Q4 Earnings Season: Far Worse Than Most Suspect
There has been some confusion about the quality of the ongoing Q4 earnings season, which has seen some 47% of the S&P 500 companies report to date (and with 53% still left things can certainly change). The confusion apparently is that this has been a "good" earning season so far. Nothing could be further from the truth, and as Goldman shows in its midterm Q4 earnings report, the reality, not spin, is that earnings are tracking at $24.03, or some 6% below the consensus estimate at the start of earnings season of $25.51. This revised number, which could well drop even more from here, means that Q4 earnings will post a minuscule 1% growth in EPS year over year compared to Q4 of 2011 when Europe was imploding, and when the world's central banks had to arrange a global bailout to prevent yet another Armageddon.
It gets worse: in Q4, only 34% of companies posted positive earnings surprises, well below the 42% average, based on the correct methodology which is relative to the standard deviation of consensus estimates two weeks prior to reporting date. This is the lowest beat ratio in all of 2012, and is the second lowest in the entire post Lehman failure period, except for the sub-30% number which we saw in Q4 2011, which as noted above, is when the world was ending.
But fear not: there is much hope that this time the future, unlike all those previous times, will be different and grow vertically from here in a straight line straight to the Utopia that would mean the S&P at 1500 is fairly priced (assuming a 13.5x multiple in a central bank-propped up world is fair).
Here are the facts:
- Using a mix of realized and consensus earnings, 4Q EPS is tracking 6% below the consensus estimate at the start of reporting season, $24.03 vs. $25.51
- Positive earnings surprises are tracking below average this quarter (34% vs. 42%). The percentage of firms missing earnings estimates by one standard deviation or more is above the 40 quarter average (18% vs. 14%).
- 36% of firms beat consensus sales expectations by more than one standard deviation, below the 10-year historical average of 38%. In addition, 19% of firms have missed sales estimates by that magnitude (versus 18% historically).
In summary, the S&P 500 is expected to earn some $98 for all of 2012, which means that as of this moment, the market is trading at a quite rich 15+ multiple (although what multiples mean under central planning nobody knows yet).
So how does the S&P500 go from 98 in earnings in 2012, to the consensus 111 in S&P500 EPS in 2013? A magic escalator apparently.
Finally, for those curious what exactly is the primary driver of this "surprising" weakness in the current earnings season, the answer is underfunded pensions - a topic that will recur over and over as more employees retire and their employer retirement promises are found to have massively underperformed relative to acctuarial plans:
Accounting and definition differences have lowered index-level results. Results comparable to consensus analyst estimates may differ from the Standard & Poor’s definition due both to accounting differences and definitions of earnings from operations. These differences are usually small, but pension charges had a significant impact in 4Q.
The Telecom Services sector is expected to post a loss following large pension charges. Verizon’s (VZ) $7.2 billion of pre-tax pension and severance charges and AT&T’s (T) $10 billion pre-tax pension charge are both considered part of operating arnings. The after-tax impact of these charges reduced index-level EPS by about $1.22 and represents the majority of index-level earnings decline.
Luckily, none of the above matters. Why? Because Benny has your back, and fundamentals are so Old Normal.