EARNINGS UPDATE – WHAT TO EXPECT FOR Q2 AND BEYOND
by ilene - July 13th, 2009 5:28 pm
EARNINGS UPDATE – WHAT TO EXPECT FOR Q2 AND BEYOND
Courtesy of The Pragmatic Capitalist
Earnings season is about the pick-up momentum and will certainly dominate the market direction over the coming 6 weeks. Preliminary results have been much better than expected. Analysts have backloaded their 2009 earnings estimates due to their expectations for a second half recovery. This puts us at an odd juncture in the market. The current quarter’s estimates appear to be relatively low, but the second half estimates appear a bit optimistic. Analysts currently expect a 14% decline in EPS versus Q2 of 2008. Third quarter is expected to decline 22% and full year results are expected to be down 14%. Full year expectations are for $59 in EPS while 2010 estimates are calling for $75. Both appear a bit optimistic. Thus far, there have been 6 positive surprises for every negative in Q2 earnings. Although there haven’t been many reports this quarter this likely bodes well for more of what we saw last quarter when the overwhelming majority of companies beat expectations.
My proprietary expectation ratio continues to show near-term deterioration. The data of late has been relatively light, but the change in trend is a certain sign that analysts are getting more aggressive with their earnings expectations. It’s important to note that the ER is an intuitive forward looking indicator.
So, what do I expect to see in Q2? Expect a huge amount of bottom line beats and in-line or worse than expected revenue figures. The economy is still incredibly weak so the top line growth has been about in-line with analyst’s expectations, however, companies are cutting costs much more efficiently than expected. This has created a huge divergence between the analysts revenue estimates and their top-line estimates. Our recent analysis of ths situation highlighted this phenomenon:
Cost cuts are no recipe for organic growth. That can only be achieved through top line growth. The implications here are that we are likely to see another quarter of “better than expected” bottom line earnings as analysts have adjusted their EPS estimates very little over the prior quarter. This could further juice the stock market. The more important factor to keep in mind, however, is that this is no recipe for long-term growth. We will need to see a sharp expansion in the economy before revenue
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site