Shutdown & the Q3 Earnings Season – Earnings Preview

by Zach | October 7, 2013 11:26 am

Shutdown & the Q3 Earnings Season – Earnings Preview

Shutdown & the Q3 Earnings Season

We didn’t get the September jobs report thanks to the government shutdown and the impasse promises to steal the limelight from the 2013 Q3 earnings season. With the October 17 debt-ceiling deadline fast approaching, we can only hope that we move past these hurdles without further damage.

The Q3 reports have been trickling in, with results from 21 S&P 500 companies out already. All of the reports thus far are from companies with fiscal quarters ending in August, which we count as part of the Q3 reporting cycle. Most of the companies reporting going forward, including Alcoa (AA[1]) that reports October 8th after the close, are on the calendar quarter. In total, we have 33 companies reporting results this week, including 10 S&P 500 members. J.P. Morgan  Chase (JPM[2]), Wells Fargo (WFC[3]), Costco (COST[4]), and Yum Brands (YUM[5]) are some of the notable companies reporting results this week.

We have had a few strong earnings reports already, particularly from Nike (NKE[6]), FedEx (FDX[7]), and AutoZone (AZO[8]), but the overall trend at this admittedly very early stage is mixed. The earnings and revenue growth rates for the 21 companies are tracking better than what these same companies in Q2 and the 4-quarter average, though the beat ratios (percentage of companies coming ahead of expectations) are a bit weaker.

This week’s results will provide better color on underlying trends, with results from companies like Costco, Yum Brands, Family Dollar (FDO[9]) and Safeway (SWY[10]) giving us a sense of the consumer economy. Results from the big banks aren’t arriving till Friday, but they will set the stage for the rest of the group the following week. Finance was instrumental in keeping last quarter’s aggregate earnings growth in the positive column and is playing a similar, though less pronounced, role this quarter as well.

J.P. Morgan has been in the news lately for all the wrong reasons, though the company has an impressive track record of positive earnings surprises, having beat expectations in the last 6 quarters. This report could have noisy parts related to the company’s recent litigation and regulatory troubles, but core earnings should still remain best in class. The mortgage business will likely be less of a contributor this time around, both for JPM as well Wells Fargo.

Low Expectations for Q3

As has been the case at the start of recent quarterly earnings cycles, expectations for the Q3 earnings season have fallen sharply over the last three months. Total earnings for companies in the S&P 500 are now expected to be up only +1.1% from the same period last year, down from +5.1% at the start of the quarter in early July, as the chart below shows.
1380921604 scaled 425 Shutdown & the Q3 Earnings Season   Earnings Preview

This negative revisions behavior is hardly unusual as we have been repeatedly seeing this pattern play out in recent quarters. Companies have been overwhelmingly guiding lower, prompting analysts to cut estimates for the following quarter. The revisions behavior ahead of the Q2 earnings season was no different, as the chart below shows.
1380921591 scaled 425 Shutdown & the Q3 Earnings Season   Earnings Preview

Most of the same sectors have experienced negative revisions this time around as was the case in Q2. The ‘regulars’ on the negative estimate revisions front include Technology, Basic Materials, and Industrials. But in addition to those sectors, Retail and Consumer Staples have played some roles in bringing down expectations for Q3 as well.

The chart below compares the Q3 total earnings growth expected for these five sectors at the start of the quarter and where those expectations stand at present
1380921580 scaled 425 Shutdown & the Q3 Earnings Season   Earnings Preview

Estimates for other sectors have come down as well, with even the Finance sector earnings expected to be up +5.9% today, vs. +6.2% last week and +8.1% in early July. Energy, Utilities, Conglomerates and even Construction have suffered negative revisions in varying degrees.

High Expectations for Q4

While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.
1380921564 scaled 425 Shutdown & the Q3 Earnings Season   Earnings Preview

Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector. But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $258.6 billion in Q2, surpassing Q1’s $253.6 billion record. But they are expected to reach $265.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +5.3%.

The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn’t much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.

Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.

Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.

For a more detailed look at the overall earnings picture, please check out our weekly Earnings Trends report here[11].

Monday – 10/7

Tuesday – 10/8

 Wednesday – 10/9

Thursday – 10/10

Friday – 10/11

Here is a list of the 33 companies reporting this week, including 10 S&P 500 members:

