CHICAGO, Jan. 11, 2011 /PRNewswire/ -- Zacks Research Equity Strategist, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.
With the strong third quarter earnings season now well behind us, the focus turns to the fourth quarter season which kicks off this week when Alcoa (NYSE: AA), Intel (Nasdaq: INTC) and J.P. Morgan (NYSE: JPM) report. We have already had a handful (24) of S&P 500 firms report, but they were mostly firms with November fiscal period ends, with a high proportion of retailers in the mix.
While far from a representative sample, the early reports are encouraging, with total net income for those firms rising 25.4% over a year ago. The early median surprise of 6.07% is also quite strong, although the ratio of positive to negative surprises is a bit weaker than normal at just 2.50%. However, those numbers are always extremely volatile in the early going and it is far too early to draw any real conclusions about the quarter.
Most of the focus should be on the expectations for those who have yet to report. There the expectations are also positive, particularly on the earnings front. Total net income is expected to rise 19.8% over year-ago levels. While that is a slowdown from the year-over-year growth of the third quarter (25.1%), it is well above the growth that was expected for the third quarter just before the third quarter reporting season really got underway (15.5%).
Given that positive earnings surprises almost always outnumber disappointments, one does not need an overly active imagination to envision that growth will be close to 25% again when all is said and done for the quarter. Revenue growth, though, is expected to slow down significantly to an actual slight decline of 0.09% from positive growth of 8.01% in the third quarter. On the other hand, revenue growth among the handful that have reported is very healthy at 10.1%.
The financials are a big part of the overall revenue growth slowdown, but not the entire story. Excluding them, revenue growth is expected to slow to 3.02% year over year from 9.12%. Tougher year-over-year comparisons are a bigger part of the story.
Net Margin Expansion
Thus, the stellar earnings growth is mostly due to the continued expansion of net margins. Much of the year-over-year margin expansion is due to the financials, were the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different.
However, even if the financials are excluded, net margins continue to march northward, at least year over year. For the S&P 500 as a whole, net margins are expected to be 8.85% in the fourth quarter, up from "just" 7.38% a year ago, but down from 9.11% in the third quarter. If the financials are excluded, margins are expected to rise to 8.20% from 7.97% a year ago but down from 8.80% a year ago. Those numbers are for the vast majority that have yet to report.
The reported net margins among the 24 early birds are 3.56%, up from 3.14% a year ago but down from 3.76% in the third quarter. Fully one third of all the companies that have reported are retailers, however, and retailers tend to have low margins.
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