Thursday, October 23, 2014
Earnings remain front and center in today’s session, with positive results from a number of industry leaders helping boost investor confidence. Hard to tell whether the mood will last through the entire session or not, but markets definitely remain on track for a very strong open.
Of this morning’s releases, Caterpillar’s (CAT) blowout numbers and positive guidance are particularly notable given ongoing global growth worries that have been a big issue for the market. But the company’s positive numbers don’t tell us much about improving business conditions around the world. On the contrary, they see this recovery taking longer to take shape compared to prior cycles, and don’t expect any meaningful improvement in the global economy next year. The positive surprise at Caterpillar is primarily a function of internal operating efficiencies, a fancy way of saying that they are good at controlling costs.
Caterpillar’s construction equipment business is getting help from the U.S. housing recovery, but its mining business has been held back by slowing demand from Latin America and the Asia Pacific regions. And the current global growth worries that have been pushing down the prices of key commodities are weighing on the mining demand outlook as well.
Low oil prices may be bad for energy companies, but they are a boon for industries on the consuming side. Hopes remain high that the steady slide in gasoline prices will help consumer spending this coming holiday season. The strong earnings reports this morning from Southwest (LUV) and United Continental (UAL) reflect these lower fuel expenses and will benefit the entire transportation sector in the current period as well.
Including this morning’s reports from these and other major companies like 3M (MMM) and Comcast (CMCSA), we now have Q3 results from 176 S&P 500 members that, combined, account for 46.4% of the index’s total market capitalization. Total earnings for these 176 companies are up +5.5% from the same period last year, with 68.2% of the companies beating earnings estimates. Total revenues are up a much stronger +4.4%, with 46.6% beating top-line estimates.
The earnings growth rate for these 176 companies is modestly below the level we saw in 2014 Q2 and the average for the preceding four quarters. But it’s notably better on the top line, with the +4.4% revenue growth rate for the 176 companies up from +3.3% growth pace for the same group of companies in Q2 and the 4-quarter average growth rate of +2.5%. Unlike the improving revenue growth rate, fewer companies are able to come out with positive revenue surprises; the revenue beat ratio for the 176 companies tracking below levels we have been seeing for the same group of companies in recent quarters.
The composite growth rate for Q3, combining the actual results from the 176 S&P 500 members that have reported — with estimates for the still-to-come 324 companies — is for earnings growth of +3.7% on +2.8% higher revenues. Estimates for the current period (2014 Q4) have started coming down, with earnings currently expected to be up +5.3% from the same period last year. This negative revisions trend will likely accelerate further as the Q3 reporting cycle peaks next week.
Sheraz Mian
Director of Research
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