Financial Pacific - Q2 2011 reporting season (third party)


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Financial Pacific - Q2 2011 reporting season (third party)

  1. 1. Research note: August 2011Q2 2011 Reporting Season
  2. 2. Q2 2011 Reporting SeasonQ2 2011 Reporting Season1 97% of S&P 500 companies have now reported results for the second quarter of 2011. The S&P 500 is now1 Quarterly EPS increased by 13.7% on a year-on-year basis, with the highest- valued at 13.2x growth sectors being Basic Materials and Energy. trailing-twelve-1 Revenues for the same period increased by 14.6%, with Energy companies months earnings, seeing the largest rise. despite the fact that1 75.6% of all companies’ earnings exceeded analysts expectations, far above aggregate earnings any point prior to the third quarter in 2009. increased by nearly1 70.2% of companies posted positive sales surprise, the highest level since 14% over the 2004. previous quarter.1 The difference between these two numbers converged, with the spread being the lowest since the onset of the financial crisis in mid-2008.Earnings & Sales Performance Overview of the 1Q11 earnings season was 15.6x. As can be seenAs more than 97% of S&P 500 companies have now reported below, earnings per share on an aggregate level are stilltheir financial results for the second quarter of 2011, we take increasing (and, indeed, grew by nearly 14% over the samethis opportunity to conduct our quarterly review of quarter of the previous year); a fall in the overall index valueperformance, trends and other various signals and patterns due to well-known, external factors accounts for the declinefrom this quarter and over time. in valuation.Index valuations based on earnings per share are significantly Repeating the performance seen last quarter, the variouslower than those in the previous quarter; the overall S&P 500 year-on-year earnings-growth rates of market sectors wereindex is currently trading at just 13.17 times trailing-twelve- quite widely distributed. Whilst Basic Materials and Energymonths earnings, whereas the comparable ratio from the end companies chalked up impressive gains (of 50.5% and 47.1%Table 1S&P 500 Earnings and Sales Growth by Sector EPS Sales Aggregate QTR EPS Aggregate Aggregate QTR EPS Count Aggregate P/E YoY% P/Sales YoY% S&P 500 500 13.17 13.73 1.18 14.58 Basic Materials 28 15.78 50.51 1.11 17.76 Communications 44 15.43 13.99 1.70 15.46 Consumer, cyclical 62 13.53 15.62 0.63 14.70 Consumer, non-cyclical 103 12.80 9.20 1.26 7.93 Energy 44 11.14 47.07 0.98 36.81 Financial 77 17.87 -24.86 1.41 7.40 Industrial 60 12.50 18.89 1.01 9.21 Technology 49 10.87 28.20 1.87 14.87 Utilities 32 12.61 -0.59 1.32 9.06Source: FactSet01
  3. 3. Q2 2011 Reporting Seasonrespectively), consumer-focussed sectors showed somewhat more precipitous in the Telecommunications Services sectormore lacklustre growth and profits of Financial companies fell (three quarters ago, earnings were 171% greater year on year;substantially – coming in nearly 25% lower than in the second most recently they only grew at 26%). Slightly morequarter of 2010. The steep growth in Energy companies’ profits noteworthy, however, is the Financials sector, where 2Q11was almost certainly related to a significantly higher oil price earnings were more than 26 per cent smaller than those fromdue to ongoing unrest in the Middle East and the 2Q10. The majority of declines in index earnings through 2008accompanying uncertainty about the continuity of supply – and 2009 were also driven by this sector. Whether or not wealthough oil prices have fallen significantly since April 2011 are at a turning point remains to be seen, but these changesand thus future year-on-year comparisons may be difficult. and those for all sectors will be watched closely over theYear-on-year earnings growth for Industrials companies was ensuing quarters.just a hair under 19% – significantly lower than the previousquarter’s YoY increase of 33.8%. This is likely related to the Earnings Sales “Surprise” – Trends & Breakdownsimpact of the Fukushima earthquake in Japan on 11 March Reversing slightly the recent trend, the number of companiesworking its way through the various supply chains for the in the index whose profits exceeded analysts’ expectationsindustry – as mentioned by several large Industrials companies increased to 75.6%. This percentage is higher than almost allin their earnings press releases. points over the past nine years, and also exceeds every quarterAs in the previous