EARNINGS INSIGHT
Key Metrics
• • •
• Earnings Growth: For Q2 2016, the estimated earnings decline is -5.3%. If the index reports a decline in earnings
for Q2, it will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.
• • •
• Earnings Revisions: On March 31, the estimated earnings decline for Q2 2016 was -2.8%. Nine sectors have
lower growth rates today (compared to March 31) due to downward revisions to earnings estimates, led by the Information Technology sector.
• • •
• Earnings Guidance: For Q2 2016, 81 companies have issued negative EPS guidance and 32 companies have
issued positive EPS guidance.
• • •
• Valuation: The forward 12-month P/E ratio is 16.4. This P/E ratio is above the 5-year average (14.6) and the
10-year average (14.3).
• • •
• Earnings Scorecard: Of the 20 companies in the S&P 500 reporting earnings to date for Q2 2016, 11 have
reported earnings above the mean estimate and 11 have reported sales above the mean estimate.
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John Butters, VP, Sr. Earnings Analyst
Media Questions/Requests
Topic of the Week:
Smaller Than Average Cuts to EPS Estimates for S&P 500 Companies during Q2
Over the course of the second quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 2.6% (to $28.65 from $29.43) during this period. How significant is a 2.6% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?
During the past year (4 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.7%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.4%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 5.5%. Thus, the decline in the bottom-up EPS estimate recorded during the first quarter was smaller than the 1-year, 5-year, and 10-year averages.
This was the smallest drop in the bottom-up EPS estimate for quarter since Q2 2015 (-2.2%).
As the bottom-up EPS estimate declined during the quarter, the value of the S&P 500 increased during this same time frame. From March 31 through June 30, the value of the index increased by 1.9% (to 2098.86 from 2059.74). This marked the 15th time in the past 20 quarters in which the bottom-up EPS estimate decreased during the quarter while the value of the index increased during the quarter.
Q2 2016 Earnings Season: By the Numbers
Overview
In terms of estimate revisions for companies in the S&P 500, analysts have made smaller cuts than average to earnings estimates for Q2 2016. On a per-share basis, estimated earnings for the second quarter have fallen by 2.6%. This percentage decline is smaller than the trailing 5-year average (-4.4%) and trailing 10-year average (-5.5%) for a quarter.
In addition, a slightly smaller percentage of S&P 500 companies have lowered the bar for earnings for Q2 2016 relative to recent averages. Of the 113 companies that have issued EPS guidance for the first quarter, 81 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 72% (81 out of 113), which is slightly below the 5-year average of 74%.
As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q2 2016 is -5.3% today, which is larger than the expected earnings decline of -2.8% at the start of the quarter (March 31). Four sectors are predicted to report year-over-year earnings growth, led by the Telecom Services and Consumer Discretionary sectors. Six sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Information Technology sectors.
As a result of downward revisions to sales estimates, the estimated sales decline for Q2 2016 is -0.8%, which is larger than the estimated sales decline of -0.5% at the start of the quarter. Six sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Four sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors.
Looking at future quarters, analysts currently project earnings and revenue growth to return in Q3 2016. The forward 12-month P/E ratio is now 16.4, which is above the 5-year and 10-year averages.
During the upcoming week, 2 S&P 500 companies are scheduled to report results for the second quarter. Earnings Revisions: Tech Sector Has Recorded Largest Drop in Expected Earnings for Q2 Small Change in Estimated Earnings Decline for Q2 This Week
The estimated earnings decline for the second quarter is -5.3% this week, which is slightly larger than the estimated earnings decline of -5.2% last week.
Overall, the estimated earnings decline for Q2 2016 of -5.3% today is larger than the estimated earnings decline of -2.8% at the start of the quarter (March 31). Nine of the ten sectors have recorded a decline in expected earnings growth since the beginning of the quarter due to downward revisions to earnings estimates, led by the Information Technology sector. The only sector that has recorded an increase in expected earnings growth since the start of the quarter due to upward revisions to earnings estimates is the Industrials sector.
Information Technology: Largest Increase in Expected Earnings Decline, Led by Apple
The Information Technology sector has recorded the largest decrease in expectations for year-over-year earnings since the start of the quarter (to -7.2% from -0.2%). Overall, 36 of the 67 companies in this sector have seen downward revisions to EPS estimates to date. Of these 36 companies, 13 have recorded EPS estimate cuts of 10% or more, led by Electronic Arts (to -0.02 from $0.21), Autodesk (to -$0.13 from -$0.07), and Seagate Technology (to $0.13 from $0.78). However, the downward revisions to EPS estimates for Apple (to $1.40 from $1.78), Microsoft (to $0.58 from $0.67), and IBM (to $2.88 from $3.44) have been the largest contributors to the increase in the projected earnings decline for this sector. The Information Technology sector has also witnessed the largest decrease in price (-3.3%) of all ten sectors since the start of the quarter.
