Earnings-Season Estimates Shuffle

2/1/2016


It's earnings season again, that special time of year when we watch the elaborately choreographed mating dance between corporate executives and Wall Street analysts.

On conference calls, executives frequently express guarded optimism and offer conservative year-ahead projections, all in an effort to dampen the expectations of analysts, notorious for their overly optimistic tendencies. Following these meetings, analysts often trim their original estimates, giving companies a springboard toward a positive profit "surprise" several months later.

An average of 69% of S&P 500 companies topped consensus profit estimates over the past four quarters, versus the long-term average of 63%, according to Thomson Reuters.

A similar story is playing out for the coming year, augmented by fears that troubles in China could spark a global slowdown. Projected 2016 per-share-profit growth for the S&P 500 Index has fallen to 5.5% from 10.3% on Oct. 1, according to Thomson Reuters.

As shown in the table below, year-ahead estimates look better than they did at this time last year. Just once in the past six years — 2010 — did actual earnings per share exceed the original estimates from about 16 months earlier.

S&P 500 ESTIMATED GROWTH
We tracked trends for projected annual profit growth for the S&P 500 Index over the four-month period from October of the previous year through January of the current year. Profit estimates for 2016 are holding up better than last year, but not as well as they did from 2010 through 2014. The last time the consensus rose during the four-month period was the one that started in October 2009.
---- Estimated EPS Growth As Of ----
Year
Final
(%)
Jan. 30
(%)
Jan. 1
(%)
Oct. 1
(%)
2016
5.5*
7.6
10.3
2015
(0.1) *
3.8
8.1
12.4
2014
8.2
9.6
10.8
11.3
2013
6.2
9.6
10.9
11.6
2012
4.0
9.0
10.0
13.2
2011
10.0
13.7
13.4
14.2
2010
31.0
27.1
30.6
26.5
*As of Jan. 27.      Source: Thomson Reuters.

Analyst estimates have fallen across all 10 of the index's sectors but have held up best for consumer discretionary (15% growth versus 16% growth expected on Oct. 1), health care (9%, 11%), financials (8%, 10%), and utilities (4%, 5%). Conversely, estimates are down sharply in materials (8%, 16%), telecom (2%, 5%), and energy (29% decline, 9% growth). 

As the broad sector trends suggest, stocks with upward analyst revisions are in short supply.

Four-fifths of stocks in the S&P 500 Index have fiscal years ending in December or January. From among that group, consensus year-ahead estimates have risen over the last 90 days for 100 companies and fallen for 271 companies. In the past 30 days, year-ahead estimates rose for 69 companies and fell for 237.

Consensus estimates have steadily marched higher for the recommended stocks in the bottom table. Just two of them — Alaska Air Group ($70; ALK) and Southwest Airlines ($37; LUV) — had announced December-quarter results as of Jan. 26. You can read in detail about these results on page 6. Although neither company gave guidance for year-ahead profits, estimates for both have risen in the days since their reports, an encouraging divergence from the broader trend. Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Buy and a Long-Term Buy.

STOCKS WITH RISING ESTIMATES
--------- 2016 Estimated Per-Share Profits ---------
Quadrix Scores
Company (Price; Ticker)
Year-Over-
Year Chg.
(%)
Current
Estimate
($)
Est. 30
Days Ago
($)
Est. 60
Days Ago
($)
Est. 90
Days Ago
($)
Earns.
Ests.
Overall
Alaska Air ($70; ALK)
17
7.61
7.15
6.89
6.89
81
99
CBRE ($28; CBG)
15
2.34
2.32
2.32
2.25
91
96
Centene ($62; CNC)
27
3.72
3.64
3.35
3.30
99
97
Gilead Sciences
($90; GILD)
(3)
11.90
11.79
11.71
11.61
98
100
Kroger ($37; KR)
9
2.23
2.23
2.18
2.18
94
87
Lear ($102; LEA)
12
11.79
11.72
11.63
11.60
97
99
Southwest Air.
($37; LUV)
22
4.30
4.06
4.06
3.96
99
99
Notes: Kroger's upcoming year ends Jan. 2017.     Quadrix scores are percentile ranks, with 100 the best.

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