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Earnings Growth Deceleration Details

Sheraz Mian

The picture emerging from the Q4 earnings season is not great, but it is not as bad either as many in the market had feared ahead of the start of this earnings season.

We knew that the period of very strong growth was now behind us. But the steady negative revisions to earnings estimates for the current and coming quarters have left growth expectations for the first half of 2019 barely in positive territory. This negative revisions trend is a function of uncertainty about global economic growth, with a host of leading companies in different industries citing weakness in China, Europe and elsewhere as the driver of weak guidance.

We will share the current scorecard and what’s on deck this week a little later, but let’s first point out the key trends that we have seen from the Q4 results through Friday, February 8th.

First, growth is decelerating. This isn’t a surprise, as we knew already that Q4 growth would be materially below the pace set in the first three quarters of the year.

Total earnings for the 332 companies that have reported are up +13.4% from the same period last year on +7.2% higher revenues. Earnings and revenue growth for the same cohort of companies had been +24.3% and +9.7% in the preceding earnings season, respectively. The comparison chart below puts this growth deceleration in a historical context for these index members.

The growth pace is on track to decelerate even further in the current and coming quarters, as we will show a little later.

Second, companies appear to be struggling to beat consensus EPS estimates.

For the 332 index members that have reported results already, 67.2% are beating EPS estimates and only 62% are beating revenue estimates. For the same cohort of companies, the proportion of positive EPS and revenue surprises was 78.6% and 60.8% in the Q3 earnings season, respectively.

The proportion of these 332 index members beating both EPS and revenue estimates is 46.7%, which compares to 50.9% for the same group of companies in the preceding reporting cycle and 12-quarter average of 53.9%.

The revenue beats percentage is on the weak side relative to historical periods, but the lag on the EPS beats percentage side is particularly noteworthy. The fact is that the Q4 EPS beats percentage is the lowest in more than 3 years.

The comparison chart below puts the Q4 blended beats percentage in a historical context for these 235 companies.

With Q4 positive surprises this hard to come by, one would reasonably assume that perhaps estimates had been too high. We know that wasn’t the case as estimates for the quarter had fallen the most of any other recent periods.

Third, estimates for 2019 Q1 and full-year 2019 are coming down in a major way, with the Q1 growth rate now in negative territory.

The chart below shows how estimates for 2019 Q1 have evolved since late-November 2018.

Negative revisions to 2019 Q1 estimates are along the same lines that we saw ahead of the start of the Q4 earnings season as well. Estimates for full-year 2019 have been coming down as well, as the chart below shows.

This chart is tracking consensus earnings growth expectations since the second half of 2018 got underway. As you can see, estimates were effectively unchanged during the September quarter, but they have been on a consistent downtrend since early October. Many in the market suspect that estimates have further to drop before stabilizing.

Key Earnings Reports This Week

We have more than 400 companies coming out with quarterly reports this week, including 63 S&P 500 members.

Tuesday, February 12th: We have 15 index members reporting results on Tuesday, of which 9 will come out before the market’s open and the rest after the market’s close. There is no shortage of big-name reporters today, but Under Armour (UAA) will be the notable report in the morning session and Activision Blizzard (ATVI) after the market’s close. Under Armour shares jumped following the Q3 earnings release on October 30th and even though the stock has since lost ground, it is still up big over the past year, up +57.3% vs. +31.3% gain for Nike (NKE) and +5.1% gain for the S&P 500 index.

Activision Blizzard and other game publishers have been struggling lately, with Epic Games’ Fortnight stealing their thunder. While estimates for the December quarter have been stable, the same for full-year have been steadily coming down. The stock is down -34% over the past year, lagging its industry’s -25.3% decline over the same time period.

Groupon (GRPN) is another notable company reporting after the close on Tuesday.

Wednesday, February 6th: We have 21 S&P 500 members reporting results on Wednesday, with Cisco (CSCO) as the more prominent company reporting after the market’s close. Cisco shares have outperformed the Tech sector as well as the broader market in the last 12 months, with the networking giant up +21.3% vs. +4% gain for the Zacks Tech sector. The stock typically responds in a major way to quarterly releases; it was up following the last two quarterly reports.

Thursday, February 14th: Coca-Cola (KO) in the morning and Nvidia (NVDA) after the market’s close are the more notable of the 18 index members reporting results on Thursday.

Nvidia shares have struggled lately, particularly since October 1st, though the stock has fallen after each of the last two releases. The stock is down -32% over the last 12 months, underperforming the Zacks Semiconductor industry’s -2.5% decline. Estimates have been steadily coming down, with the current 75 cents per share estimate for the quarter down from $1.99 per share estimate three months back. Estimates for full-year 2019 have come down more than -40% over the last three months, highlighting the tough supply-demand dynamics in the space.

Friday, February 15th: Deere & Co. (DE) and Pepsi (PEP) will be the notable for the 4 index members on deck to report Q4 results on Friday.

Q4 Earnings Season Scorecard (as of Feb 8th, 2019)

We now have Q4 results from 332 S&P 500 members that combined account for 78% of the index’s total market capitalization. Total earnings for these 332 index members are up +13.4% from the same period last year on +7.2% higher revenues, with 67.2% beating EPS estimates and 62% beating revenue estimates.

The table below shows the current scorecard.

We mentioned earlier how companies are struggling to beat consensus estimates. The Chart below compares the 2018 Q4 EPS beats percentage with other recent periods for the same cohort of companies that have reported already.

For Q4 as a whole, combining the actual results from the 332 index members that have reported with estimates for the still-to-come 168 companies, total earnings for the S&P 500 index are expected to be up +13.7% from the same period last year on +6.2% higher revenues, which would follow the +25.7% earnings growth on +8.5% higher revenues in 2018 Q3.

Earnings growth is expected to be in double digits for 8 of the 16 Zacks sectors, with Energy (+100.3% growth), Finance (+16.1%), Construction (+21.8%) and Transportation (+29.3%) as the strongest growth. Tech sector earnings are track to decelerate meaningfully in Q4, up +7.7%, after back-to-back quarters of very strong growth.

Four sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (-7.4% decline), Autos (-9.8%), Utilities (-7.8%) and Basic Materials (-0.7%)

The table below shows the summary picture for Q4, contrasted with what was actually achieved in the preceding earnings season.

The chart below shows Q4 earnings and revenue growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 4 quarters.

As you can see in the chart below, the growth pace is expected to decelerate materially from what we saw in the first three quarters of the year.

The chart below shows the same data on a rolling 4-quarter basis.

Whether we look at the growth picture on a quarterly basis or on a rolling quarter basis, there is no doubt that growth peak is now behind us. The question now is how much estimates for the coming quarters have still to come down. And the answer to that question will depend on the evolving economic backdrop that we discussed at the start.

For more details about the overall earnings picture, the Q4 earnings season and expectations for the coming periods, please check our weekly Earnings Trends report.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.

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