This is the second part of the three part series providing S&P500 earnings reports for Traverse City, Michigan. In this report we will look at how earnings projections are doing in comparison to previous time periods and on a sector basis. I also included some comments near the close of the article for investors in the Traverse City area to think about.
Next year's projections
There are circumstances seen during this quarter’s earnings that do not appear elsewhere throughout the year and they are discussed in more detail in the data notes below.
Overall the un-weighted next full year forward earnings projections that were gathered on Feb 24, 2013 increased by 5.11% over those gathered on Jan 27, 2012. This increase was largely due to the number of stocks changing fiscal years with this report but was also partially due to a constituent change and an overall increase in forward projections.
The next full year forward projections increased on 329 (65.80%) of the constituents, of these 230 (69.91%) had increases of $0.10 or more and 33 (10.03%) had an increase of $0.01. There were 142 (43,16%) that had increases of 10% or more and 65 (19.76%) had an increase of less than 1%.
The projections remained the same on 61 (12.20%) of the constituents.
The projections decreased on 110 (22.00%) of the constituents, of these 28 (25.45%) had decreases of $0.10 or more and 36 (32.73%) had decreases of $0.01. There were 13 (11.82%) that had decreases of 10% or more and 63 (57.27%) had a decrease of less than 1%.
Of the 329 constituents with increases Energy (81.40%), Consumer Staples (78.57%) and Financials (73.75%) had the highest rate of constituent increases. Telecommunications Services (37.50%), Information Technology (50.00%) and Utilities (54.84%) had the lowest rate of increases.
Of the 110 constituents with decreases Materials (33.33%), Utilities (32.26%) and Information Technology (31.43%) had the highest rate of decreases. Consumer Staples (11.90%), Financials (13.75%) and Energy (16.28%) had the lowest rate of decreases.
Of the 61 constituents that remained unchanged Telecommunications Services (37.50%), Information Technology (18.57%) and Industrials (18.33%) had the highest rates that remained the same. The lowest rates of unchanged earnings were seen in Energy (2.33%), Materials (3.33%) and Consumer Staples (9.52%).
The largest earnings projection increases seen between this and the last reported period was seen in Energy (12.51%), Consumer Discretionary (5.66%) and Materials (5.49%). The only decrease during the period was seen in Telecommunications Services Utilities (-2.08%) with all other sectors seeing increases and the smallest increases were seen in Utilities (2.04%) and Information Technology (2.21%).
The largest earnings projection increases over the projections of a quarter ago were seen in Energy (13.20%), Financials (8.93%) and Industrials (8.66%). The smallest increases were seen in Utilities (2.04%), Information Technology (4.06%) and Consumer Staples (6.28%). Overall earnings projections increased by 7.38% over those a quarter ago.
The following is based on the beginning of quarter earnings estimates as outlined in Part 1 of this report. Three of the five companies that will be omitted from this data had reported at the time this data was collected and one of the five will not report earnings for the fourth quarter.
Of the 441 (three omissions) constituents that have reported earnings for the fourth quarter, the sectors with the highest percentage beating the beginning of the quarter estimates were seen in Information Technologies (76.92%) with 65 of 70 reporting, Consumer Staples (74.36%) with 39 of 42 reporting, and Utilities (71.43%) with 21 of 31 reporting. The lowest rates were seen in Telecommunication Services (0.00%) with 5 of 8 reporting, Energy (55.00%) with 40 of 43 reporting and Materials (55.17%) with 28 of 30 reporting.
The sectors with the highest percentage missing the beginning of the quarter estimates were Telecommunication Services (83.33%) with 5 of 8 reporting, Energy (40.00%) with 40 of 43 reporting and Materials (34.48%) with 29 of 30 reporting. The lowest rates of misses were seen in Information Technologies (15.38%) with 65 of 70 reporting, Consumer Staples (20.51%) with 39 of 42 reporting and Health Care (22.00%) with 50 of 53 reporting.
