Roughly one third of the S&P has reported earnings so far, with another third reporting in the next five days and almighty AAPL on deck Thursday evening, and if there is one word to describe what has happened so far, that word would be "ugly." The same word would be used to describe how Q4 is shaping up to be. And that word will be very a optimistic prediction of what 2013 will bring unless a major catalyst develops that pushes Congress to resolve the fiscal cliff situation. So far that catalyst is missing. But going back to Q3 earnings, here is how Goldman's David Kostin summarizes events to date: "3Q reporting season is roughly one third finished. Two early conclusions: (1) Information Technology results have been startlingly weak with high-profile revenue disappointments by the four horsemen: MSFT, GOOG, IBM, and ORCL. (2) EPS guidance for 4Q has been overwhelmingly negative across all S&P 500 sectors with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect further EPS cuts of 6% loom ahead. Firms reporting next week: AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX." Sorry Bob Pisani, better luck spinning earnings favorably next QE.
More detail on what is shaping up as the ugliest earnings season (even with DVA and loan loss-reserves included) in years:
Two early conclusions from 3Q earnings season: (1) Information Technology top-line sales results have been weak lead by MSFT, GOOG, IBM, and ORCL. Since the start of 3Q reporting season, analysts have cut 4Q sales forecasts for those Information Technology firms reporting results by 70 bp, lowered margin forecast by 43 bp and cut expected EPS growth by 260 bp. (2) Earnings guidance for 4Q has been overwhelmingly negative across the S&P 500 with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect reductions of perhaps 6% still need to take place.
The distribution of 3Q results has been lower than the historical average. 117 firms in the index have now reported 3Q results (34% of total cap). 37% of companies beat earnings estimates and 21% missed. In a typical quarter, 41% of companies exceed EPS expectations and 13% miss.
The bar for 3Q earnings season is very low. First, 2Q results disappointed with twice as many revenue misses and one half as many beats compared with a typical quarter. Second, guidance heading into reporting season was more pessimistic than usual with 80% of firms guiding below consensus compared with prior quarters when the midpoint of guidance falls below the average analyst estimate roughly 67% of the time. Third, analysts slashed 3Q earnings estimates by 5% during the quarter, leading to the expectation that 3Q 2012 would witness a 1% year-over-year decline in EPS versus 3Q 2011.
Sales are disappointing again in 3Q with year/year growth of just 2% and negative surprises of 30 bp. 15% of firms beat consensus sales expectations by more than one standard deviation (below the historical average of 35%). In addition, 36% of firms have missed sales estimates by that magnitude, versus 19% historically. Revenue estimates for 4Q have declined by 30 bp.
Margin of 8.6% is slightly below the expectation at the start of earnings season (8.7%) and represents a
year-over-year decline of roughly 33 bp. Information Technology results have been particularly disappointing. Microsoft (MSFT) and Google (GOOG) missed revenue and earnings estimates and IBM and Oracle (ORCL) missed sales estimates. The sector actually posted a nearly 1% positive surprise in revenue relative to analyst expectations. However, analyst methodology for forecasting financial results for certain Information Technology companies differs from the Standard and Poor’s definition of revenues and operating earnings.
Apple reports on Thursday evening. Consensus expects the company will grow 3Q EPS by 28% versus last year. AAPL sales are forecast to rise by 31%. Consensus expects margins will fall by 46 bp to a still stellar level of nearly 23%. Analysts expect AAPL will be the second largest contributor to S&P 500 earnings representing 3.7% of 3Q 2012 EPS and 20% of Information Technology earnings. AAPL represents 4.5% of S&P 500 equity cap and 24% of the Information Technology sector. While Apple’s share of 3Q EPS is not in proportion to its share of market cap, this appears to be a seasonal issue. Next quarter, consensus expects AAPL will contribute 6% of S&P 500 EPS. Information Technology sector is expected to grow 3Q earnings by 7% year/year. However, the sector earnings growth is just 3% excluding AAPL.
Managements are lowering guidance, indicating downside to 4Q EPS. Fully 20 companies have provided 4Q guidance following their 3Q earnings announcements and 18 of these firms have reduced 4Q profit guidance. The midpoint of guidance was below the mean consensus estimate in all but two cases. Although guidance tends to be downbeat, this is especially negative.
4Q EPS estimates for reported companies are down by just 40 bp. We expect further negative 4Q EPS revisions will occur most likely as a result of reduced margin estimates. We forecast full-year 2012 S&P 500 earnings of $100 per share. Assuming no change in 3Q EPS, 4Q estimates would have to fall by 6% to reach our full-year estimate.
Next week 160 firms representing 31% of S&P 500 market cap will report results. At the sector level, 41% of Health Care, 39% of Industrials, and 35% of Information Technology as measured by market cap will release results. Large companies reporting include: AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX.
And the purdy charts to go along with the narrative:
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