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EPS 'Beats' Lose All Meaning As Downward Revisions, Buybacks Mask Weakness
Good news: companies are beating earnings estimates by the widest margin in four years. For Q1, S&P 500 companies have on average posted bottom line results that have topped estimates by an average of 6.4%, well ahead of the 5-year average of 5.4%. In fact, if the trend holds, this will be the best quarter for FactSet’s earnings surprise percentage since Q1 2011.
The bad news: this has very little to do with strong corporate earnings and quite a lot to do with analysts cutting estimates. In fact, the bottom-up EPS estimate has fallen by 8.2% in Q1, nearly double the 1-, 5-, and 10-year averages and the largest decline since 2009.
Via FactSet:
During the first quarter of 2015, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 8.2% (to $27.05 from $29.48) during the quarter. How significant is an 8.2% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?
During the past year (4 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.3%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.0%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.8%. Thus, the decline in the bottom-up EPS estimate recorded during the first quarter was higher than the 1-year, 5-year, and 10-year averages.
In fact, this marks the largest percentage decrease in the bottom-up EPS estimate for the S&P 500 for a quarter since Q1 2009 (-26.8%).
This has led directly to the largest decline in the estimated earnings growth rate since the aftermath of the crisis, with EPS growth estimates diving to -4.7% from 4.3%.
And in case the above isn’t clear enough, here’s FactSet again:
Are companies reporting large upside earnings surprises for Q1 in part because analysts lowered estimates by larger than average margins during the first quarter? The answer is yes.
Consider the following two charts, the first of which shows the glaring disconnect between earnings and stocks while the second shows the extent to which estimates were cut over the course of Q1.
Here's Deutsche Bank, discussing the same main points, namely that buybacks and higher margins (likely helped by layoffs) worked to offset weakness on the top-line:
447 companies or 92% of S&P EPS reported. 59% beat on EPS with a wtd avg beat of 6.2% (6.7% ex Fin), but only 32% beat on sales with a wtd avg miss of -0.9% (-1.5% ex Fin). The wtd avg EPS beat of 6.2% is better than normal, but the 8.2% cut to 1Q EPS before reporting is also the biggest since recession. Btm-up 1Q EPS is now $28.66, 1.9% y/y. The 1Q EPS growth is on -3.4% sales decline helped by 4% y/y margin expansion and 1.4% from share buybacks.
And speaking of share repurchases, April set an all-time record for announced buyback programs, as companies authorized $141 billion in repurchases (up 141% Y/Y).
As WSJ notes, this puts 2015 on a record pace, meaning investors (and the SNB) can simply frontrun price insensitive corporate management teams for the remainder of the year:
The rise now puts 2015 on pace to reach $1.2 trillion worth of announced buyback programs, shattering the 2007 record of $863 billion in authorized buybacks, Birinyi said Thursday.
The research firm attributes the April rise to new programs of $50 billion a piece by Apple Inc. and General Electric Corp. Those programs, for their part, are tied for the largest ever for an individual company. Stock buybacks have been widely cited as giving fuel to the bull market in stocks, now in its sixth year. Corporations have amassed massive cash stockpiles in the years since the financial crisis, plowing much of it into shareholder friendly activities like buybacks and dividends. Cash held by S&P 500 companies stood at a record $1.43 trillion as of the end of the fourth quarter, according to FactSet.
* * *
What all of this means is that between buybacks and downward revisions, earnings "beats" now convey exactly nothing about the health of corporate America. An EPS "beat" is now simply a function of how much stock a company has managed to buy back at the expense of future growth and productivity and the degree to which analysts have slashed estimates over the course of the reporting period.
To sum up, here are four charts from Deutsche that tell you everything you need to know.
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And the loans that were taken to buy the shares rest with the banker cabal ensuring that they will take possession of all assets when the market falls... neat plan.... first print money and steal it all that way, then own all assets and physical real estate. Evil knows no bounds.
Take possesion? You're kidding, right? The Bankster will REFINANCE IT 3 TIMES! 3 MORE UNDERWRITINGS.
Earnings calls were always the biggest reach around, circle jerking, mutual-pleasing exercises between companies and analysts.
Yeah, Company X announced an EPS os $1.4529 whihc just beat the projected number of $1.4530.
