22 February 2012 at 10:10 GMT
Given the latest talk about Apple distorting the earnings season’s surprise factor and aggregate earnings, we have dug into the numbers ourselves.
With 380 out of 500 companies in the S&P 500 having reported earnings the conclusions are:
Aggregate 4Q net income is USD 194 bn. up 5.4% YoY with an earnings surprise of 3.3% (actual 4Q net income less estimate).
Of the USD 6.3 bn. net income surprise Apple stands impressively for 55.3%. Yes, it seems the distortion may be there.
Excluding Apple’s net income from the aggregate, the S&P 500 only had an earnings growth of 1.6% YoY and 1.6% earnings surprise. So the earnings surprise seems to be very much distorted by Apple's blowout earnings.
However, to balance things out, we also tried removing the largest negative surprise - Bank of America - along with Apple. Excluding both numbers, the S&P 500 has had net income growth of 3.8% YoY and and earnings surprise of 2.8%. Slightly better than only excluding Apple.
Financials and utilities had an unusual quarter
Financials are still weak and the fourth quarter in particular was tough, with unusually low investment banking activity. Fourth quarter net income in financials was also driven by many non-cash items. Excluding financials and Apple from the aggregate net income figures, the S&P 500 had net income growth of 5.4% YoY and an earnings surprise of 2.0% The earnings growth increased, but the surprise factor fell when compared to only excluding Bank of America, which signals that financials in aggregate actually surprised despite of the weak fourth quarter.
Fourth quarter also saw a very unusual mild winter weather in the US, impacting utilities and distorting their YoY numbers. Excluding Apple, financials and utilities, S&P 500 had net income growth of 5.7% YoY and an earnings surprise of 2.3%
So when excluding the three most distorting components (Apple, financials and utilities) we end up with net income growth of 5.7% YoY, above the aggregate 5.4% YoY for all of S&P 500. At the same time the earnings surprise fell to 2.3% in the quarter, which is in line with the previous two quarters. So Apple clearly distorted the numbers a bit, but the overall picture is still good.
In fact a 5.7% YoY growth in net income for the real economy (S&P 500 excluding Apple, financials and utilities) is very acceptable, given the difficult business environment in 4Q, with a weak European economy that we know declined in the fourth quarter.
An earnings surprise of 2.3% is also still 9.5% annualized, so overall, the earnings season has been good.