Industrials: Largest Decrease in Expected Earnings Decline, Led by GE
On the other hand, the Industrials sector has recorded the largest increase in expectations for year-over-year earnings since the start of the quarter (to -1.4% from -4.1%). However, only 23 of the 68 companies in this sector have seen upward revisions to EPS estimates to date, led by General Electric (to $0.46 from $0.29). Despite the increase in estimated earnings, General Electric has recorded a decrease in price of 0.9% since March 31. The Industrials sector overall has witnessed an increase in price of 0.8% since the start of the quarter.
Index-Level (Bottom-Up) EPS Estimate: Smaller Decline than Average
Downward revisions to earnings estimates in aggregate for the second quarter were below recent averages. On a per-share basis, the Q2 bottom-up EPS estimate (which is an aggregation of the earnings estimates for all 500 companies in the index and can be used as a proxy for the earnings for the index) fell by 2.6% (to $28.65 from $29.43) during the quarter. This decline in the EPS estimate for Q2 2016 was below the trailing 1-year average decline (-4.8%), the trailing 5-year average decline (-4.4%), and the trailing 10- year average decline (-5.5%) in the bottom-up EPS estimate for a quarter.
Guidance: Negative EPS Guidance (72%) for Q2 Slightly Below Average
A slightly smaller percentage of S&P 500 companies have lowered the bar for earnings for Q2 2016 relative to recent averages. At this point in time, 113 companies in the index have issued EPS guidance for Q2 2016. Of these 113 companies, 81 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 72% (81 out of 113), which is slightly below the 5-year average of 74%. For more details on guidance for Q2, please see our most recent “FactSet Guidance Quarterly” report at this link:
www.factset.com/guidance
Earnings Growth: Fifth Consecutive Quarter of Year-Over-Year Earnings Declines (-5.3%)
The estimated earnings decline for Q2 2016 is -5.3%. If the index reports a decrease in earnings for the quarter, it will mark the first time the index has seen five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009. Four sectors are projected to report year-over-year growth in earnings, led by the Telecom Services and Consumer Discretionary sectors. Six sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Information Technology sectors.
Telecom Services: AT&T Leads Growth
The Telecom Services sector is expected to report the highest earnings growth at 7.3%. Of the five companies in the sector, AT&T is projected to be the largest contributor to earnings growth. The mean EPS estimate for Q2 2016 (which reflects the combination of AT&T and DIRECTV) is $0.72, compared to year-ago EPS (which reflects standalone AT&T) of $0.69. If this company is excluded, the estimated earnings growth rate for the Telecom Services sector would fall to -5.0%.
Consumer Discretionary: Internet Retail, Home Goods, and Autos Lead Growth
The Consumer Discretionary sector is expected to report the second highest earnings growth at 6.6%. At the industry level, 8 of the 12 industries in this sector are projected to report earnings growth for the quarter. Of these 8 industries, 4 are predicted to report double-digit earnings growth: Internet & Catalog Retail (41%), Household Durables (25%), Automobile Manufacturers (17%), and Auto Components (11%). On the other hand, the Leisure Products (-24%) industry is expected to report the largest year-over-year decline in earnings at the industry level for the quarter. Energy: Largest Contributor to Earnings Decline in the S&P 500
The Energy sector is expected to report the largest year-over-year decline in earnings (-77.7%) of all ten sectors. Five of the six sub-industries in this sector are projected to report a year-over-year decrease in earnings: Oil & Gas Exploration & Production (-807%), Oil & Gas Equipment & Services (-108%), Oil & Gas Drilling (-107%), Integrated Oil & Gas (-45%), and Oil & Gas Refining & Marketing (-38%). The Oil & Gas Storage & Transportation (14%) sub-industry is the only sub-sub-industry in the sector expected to report earnings growth for the quarter.
This sector is also expected to be the largest contributor to the earnings decline for the S&P 500 as a whole. If the Energy sector is excluded, the estimated earnings decline for the S&P 500 would improve to -1.8% from -5.3%. Materials: Weakness in Metals & Mining and Chemicals
The Materials sector is expected to report the second largest year-over-year decline in earnings (-12.6%) of all ten sectors. At the industry level, three of the four industries in the sector are projected to report a year-over-year decrease in earnings, led by the Metals & Mining (-31%) and Chemicals (-14%) industries.
