Earnings Preseason Results Signal Improving Profits Likely for Some Sectors
Even though the “earnings season” for the first quarter of 2012 won’t officially begin until tomorrow, when Alcoa Inc. (AA.N) reports its results, a bevy of early-reporting companies already is signaling that corporate profits may prove to be stronger than analysts have been forecasting.
Of the 28 companies that released their first-quarter results ahead of Alcoa’s, becoming part of the earnings preseason, 79% reported profits that were better than expected. That’s significantly better than the long-term average of 62%, and as the chart below indicates, gives investors reason for optimism about the broader earnings season just about to get underway. Historically, the strength of earnings preseason results has predicted the rate at which companies have reported better-than-expected results in the entire earnings season, about two-thirds of the time. That suggests there is a strong likelihood that a significant number of companies will announce results that exceed analysts’ estimates in the coming weeks.
Ten of the companies in the Standard & Poor’s 500 index’s Consumer Discretionary sector reported their first-quarter results in the preseason period, all of which topped analysts’ estimates, as detailed in the table below. That left the sector’s total earnings to date some 12% higher than analysts had anticipated. The Consumer Staples sector also put in a strong performance, with five of the six companies that reported during the preseason announcing results that exceeded analysts’ estimates. The other sector to have a significant number of companies reporting earnings during the preseason was Information Technology. Although only 43% of those technology companies that reported their results during the preseason period beat estimates, another 43% reported results that were in line with expectations. The only weak sector was Materials, although since only two companies reported during the period, it can’t be seen as statistically significant.
The obvious question that follows such a string of positive earnings surprises is whether they are a result of a better-than-expected economic environment driving sales and profit margins higher, or whether analysts had become too bearish in their assessments and companies had consciously or unconsciously driven down expectations. Certainly, analysts’ estimates for earnings growth have been falling on a consistent basis; today, most analysts are calling for S&P 500 companies to generate growth in profits of only 3.3% in the first quarter. Managers of some of the companies that reported results during the preseason appeared to give some credence to the former explanation, mentioning they have witnessed clear signs of economic recovery, even though they still expect to encounter bumps along the road.
Stuart Miller, CEO of Lennar Corp (LEN.N), took a very upbeat view of the economy during the company’s earnings conference call. The homebuilder reported earnings of 8 cents a share, double the pre-release estimate by analysts of 4 cents a share. That jump in profits, Miller says, serves as “confirmation that both the housing market and the overall economy are stabilizing and that a very real trend is beginning to take shape.”
Nike Inc (NKE.N) CEO Mike Parker also sees consumer confidence stabilizing, a positive sign for the economy and for the company’s bottom line. However, Nike’s management continues to worry about the rising costs of both raw materials and labor, as well as relatively high unemployment levels and heavy debt loads, Parker also cited unease related to more macro issues, such as “unemployment, debt and currency issues brought on by political uncertainty.” Nevertheless, Nike was another preseason winner: it reported earnings of $1.20 a share, beating analysts’ estimates of $1.17 a share.
Mosaic Company (MOS.N) blamed the pressure of higher commodity prices on its bottom line for its failure to meet analysts’ estimates for the fertilizer company’s first quarter of 74 cents a share. Larry Stranghoener, Mosaic’s CEO, pointed out the higher costs lowered operating earnings by $225 million. That, he said, more than offset the gains in both sales volumes and the prices Mosaic was able to charge for its products. The company reported net income of 64 cents a share.
The aggregate StarMine Predicted Surprise data provides us with another view of the upcoming quarter. By aggregating the SmartEstimates, (which place greater weight on the most recent estimates by the most accurate analysts) for each company in the index, we get a picture of which sectors may be poised to outperform. Technology and Consumer Discretionary are high on this list, confirming the signals sent by the preseason earnings announcement trends. These two sectors also have more optimistic preannouncement levels and higher estimated growth rates than do others in the S&P 500. On the other hand, companies within the Materials, Energy, and Utilities sectors seem more likely to report earnings that fall short of analysts’ estimates. These sectors also offer a less upbeat growth outlook, ranging from an anemic gain of only 1.2% for the Energy sector to a decline of 14.6% for the Materials companies.
While the outlook for some of the sectors in the S&P 500 may be rosier than expected, based on the results of the preseason earnings period, it also seems clear that not every industry or sector will be benefitting equally from whatever economic growth materialized during the first quarter of 2012.
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