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
ADTRAN INC ADTN 0.22 0.17 20 Tuesday AMC
ALCOA INC AA 0.06 0.03 0 Tuesday AMC
EXFO INC EXFO 0.02 -0.01 0 Tuesday AMC
HIPCRICKET INC HIPP -0.03 -0.07 50 Tuesday AMC
MISTRAS GROUP MG 0.11 0.14 -5.88 Tuesday AMC
PLUG POWER INC PLUG -0.08 -0.27 9.09 Tuesday BTO
WOLVERINE WORLD WWW 1.03 0.72 35.29 Tuesday BTO
YUM! BRANDS INC YUM 0.93 0.99 1.82 Tuesday AMC
COSTCO WHOLE CP COST 1.46 1.39 -1.89 Wednesday BTO
DEL FRISCOS RST DFRG 0.11 0.1 5.26 Wednesday BTO
DRAGONWAVE INC DRWI -0.24 -0.36 8.82 Wednesday AMC
FAMILY DOLLAR FDO 0.84 0.75 1.94 Wednesday BTO
FASTENAL FAST 0.41 0.37 0 Wednesday BTO
HELEN OF TROY HELE 0.73 0.72 18.84 Wednesday AMC
NOVAGOLD RSRCS NG -0.03 -0.09 0 Wednesday AMC
PROGRESSIVE COR PGR 0.36 0.28 -2.44 Wednesday BTO
RPM INTL INC RPM 0.7 0.64 7.46 Wednesday BTO
RUBY TUESDAY RT -0.05 0.04 -36.84 Wednesday AMC
VOXX INTL CP VOXX 0.08 0.17 125 Wednesday AMC
ZEP INC ZEP 0.23 0.31 -31.71 Wednesday BTO
ANGIODYNAMICS ANGO 0.03 0.1 40 Thursday AMC
API TECH CORP ATNY -0.01 -0.03 -100 Thursday BTO
BANK OZARKS OZRK 0.6 0.55 0 Thursday AMC
E2OPEN INC EOPN -0.18 0.01 5 Thursday AMC
IGATE CORP IGTE 0.38 0.33 24.14 Thursday BTO
LINDSAY CORP LNN 0.91 0.68 12.92 Thursday BTO
MARRIOT VAC WW VAC 0.4 0.23 48.98 Thursday BTO
MATERIAL SCI CP MASC 0.16 0.12 -23.53 Thursday BTO
MICRON TECH MU 0.23 -0.24 33.33 Thursday AMC
SAFEWAY INC SWY 0.15 0.45 -44 Thursday AMC
JPMORGAN CHASE JPM 1.27 1.4 10.34 Friday BTO
WEBSTER FINL CP WBS 0.49 0.48 2.13 Friday BTO
WELLS FARGO-NEW WFC 0.97 0.88 5.38 Friday BTO

ALCOA INC (AA): Free Stock Analysis Report[17]

AUTOZONE INC (AZO): Free Stock Analysis Report[18]

COSTCO WHOLE CP (COST): Free Stock Analysis Report[19]

FASTENAL (FAST): Free Stock Analysis Report[20]

FAMILY DOLLAR (FDO): Free Stock Analysis Report[21]

FEDEX CORP (FDX): Free Stock Analysis Report[22]

GLOBAL PAYMENTS (GPN): Free Stock Analysis Report[23]

JPMORGAN CHASE (JPM): Free Stock Analysis Report[24]

MICRON TECH (MU): Free Stock Analysis Report[25]

NIKE INC-B (NKE): Free Stock Analysis Report[26]

RUBY TUESDAY (RT): Free Stock Analysis Report[27]

SAFEWAY INC (SWY): Free Stock Analysis Report[28]

WELLS FARGO-NEW (WFC): Free Stock Analysis Report[29]

YUM! BRANDS INC (YUM): Free Stock Analysis Report[30]

To read this article on Zacks.com click here.[31]

Zacks Investment Research[32]

Endnotes:
  1. AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA
  2. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  3. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  4. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  5. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  6. NKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NKE
  7. FDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDX
  8. AZO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AZO
  9. FDO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDO
  10. SWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWY
  11. here: http://www.zacks.com/commentary/29268/Q3-Earnings-Season-Gets-Underway
  12. GPN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPN
  13. click here: http://www.zacks.com/earnings/earnings-surprise-predictions/
  14. FAST: http://studio-5.financialcontent.com/investplace/quote?Symbol=FAST
  15. RT: http://studio-5.financialcontent.com/investplace/quote?Symbol=RT
  16. MU: http://studio-5.financialcontent.com/investplace/quote?Symbol=MU
  17. ALCOA INC (AA): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=AA&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  18. AUTOZONE INC (AZO): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=AZO&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  19. COSTCO WHOLE CP (COST): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=COST&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  20. FASTENAL (FAST): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=FAST&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  21. FAMILY DOLLAR (FDO): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=FDO&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  22. FEDEX CORP (FDX): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=FDX&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  23. GLOBAL PAYMENTS (GPN): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZR_LINK&d_alert=rd_final_rank&t=GPN&ADID=INVESTORPLACE_CONTENT_ZR_ARTCAT_EARNINGS_PREVIEW
  24. JPMORGAN CHASE (JPM): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=JPM&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  25. MICRON TECH (MU): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZR_LINK&d_alert=rd_final_rank&t=MU&ADID=INVESTORPLACE_CONTENT_ZR_ARTCAT_EARNINGS_PREVIEW
  26. NIKE INC-B (NKE): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=NKE&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  27. RUBY TUESDAY (RT): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZR_LINK&d_alert=rd_final_rank&t=RT&ADID=INVESTORPLACE_CONTENT_ZR_ARTCAT_EARNINGS_PREVIEW
  28. SAFEWAY INC (SWY): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=SWY&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  29. WELLS FARGO-NEW (WFC): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=WFC&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  30. YUM! BRANDS INC (YUM): Free Stock Analysis Report: http://www.zacks.com/registration/pfp?ALERT=ZER_LINK&d_alert=ZER_CONF&t=YUM&ADID=INVESTORPLACE_CONTENT_ZER_ARTCAT_EARNINGS_PREVIEW
  31. To read this article on Zacks.com click here.: http://www.zacks.com/commentary/29290/shutdown-the-q3-earnings-season
  32. Zacks Investment Research: http://www.zacks.com/

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