The sectors with the highest percentage increase in the actual earnings amounts reported over the beginning of the quarter estimates were Utilities (9.98%) with 21 of 31 reporting, Energy (9.80%) with 40 of 43 reporting and Information Technologies (4.53%) with 65 of 70 reporting. Three sectors saw decreases in comparison to the beginning of the quarter estimates with those being Telecommunication Services (-20.57%) with 5 of 8 reporting, Financials (-1.88%) with 74 of 80 reporting and Consumer Staples (-0.12%) with 39 of 42 reporting.
Overall the 441 reporting constituents I had beginning of the quarter estimates for, beat the beginning of the quarter earnings estimates by 2.36%.
As I had mentioned in the March 4 Stock Market Preview, at the time of this update the trailing twelve months operating earnings of the current constituents were 25.71% higher than the then record TTM operating earnings of the third quarter of 2007. This will be the eighth straight quarter that the trailing twelve months earnings have set a new record.
Legg Mason’s (LM) earnings miss took the Financial Sector from beating the beginning of the quarter estimates in excess of 10% in the January update, to missing them by 1.88% in this one. Most in the sector (62.16%) beat beginning of the quarter projections, and several did very well with earnings. The loss seen this quarter is misleading.
The Telecommunications Sector often reports poor earnings in the fourth quarter. Even so the numbers are somewhat deceiving in this report. The sector has only eight constituents and two missed the beginning of the quarter estimates by fairly large amounts in comparison to the total earnings. Even though the two that reported during the period prior to the February updates missed projections, the sector saw the percentage they missed the beginning of the quarter earnings estimates drop by about 10% since the January update.
As I always do for index additions that I did not have prior month earnings projections for, I count them as unchanged in these updates.
This month’s data is unduly influenced by changes that occur during this quarter every year. There are 365 (73%) of the constituents in the S&P500 that ended their fiscal year in December 2012 (down from 366 in December 2011). There has been 332 (66.4%) of the constituents that have reported their end of fiscal year earnings during the past two monthly updates of my database, 91 (18.2%) during the January update and 241 (48.2%) during this update. The 241 companies that reported end of year earnings during this update had their next full year earnings changed from 2013 (now the current year) to 2014 (now the next full year forward) in this report.
The change to 2014 earnings in this large number of companies unduly influenced this month’s data as most of these companies saw increases in the next full year earnings when this change was made, and this increase was much larger than would normally be seen in a month to month basis. Without the change to 2014 earnings for these 241 companies the month over month earnings would have increased, but only slightly by about 0.09%.
Every month has some companies that report end of fiscal year earnings, but none near the number that report end of fiscal year earnings in December. The next highest number that report end of fiscal year earnings is 27 (5.4%) occurring in both January and in June and the fewest are seen in July with two (0.4%). Normally the number of constituents making changes to the next fiscal year has little noticeable effect on the numbers in this report.
These changes could be deceiving, but only if they are looked at in the wrong context. Unlike most months during the year where we are watching short term changes in the forward earnings, with the reports this quarter we will see how the majority of stocks are expected to do in the longer term.
For instance, by taking the month over month change in earnings estimates (5.11%) and subtracting the increase that would have occurred without a change (0.09%) then dividing it by the number of forward earnings changes during the period (48.2%) we can see that earnings are expected to increase on average by about 10.41% during 2014 for those that changed forward earnings during this month’s reports. The January report also shows a double digit percentage increase.
On an individual company basis, some of these projections are undoubtedly either too high or too low, but it gives us some idea on what we can expect from the majority. Unless something goes completely haywire between now and 2014, I tend to think the overall projections are probably too low, with the exception of many of those in the Energy Sector.
What I wrote about the Energy Sector earnings estimates during the fourth quarter updates last year has not changed. The updates during the past year show this concern was founded. The perception that oil is worth more than it is continues to pump these estimates up. But real supply and real demand show that oil is in a bubble and the current price is much too high, not too low.
Many of these sources were used in this article.
Have a great day trading.
Disclosure: I do not current have investments in LM. I am currently about 89% long in stocks in my trading accounts.
Disclaimer: This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research and where appropriate, seek professional investment advice before acting on any information contained in these articles.