Information Technology: Apple Leads Decline
The Information Technology sector is expected to report the third largest year-over-year decline in earnings (-7.2%) of all ten sectors. At the industry level, five of the seven industries in the sector are projected to report a year-over-year decrease in earnings, led by the Technology Hardware, Storage, & Peripherals (-25%) industry. At the company level, Apple is predicted to be the largest contributor to the estimated year-over-year decline in earnings for the sector. The mean EPS estimate for Q2 2016 is $1.40, compared to year-ago EPS of $1.85. If this company is excluded, the estimated earnings decline for the Information Technology sector would improve to -1.9%.
Revenues: Sixth Consecutive Quarter of Year-Over-Year Revenue Declines (-0.8%)
The estimated revenue decline for Q2 2016 is -0.8%. If the index reports a decrease in sales for the quarter, it will mark the first time the index has seen six consecutive quarters of year-over-year declines in sales since FactSet began tracking the data in Q3 2008. Six sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Four sectors are projected to report a year-over-year decline in revenues, led by the Energy and Materials sectors.
Telecom Services: AT&T Leads Growth
The Telecom Services sector is expected to report the highest revenue growth of all ten sectors at 11.0%. At the company level, AT&T is projected to be the largest contributor to revenue growth for the sector. The mean sales estimate for Q2 2016 (which reflects the combination of AT&T and DIRECTV) is $40.7 billion, compared to year-ago sales (which reflects standalone AT&T) of $33.0 billion. If AT&T is excluded, the blended revenue growth rate for the sector would fall to 0.8%.
Health Care: Broad-Based Growth
The Health Care sector is expected to report the second highest revenue growth of all ten sectors at 7.7%. All six industries in this sector are projected to report sales growth for the quarter, led by the Health Care Providers & Services (10%) industry.
Energy: Largest Contributor to Earnings Decline in the S&P 500
The Energy sector is expected to report the largest year-over-year decrease in sales (-27.7%) for the quarter. All six sub-industries in the sector are projected to report a year-over-year decrease in revenues: Oil & Gas Drilling (-50%), Oil & Gas Equipment & Services (-34%), Oil & Gas Exploration & Production (-30%), Oil & Gas Refining & Marketing (-28%), Integrated Oil & Gas (-27%), and Oil & Gas Storage & Transportation (-1%).
This sector is also expected to be the largest contributor to the sales decline for the S&P 500 as a whole. If the Energy sector is excluded, the estimated revenue decline for the S&P 500 would improve to 2.2% from -0.8%. Materials: Weakness in Chemicals and Metals & Mining
The Materials (-6.8%) sector is expected to report the second largest year-over-year decrease in revenues of all ten sectors. Two of the four industries in this sector are projected to report a year-over-year decline in sales for the quarter: Chemicals (-11%) and Metals & Mining (-7%).
Looking Ahead: Forward Estimates and Valuation
Earnings and Revenue Growth Expected to Return In 2nd Half of 2016
For Q2 2016, S&P 500 companies are expected to report year-over-year declines in both earnings (-5.3%) and sales (-0.8%). However, analysts currently expect earnings growth and revenue growth to return in the second half of 2016. In terms of earnings, the estimated growth rates for Q3 2016 and Q4 2016 are 0.8% and 7.3%. In terms of revenues, the estimated growth rates for Q3 2016 and Q4 2016 are 2.2% and 5.1%.
For more on 2nd half earnings, please see our most recent “FactSet Market Insight” as the following link:
www.factset.com/websitefiles/PDFs/marketinsight/marketinsight_6.28.16
For all of 2016, analysts are still projecting earnings (+0.6%) and revenues (+1.7%) to increase slightly year-over-year.
Valuation: Forward P/E Ratio is 16.4, above the 10-Year Average (14.3)
The forward 12-month P/E ratio is 16.4. This P/E ratio is above the prior 5-year average forward 12-month P/E ratio of 14.6, and above the prior 10-year average forward month P/E ratio of 14.3. However, it is below the forward 12-month P/E ratio of 16.6 recorded at the start of the second quarter (March 31). Since the start of the second quarter, the price of the index has increased by 0.5%, while the forward 12-month EPS estimate has increased by 2.0%. At the sector level, the Energy (65.7) sector has the highest forward 12-month P/E ratio, while the Financials (12.4) sector has the lowest forward 12-month P/E ratio. Eight sectors have forward 12-month P/E ratios that are above their 10-year averages, led by the Energy (65.7 vs. 15.4) sector. The Information Technology (15.6 vs. 15.8) and Telecom Services (14.1 vs. 14.6) sectors are the only sectors with forward 12-month P/E ratios below the 10-year averages.
Companies Reporting Next Week: 2
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