CHICAGO, Nov. 3, 2014 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Wal-Mart (NYSE:WMT-Free Report), AIG (NYSE:AIG-Free Report), Herbalife (NYSE:HLF-Free Report) and Sprint (NYSE:S-Free Report).
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Average Grade for Q3 Earnings Season
We still have plenty of Q3 earnings reports to come, but the bulk of the earnings season is now behind us, with results from 363 S&P 500 companies already out as of Friday, October 31st. The Retail sector is the only one where more than half of the sector's companies have yet to report Q3 results. For the remaining sectors, the reporting season has ended for 2 – Autos and Aerospace – whole 4 other sectors have Q3 results for 90% or more of their total market caps.
More than a 1000 companies will be reporting results this week, including 87 S&P 500 members. By the end of this week, we will have Q3 earnings reports from 450 S&P 500 companies, with the Retail sector as the only one that will have any sizable number of reports still awaited at that stage.
We grade this earnings season as about 'average' – it isn't good, but it isn't bad either. To explain our 'average' grade, we share two types of charts below that will show how the results thus far compare with the past and what's happening to estimates for the current period (2014 Q4).
As you can see, it's hard to make one all-encompassing narrative for the reporting cycle, other than to say that it's not materially different from what we have been seeing from these companies in other recent quarters, particularly on the growth front. Beat ratios appear to be diverging from the norm a bit – with the Q3 earnings beat ratios modestly tracking above recent levels while revenue beat rates are on the weak side.
One could argue that this isn't bad performance and we are being harsh in giving this reporting cycle an 'average' grade. That's a fair comment, but our grade also reflects how the results thus far, particularly management guidance, are impacting estimates for the current period (2014 Q4).
This negative revisions trend isn't new either – we have been seeing this quarter after quarter for more than two years now. In some respects, the pace and magnitude of negative revisions at this stage is exceeding what we had been seeing at comparable stages in the last few quarters.
The Q3 Scorecard (as of October 31st)
We have seen Q3 results from 363 S&P 500 members that combined account for 79.2% of the index's total market capitalization. Total earnings for these companies are up +7.2% from the same period last year, with 72.5% of the companies beating earnings estimates. Total revenues are up +3.9% and 52.1% have come ahead of top-line estimates.
The earnings growth rate for 9 of the 16 Zacks sectors is in double digits, with Basic Materials (up +22.9%), Utilities (+14.9%), and Medical (+14.2%) having the strongest growth rates. The Materials strength is a reflection of increased demand for this economically sensitive sector in these troubled times, but relatively easier comparisons for the Chemicals (the largest industry in the sector) and Steel industries.
On the flip side, we have just a couple of negative signs on the growth front, with Autos down -21.6% and Retail down -1.3%. We know that the automakers were struggling with product recalls and the Retail sector still has plenty of reports to come. The hope is that the falling gasoline prices will help the sector this holiday season, though recent commentary from Wal-Mart (NYSE:WMT-Free Report) doesn't bear that out.
Mixed Tech Results
The Tech sector where we have seen results from 81.4% of the sector's market cap has been a relative laggard. Total earnings for the 44 Tech sector companies (out of 65 in the S&P 500 index) are up +6.0% on +9.1% higher revenues, with 72.7% beating EPS estimates and 61.4% coming ahead of top-line estimates. The beat ratios for the sector were tracking below historical levels earlier in the reporting cycle, but are now tracking above recent historical levels on the earnings front and a bit below on the revenue side.
The earnings growth rate is notably weaker than what we have seen from the cohort of 44 companies in other recent quarters, though the revenue growth rate is better.
The Composite Picture
Total earnings are expected to be up +5.9% from the same period last year on +3.2% higher revenues and modest margin gains. The expected growth rate for Q3 has been steadily improving in recent days as companies report results and beat estimates.
Total earnings for the S&P 500 reached an all-time quarterly record in 2014 Q2 and current estimates for Q3 put the quarterly total as the second highest ever. But given the historical trend of roughly two-thirds of the companies beating earnings estimates, the final Q3 tally will likely be right in the preceding quarter's record vicinity.
As mentioned earlier, estimates have been coming down lately and the revisions trend will likely accelerate as more consumer centric companies report in the coming days.
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Note: For a complete analysis of 2014 Q3 estimates, please check out weekly Earnings Trends report.
Monday-11/03
- The October manufacturing ISM report will be the highlight today, with expectations of a modest pullback from September's 56.6 level.
- On a busy earnings day, we will have AIG (NYSE:AIG-Free Report), Herbalife (NYSE:HLF-Free Report) and Sprint (NYSE:S-Free Report) report results after the close.
- Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of positive earnings surprises, is showing AIG beating EPS estimates.
- Our research shows that companies with positive Earnings ESP and Zacks Rank of 1, 2 or 3 are highly likely to beat earnings estimates. AIG has Zacks Rank #2 (Buy)
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