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CHICAGO, Feb. 10, 2014 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Bank of America (NYSE:BAC-Free Report), Verizon (NYSE:VZ-Free Report), Travelers (NYSE:TRV-Free Report) and Prudential Financial (NYSE:PRU-Free Report).
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Positive Surprises & Negative Guidance
The jobs report didn't remove doubts about the economy, but investors don't appear ready to give up; at least not yet. Whether the frigid weather has anything to do with the recent run of soft data or not, it has nevertheless been a pain in the neck. Hard to envision how the green shoots will sprout with all the snow sitting around.
We may not be 100% sure about what's going in the economy, but there is little doubt about the corporate earnings picture. The Q4 earnings season is by no means over, with more than 400 companies releasing results this week, including 55 S&P 500 members. But the bulk of the reporting season is now behind us, giving us a good enough sense of how good, or otherwise, this reporting season has been.
We are sticking with our overall take that the Q4 earnings season has turned out to be no worse than other recent quarters. In fact, this earnings season is better than recent quarters in terms of earnings growth and positive surprises. Where it's no different from other recent quarters is in terms of lackluster top-line growth and continued negative guidance.
It appears that investors were looking for something better, particularly on the guidance front. The hope was that given the improving domestic economic scene and signs of stabilization in Europe, we will get relatively reassuring guidance from management teams. But we didn't get that, with managements continuing to provide sub-par outlooks for the coming quarter(s).
In other words, management teams are dishing out what they have been doing for more than a year now. And this is prompting estimates for the current quarter to come down, as the chart below shows.
Q4 Earnings Scorecard (as of Friday, 2/7/2014)
Total earnings for the 345 S&P 500 members that have reported already, combined accounting for 78.6% of the index's total market capitalization, are up +11.4% from the same period last year, with a 'beat ratio' of 69.6% and a median surprise of +2.5%. Total revenues are barely in the positive column, up only +0.2%, with a revenue 'beat ratio' of 62.6% and a median surprise of +0.8%.
More companies have beat earnings and revenue expectations than has been the case in recent quarters, as the chart below shows. Perhaps expectations had fallen a bit low ahead of the Q4 reporting season.
The earnings growth rate for these 345 companies is better than what we saw from this same group of companies in Q3 and the 4-quarer average. A big contributor to the strong Q4 earnings growth is easy comparisons for three companies – Bank of America (NYSE:BAC-Free Report), Verizon (NYSE:VZ-Free Report), and Travelers (NYSE:TRV-Free Report). Exclude these three companies and total earnings growth for the S&P 500 companies that have reported drops to +6.7% from the 'headline' +11.4%, which is about where growth has been in recent quarters.
The revenue growth rate is notably weak, but that's primarily because of the Finance and Energy sectors.
Prudential Financial (NYSE:PRU-Free Report) had an unusually large top-line gain in the year-earlier quarter and is a big reason for the Finance sector's -12% drop in reported revenues. Excluding these two sectors, total revenue growth for the S&P 500 improves to +4.4%, which compares to +4.6% gain for the same group of companies in Q3 and the 4-quarter average of +2.9%. What this means is that top-line growth is weak, but it's as weak as the 'headline' +0.2% gain would make you believe.
The Composite Growth Picture
The 'composite' picture for Q4, where we combine results from the 345 companies that have reported already with the 155 still to come, is for growth rate of +8.9%. This will be the highest quarterly growth pace of 2013, with easy comparisons playing a non-trivial role in propping up the growth pace. The +8.9% growth rate compares to +5.0% in Q3 and +4% in Q2.
Finance remains a big growth driver in Q4 – total earnings growth for the S&P 500 in Q4 drop to +5.9% once the sector is excluded. Energy continues to be a drag on aggregate growth, with total earnings for the sector expected to be down -9.8% in Q4 after declining -8.4% in Q3. Excluding the Energy sector, total Q4 earnings for the S&P 500 would be up +11.7% vs. +6.9% in Q3.
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