Thomas Kiely
Willing to change, that was the message new Microsoft CEO Satya Nadella was pushing as the firm released third quarter earnings.
Article / 30 October 2012 at 7:33 GMT

S&P500 Q3 earnings: Companies' revenue misses are a big concern

Peter Bo Kiaer Peter Bo Kiaer
Strategist & Equity Analyst / Private

Executive summary

  • 59% of companies have missed revenue expectations
  • The revenue miss is  now at 0.5% versus 0.1% the week before
  • Better earnings, but still trailing expectations by 2.9% 
  • Earnings surprise in 63% of the earnings reports

State of revenues and EPS in last week's reports
Companies are still having a hard time when it comes to revenues. Their struggle is becoming increasingly pronounced as indicated by several earnings reports last week in which revenues missed expectations by 0.5 percent, versus 0.1 percent in the previous week, see table 1. Meanwhile, the EPS surprise in last week's earnings reports improved to -2.9 percent versus -7.7 percent the week before. This of course was perceived positively by investors but declining revenue is definitely still a big concern.

Single incidents matter less and less as we move further into the earnings season but we probably need to see the end of this week before we can really draw conclusions. A total of 274 S&P 500 companies or 55 percent of all companies in the index, representing around 2/3 of market cap, have reported Q3 earnings so far.

SP500 earnings surprises

Finance is now the only sector which has recorded better than expected sales while the other sectors are below expectations. Finance declined a tad though to 2.2 percent above consensus and versus 2.9 percent the week before. IT was trailing by 1.1 percent but this has improved to -0.4 percent which is good news. The big change since last week though was in utilities. Six utility companies have reported so far and all were weaker on revenue, having missed expectations by a mile, i.e. -10.5 percent. This sector is clearly a laggard and reflects the poor state of economic activity.

Status on earnings
Consumer Discretionary has generally seen better earnings than what we could expect as we know US consumers are  struggling. Last week however the EPS surprise dropped from +4.5 percent to -2.2 percent but this is not due to a generally weaker trend but attributed to the big earnings miss from Amazon (NASDAQ:AMZN) of more than 125 percent. If we take Amazon out of the overall Consumer Discretionary sector's earnings performance calculation it is ahead by 2.5 percent.

Staples are still well ahead with a 6.0 percent increase but Energy continues to trail expectations and now stands at -6.4 percent. In Financials, 56 companies have reported and EPS is now well ahead of expectations by +7.3 precent.

IT is still behind EPS expectations by -35.1 percent. As mentioned last week, AMD (NYSE:AMD) had a really big miss of 1275 percent. If we again remove AMD from the equation then IT trails expectations by just 4.1 percent - still not a good number, though much more meaningful. In Telecom, EPS is now trailing by 11 percent versus -1.8 percent the week before  - much influenced by a large miss of 38 percent by Sprint Nextel (NYSE:S).

Earnings surprises were still in the normal high range by the end of last week with 63 percent of the companies ahead of expectations. The overall picture on revenues is stable from the week before as 59 percent of the companies have reported revenues below expectations, see table 2. (We are well aware that the numbers do not add up to 100 percent, but this is due to problems in the way Bloomberg classifies some of its data.)

SP500 earnings surprises

Investor price reaction overall has improved from -0.8 percent to -0.4 percent. Positive revenue surprises combined with positive EPS surprises is the preferred investment combination as prices of stocks meeting this criteria versus the S&P500 were up 2.2 percent, see table 2. The remaining combinations all have relative price drops where negative Revenue and Earnings surprise give rise to the largest drops. It is of course critical when both revenue and earnings face headwinds.

SP500 Earnings surprise and price reaction

Surprise development during the reporting season
Revenue/Sales is stable in relative terms, as mentioned above, and this translates into a rising net negative number given that we have more companies having reported. This is clear from chart 1, as we see that negative surprises continue to grow at a high pace.

Revenue surprise over the season

On the earnings front, the absolute number of negative surprises leveled out Friday, while positive surprises continued, see chart 2. The overall picture of net earnings surprises, being well into positive territory, is on par with what we normally see in the third quarter.

EPS surprise over the season

How far are we?
Looking at chart 3 we can see that almost 2/3 of market cap have reported so far in the season, see chart 3. By the end of this week the earnings season will be more or less over as we will near the 80 percent mark of market cap companies having reported.

Covered Market Cap during this season

The remainder of the season after this week will be a long trail of reports, though they will probably be unable to alter the overall conclusions of this earnings season.

This week
This is the last important week in the earnings season with 115 companies reporting and most concentrated on Tuesday to Thursday. Energy (20 companies) and Utility (17) are heavily represented, followed by Finance (16) and Industrials (14).

We continue to see companies confirming the picture that it is difficult to keep the pace in revenues with companies missing on estimates in 59 percent of the cases, which is the biggest concern overall for investors. Companies might in the short run be able to cut costs and get EPS in line with or better than expectations but to a certain extent this is not a valid business model as the company would cease to exist in a longer perspective. This is a big worry and we need to see progress and growth. That was why we saw an unusually strong reaction to better GDP growth numbers in the US on Friday.

Read also:

  1. The S&P 500 earnings season starts today: A Helicopter View 
  2. S&P500 Q3 earnings: Dour tone despite positive EPS surprise.
  3. S&P500 Earnings: Analysts cut growth outlook for 2012 and 2013.
  4. S&P500 Q3 earnings: A struggle to meet revenue expectations
  5. S&P500 Earnings: Don't just look at yearly EPS - look at quarters


I plan to publish several more articles about the Q3 earnings season over the next three to four weeks.  If you would like to be notified by email whenever I publish these stories, become a member of and follow me or the topics of your choice. Joining is free, and you can sign in with Facebook, Twitter, LinkedIn or Google.


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