Fin - Breakout - US

3 Key Themes For Q2 Earnings Season

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In the high jump, after you've successfully cleared a particular height, they raise the bar.

On Wall Street, it seems, each time earnings season rolls around analysts lower the bar and make it easier for companies to beat estimates.

And according to John Butters, Senior Earnings Analyst at Factset, this year is no exception as the consensus for S&P 500 earnings growth has gone from about 14% to 8% in the past 2 weeks.

The catch is, that decline is almost entirely due to the enormous loss Bank of America (BAC) pre-announced on June 27th. Therefore, the challenge or first theme to watch is if the other 499 stocks in the index can still beat the street since Butters says estimates "haven't come down significantly."

"So if we do see a significant number of companies beat estimates, they won't be beating estimates that have been lowered, they would be beating estimates that have basically remained flat, or in the case of some sectors such as energy, have increased quite a bit during the quarter," says Butters. And over the past six quarters, at least 70% of companies have beaten estimates.

The second theme to watch this earnings season, Butters says, is the commodity effect - both positive and negative - and how well companies have managed it.

On the upside, high commodity prices have pushed the Materials and Energy sectors to the top of the growth charts with analysts expecting to see 48% and 35% profit growth respectively.

On the downside, he says, rising input costs and energy spending are "particularly relevant to the Consumer Discretionary and Consumer Staples sectors."

He cites Carnival's (CCL) results as an early example. "They saw a significant negative impact from higher costs. They reported EPS that were down 20% and specifically came out and said higher fuel costs were why they came out with lower earnings," says Butters.

Flip that over, and Butters says we will have to pay close attention to any mention of pricing, good or bad. He points to a Factset survey last quarter showing that "90% of companies in the Consumer Staples sector announced that they would be increasing prices going forward to offset some of these higher input commodity costs."

The third theme du season on Butter's radar has to do with guidance and margins. He says while overall margins are expected to be about 9% for the S&P 500, which is a "little bit of a dip," that can be partly explained by the downward revisions in Financials.

"What is interesting is if you look at the expectations going forward. The analysts are calling for margins to continue to improve through the 2nd half of 2011 and into 2012." Furthermore, "one of the things to watch is, what are companies saying about margins and probably in a broader sense, what kind of guidance they are giving." For context he says that last quarter, about 66% of companies guided estimates lower versus about 62% doing so in the January reporting season.
And one final factoid to watch: Sales. Butters says if Q2 revenues indeed grow by the 10% that analysts are predicting, it will be the first time we've seen double-digit sales growth since early 2010.

What are you expecting from earnings season? Any particular areas of concern?

Let us know below in the comments section below or feel free to jump on the Twitter bandwagon @MattNesto

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