quarter, dispersion in year-on-year revenue prior to 3Q09. Such a high proportion of companies surpassinggrowth rates was more tightly clustered. Nevertheless, the expectations is more similar to the economic recovery in 2009Energy sector posted impressive gains of almost 37% – due than to the recession of 2008.again, at least in part, to the inflated oil price. In such an It is worthwhile pointing out that this metric does not indicateenvironment, both energy providers and their servicers benefit a company’s overall profitability; it merely tracks a company’s– and this occurrence is evident in the sector’s increased earnings performance relative to analysts’ expectations.revenues. The Financial and Consumer, Non-Cyclical sectors Companies that lose money are still capable of generatingposted much lower gains, but with both still increasing positive earnings surprises and, indeed, those whose earningsrevenues by more than 7% year on year. grow but do not exceed forecasts can have negative earnings surprise. Nevertheless, it is clear to see that more companies’Earnings Growth Rates – Breakdown Per Sector profits are exceeding market expectations in 2Q11 than in any of the previous three quarters and that a mean-reversion trendIt is worth diving into a bit more detail about the earnings- (in which the quarterly percentage converges on a long-termgrowth trends across the various market sectors (as defined by average) might be a while off yet. This is reinforced by the factGICS) comprising the S&P 500 index. As can be seen in the that the most recent surprise-percentage of 75.6% is moretable below, there is a great deal of dispersion amongst EPS than one standard deviation above the nine-year average.growth rates amongst the industry groups. Interestingly, the number of companies whose sales numbersA slowdown of growth in the Consumer Staples and Materials exceeded analysts’ expectations was a hair over 70% – thesectors is noteworthy as it shows that earnings in these two second-highest percentage on the chart below (with themarket segments, whist still greater than the same period a highest value, 71.3%, being measured in 1Q04). Traditionally,year ago, are increasing at a lower rate. This change is much and perhaps due to the differing ways in which the numbersTable 2Earnings Growth Rates – Breakdown Per Sector Consumer Consumer Information Telecomms Discretionary Staples Energy Financials Healthcare Industrials Technology Materials Services Utilities Quarterly EPS 2010 Q3 3.95 4.5 8.5 2.4 5.62 4.58 6.58 4 4.34 3.09 2010 Q4 4.54 5.96 9.03 3.44 5.26 4.71 7.76 2.83 1.11 2.07 2011 Q1 4.4 4.71 10.72 3.6 6.53 4.61 6.93 4.66 1.79 2.83 2011 Q2 5.1 5.11 12.53 2.53 7.08 5.36 7.25 5.06 1.71 3.14 YoY% Growth 2010 Q3 27.0 0.9 44.3 103.4 -16.5 53.4 53.4 66.0 171.3 -11.0 2010 Q4 19.8 39.3 45.9 -1374.1 -23.8 24.0 24.0 92.5 65.7 -49.8 2011 Q1 15.5 18.0 29.6 3.2 20.7 28.6 28.6 73.2 94.6 -6.9 2011 Q2 17.0 10.1 28.6 -26.5 14.7 24.4 24.4 56.2 25.7 10.6Source: FactSet 02
  4. 4. Q2 2011 Reporting SeasonChart 1 Chart 2Percentage of Positive EPS Purprises – S&P 500 Percentage of Positive Sales Surprises – S&P 500Source: FactSet Source: FactSetare derived, analysts tend to be better at forecasting revenues Comparing the breakdown of positive-surprise companies bynumbers; nevertheless, the percentage of companies sector for both earnings and sales estimates – and how thisexceeding revenues projections for the second quarter in 2011 number has changed from the previous quarter – shows uswas also outside one standard deviation of the nine-year some interesting things. Although the Basic Materials andaverage. Energy sectors’ earnings grew the most out of all nine sectorsOnce again it bears mention that these numbers do not (as shown in the first section above), their members’ positiveindicate a company’s overall performance or profitability; they surprise was among the lowest of all sectors. This is a verysimply indicate the broad-market’s financial state in relation to good example of the above-mentioned phenomenon wherebyexpectations. Even if a company is doing poorly, it might be a company (or, indeed, an entire sector) may achievedoing less poorly than expected – in which case its surprise will significant positive earnings growth but, since this is entirelybe positive on the chart above. Given this, however, the accurately predicted by analysts, the positive-surprise numbersincreasing positive-surprise percentages of companies’ salesand earnings, coupled with the fact that both seem to be are very low.avoiding