Was Better Than Expected
S&P 500 Quarterly Sales Beat Rate
67%60%63%68%69%73%61%56%66%42%40%0%10%20%30%40%50%60%70%80%90%Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12
Source: Bloomberg Finance L.P. As of November 12, 2012
Total Positive Positive %Positive Positive %S&P 500454 / 50018239.9%32470.7%
Energy42 / 432252.4%2457.1%Materials31 / 31825.8%1548.4%Industrials57 / 611628.1%4070.2%Consumer Disc64 / 802234.4%4773.4%Consumer Staples34 / 421235.3%2676.5%Health Care48 / 521735.4%4287.5%Financials81 / 815164.6%6377.8%Information Tech60 / 702745.0%4371.7%Telecom8 / 8450.0%450.0%Utilities31 / 3139.7%2064.5%
Source: Bloomberg Finance L.P., PAIR. As of November 12, 2012
Sales BeatEPS Beat