While Q1 expectations have been marked down notably, the full year has hardly budged as the back-end of 2013 gets more and more loaded with margin expansion hope and earnings growth faith. As Goldman notes, consensus expects S&P 500 will deliver year-over-year EPS growth of +3% in 1Q 2013 driven by Financials earnings growth of 9%. Bottom-up consensus quarterly earnings growth rises from 3% in 1Q 2013 to 18% by 4Q 2013 using a recurring earnings 2012 base (Operating EPS is expected to surge to 29% growth by Q4). Against this, the level of consensus sales is highly correlated with economic growth expectations (i.e. moderate) and so it is on the shoulders of margins that the whole house of cards sits. Consensus expects margin recovery will begin in 4Q and extend throughout 2014. Consensus now expects full-year 2013 margins to reach a new peak of 9.2%. However, as Goldman notes, the prospect that margins may have peaked was a consistent theme that emerged during the 4Q 2012 earning conference calls; but we warn that 2013 earnings comparisons to 2013 will be problematic due to the significant differences between Operating and Adjusted EPS - which could also be quite telling in terms of accounting gimmickery.
The bottom-up consensus estimate for 1Q 2013 is now $25.71, implying 3% growth versus 1Q 2012 on a recurring earnings base. Bottom-up consensus forecasts stronger earnings growth in defensives versus cyclicals (6% vs. 1%) and domestically focused groups over those with international exposure (7% vs. 0%). Consensus expects Financials and Consumer Discretionary to post the strongest year-over-year quarterly earnings growth in 1Q. Consensus estimates for the Industrials and Energy sectors imply year-over-year EPS declines.
Q1 is all about the financials...
[7]
Earnings Comps may however be tricky... S&P 500 earnings are typically calculated using one of two methods:
- Operating EPS is a standardized calculation for earnings defined by Standard & Poor’s. The uniform approach allows for better comparison across sectors and over time.
- Adjusted EPS results are comparable to bottom-up consensus estimates. This reflects methodology differences among stocks like the treatment of employee stock option expenses.
Although differences between the two series are usually small, 2012 operating EPS ($97) is significantly different from 2012 adjusted EPS ($104).
For example, atypical operating items such as pension charges in AT&T, Verizon and UPS and Hewlett-Packard’s write-down reduced operating EPS while adjusted EPS rose. Focus on recurring earnings for a better 2012 EPS base.
Recurring 2012 earnings offer a better base for 2013 earnings than both adjusted and operating. The recurring EPS series maintains a uniform approach but excludes atypical operating items. The differences between recurring and operating earnings were greater in the second half of 2012. 4Q 2012 earnings growth rises to 5% from -2% using recurring EPS instead of operating EPS.
Interesting that the last time the Recurring vs Operating EPS started to disconnect like this was the lead in to the last recession (as accounting gimmickry perhaps dominated)...
[8]
Bottom-up consensus full-year 2013 EPS is now $112. The bottom-up consensus estimate for 1Q 2013 is now $25.71, implying 6% growth versus 1Q 2012 operating EPS and 3% growth versus 1Q 2012 recurring EPS. Bottom-up consensus quarterly earnings growth rises from 3% in 1Q 2013 to 18% by 4Q 2013 using a recurring earnings 2012 base.
[9]
The level of sales is highly correlated with economic growth expectations.
[10]
Consensus expects margin recovery will begin in 4Q and extend throughout 2014. Consensus now expects full-year 2013 margins to reach a new peak of 9.2%. The prospect that margins may have peaked was a consistent theme that emerged during the 4Q 2012 earning conference calls. We expect the trend will continue in management commentary this season as well.
[11]
Bottom-up consensus full-year 2013 EPS is now $112, down 1% from $113 at the start of the year. Earnings revisions to 1Q 2013 estimates fell 3% and account for over half of the year-to-date revision to full-year 2013 earnings.
We expect further downside to consensus S&P 500 2013 estimates. We expect the most downside to 4Q EPS, which has the highest earnings growth expectations, the smallest negative revision year-to-date, and margin expansion.
[12]
The majority of companies and market cap in the S&P 500 will report earnings during a three week period (April 15 –May 3).
[13]
Source: Goldman Sachs