reversion to a long-term mean, could mean, among There are cases, however, when analysts’ predictions varyother things, that analysts are downbeat about the future but widely in their accuracy over time, as demonstrated in thethat more companies are proving them wrong than in the table below:recent past.Table 3S&P 500 Earnings and Sales Surprise Proportions by Sector 2Q11 EPS Sales 2Q11 Spread Spread Positive Negative Positive Negative EPS – Count Count Count % Positive Count Count % Positive Sales EPS – Sales S&P 500 500 366 118 75.6% 335 140 70.5% 5.1% 4.3% Basic Materials 28 17 11 60.7% 22 6 78.6% -17.9% 23.1% Communications 44 35 9 79.5% 30 14 68.2% 11.4% -18.2% Consumer, cyclical 62 50 9 84.7% 44 16 73.3% 11.4% 7.9% Consumer, non-cyclical 103 77 17 81.9% 68 26 72.3% 9.6% 5.9% Energy 44 29 15 65.9% 28 13 68.3% -2.4% -0.1% Financial 77 57 20 74.0% 51 21 70.8% 3.2% 0.6% Industrial 60 40 18 69.0% 39 19 67.2% 1.7% -1.7% Technology 49 41 6 87.2% 34 13 72.3% 14.9% 10.0% Utilities 32 19 13 59.4% 18 12 60.0% -0.6% 29.4%Source: FactSet03
  5. 5. Q2 2011 Reporting SeasonThe most interesting feature of the chart above is the change Chart 3 Ratio of Positive EPS to Sales Surprises – S&P 500in spread values shown in the two rightmost columns. Forinstance, let us consider the story of the Basic Materials sector.In the first quarter of the year, far more companies surprisedthe market with their profits than their revenues (the spread is23.1%). However, in the second quarter, the pendulum seemsto have swung the other way: now the trend is reversed, withthe spread between positive-earnings and positive revenuescompanies at -17.9% (meaning that analysts were now muchmore accurate with their earnings than with their salesforecasts). This shows the highly volatile nature of forecastingin general and could indicate that, after having been verywrong with their estimates of earnings in relation to sales inthe first quarter (shown by the fact that so many morecompanies had positive earnings surprise than sales surprise),analysts covering Basic Materials companies might haveovercompensated by ‘upping’ their earnings estimates relative Source: FactSetto sales estimates quite significantly, thereby tipping the scalesin the opposite direction. The exact opposite phenomenon can analysts’ forecasts proved much more accurate for revenuesbe seen with companies in the Communications sector: than for earnings – reflecting, perhaps, pessimism aboutover-optimistic earnings estimates relative to revenues in the companies’ ability to convert sales into profits? Or will futurefirst quarter most likely led to far more companies surprising periods see as much inconsistency between estimated metricswith their sales numbers than with profits (the spread is as those during the last financial crisis?-18.2%); adjustment of earnings estimates accordingly for themost recent quarter led to a reversal of the phenomenon, Conclusionswhere the spread is now 11.4%. Although profits and revenues grew for the S&P 500 index in aggregate, the increases were slightly less than those of theEarnings Sales Surprise – Comparison previous quarter. Once again, however, the growth rates wereThe following chart shows the proportions of companies distributed quite widely amongst various industries, reflectingbeating earnings and sales expectations side by side – and impacts of differing external forces on the companies withinshows how the difference between them (the red line) has them. The percentage of companies exceeding forecastschanged over time. As in the previous quarter, the spread is increased – for profits and revenues – above both the previousstill below the nine-year average, indicating increasing quarter’s numbers and each respective long-term average.consistency between analysts’ earnings and sales estimates Additionally, the spread between number of companies– at least compared to the past three years. exceeding sales and earnings expectations converged slightlyThe future of this spread will be interesting to observe. Will the this quarter, bringing the difference between the two numbersperiod of 2008-2009 be remembered as an aberration in which to pre-crisis levels.DisclaimerIssued by EFG Asset Management, a division of EFG Private Bank Limited, which is authorised and regulated by the Financial Services Authority, 25 The North Colonnade,Canary Wharf, London E14 5HS. EFG Private Bank Limited is a member of the London Stock Exchange. A member of EFG International. 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