So precise we are and so well we know our NUMBers.
BullTit! <- Oxymoron.
Meanwhile, something calm for a Sunday: 19
https://www.youtube.com/watch?v=wzESrhRrkTI
Here I thought EPS stood for expensively purchased shares...I learn new stuff here every day.
Yeah, just wait until the next time TSHTF and they start selling those shares back into a rapidly declining market just to raise enough capital to stay afloat.
These things always start out in a very civil way... "Hello. How do you do, old chap. Welcome to the club. Very nice to see you." But they end in screaming and blood.
Go into debt to purchase stock = Buybacks.
Now that's a winning formula!
The Oroborus has long been a holy symbol of the Killuminutty....
Up it goes...ass into head....
The way in is the way out -
You can use vinegar to neutralize the burn
(legal) FRAUD, The US of Arsewholes specializes in it
Piercingly precise and pertinent too.
But the Brits own the legal system.
So, it is merely by proxy and creatiing the extremely psycopathic business and lawyer class, the British Power Structure, via their German (Saxe Coburg Gotha re-member???) 4th Reich specialize in LEGAL fraud.
And since the source of todays legality is Latin....
No wonder all roads lead to Rome!
Mundus vult decipi....
Hiding the decline.
I've been making a living out of eps plays. I bought puts on SNDK for eps, went long GPRO, shorted YELP, bought puts on LNKD, bought puts on MNST.......... all very nice gains. I also shorted STMP and it flew 20% on me so I got stomped on that one but overall I have done extremely well during this quarter EPS plays. And this Tuesday Z reports, Zillow, which looks like a killer short at first glance. Will look into it a lot more today and tomorrow before their report.
http://m.youtube.com/watch?v=GzuviYRse3E
We are not a civilization, but a Zionized-civilization. Meaning, how ever we got here, we're in an uncontrolled spin and augering in.
Liberty is a demand. Tyranny is submission.
QLYS absolutely CRASHED on their eps day. I think it crashed like 45% in just two days so anyone who had puts on that could have gotten rich!!! Had I gone more aggressively in LNKD puts, I could have made over 100k from just 5k. 100 $210 puts were only like 50c i believe. I bought the $250's for $9 a piece and sold them the next day for $50. I want to buy $90 puts on Z and see it crash to $60. 49% of the float is short.
Be careful on Zillow. Something's not right with that stock. They pre-warned, then delayed and it really hasn't crashed. It's not acting right. This smells of "better than expected" short squeeze. But it sounds like you've had a monster earnings seasons so you will probably be playing it with house money anyway.
Good Luck!
Thank you. I appreciate the heads up on Z. I have heard of the stock, seen it flash across cnbc several times but never knew what it was until I was looking through my eps dates on yahoo finance. Took a look at it and it looks like it has a lot of potential. They are supposed to report a loss of 11c, last year they earned .02c, revs for the full year are less than 700 million yet the company has a 5.5 BILLION market cap????? Everything is headed south for this company and it's inflated to the moon. 49% short interest?? My god!!!! It could get a short squeeze over the short term but how is this not a great long term short? It looks like another dotcom that's about to bust. 3 options here for me. 1. Short the stock on Tuesday before the bell, 2. Buy january puts and expect a continued crash, 3. Buy $90 puts that expire this Friday in hopes of a big selloff after their eps.
Yes, it will be house money and this house money has been given to me for taking some risks but this is my niche and really the only thing that interests me in the market right now. I'd like for Z to pop to $95 tuesday and then i could get the $90 puts for a buck and change. Take a look at all the insider sales going on very recently. One thing in common that all of the stocks i shorted that crashed on eps was heavy insider selling just weeks before the eps. We'll see what happens but it should be very volatile, esp with 49% short interest.
tHIS iS nOT A LOve sONG! ... tHIS iS nOT A LOve sONG! ... tHIS iS nOT A LOve sONG!
Public Image Ltd - (This is Not a) Love Song - YouTube
/hehehee
LoL
increase the money supply to decrease the supply of stocks. that sounds like a sustainable model
Still waiting / would appreciate to see not just how much cash companies have, but the total of buybacks financed with debt (and possibly average maturity)