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Will Q1 Earnings Be the Low Point for the Year?

The 2014 Q1 earnings season takes center stage this week with Alcoa’s (AA) release after the close on Tuesday. Alcoa isn’t the overall first to report Q1 results, though it is the first S&P 500 member with the calendar fiscal quarter to come out with results. Companies with fiscal quarters ending in February have been reporting since mid-March and all 21 of those form part of the Q1 tally.

In fairness to Alcoa, however, the market starts paying attention to the earnings season after their earnings announcement even though the list of companies that report before it includes such industry leaders like FedEx (FDX), Nike (NKE) and others. In total, we have 33 companies reporting Q1 results this week, including 8 S&P 500 members. The reporting cycle really gets into high gear from next, as the chart below shows.

 

Expectations for 2014 Q1

Estimates for Q1 started coming down at an accelerated pace as companies predominantly guided lower on the 2013 Q4 earnings calls, consistent with the trend we have been seeing for more than a year now. Total Q1 earnings for companies in the S&P 500 are currently expected to be down -3.3% from the same period last year, a material decline from the +2.1% growth expected in early January 2014. Please note that the expected Q1 earnings decline has been exacerbated by Google’s new class of stock. Excluding Google from the S&P 500, total S&P 500 earnings would be down (only) -2.7%.  

The negative revision trend is widespread, but is particularly notable for the Retail, Basic Materials, Autos, Consumer Staples, and the Energy sectors, as the chart below shows.

 
With roughly two-thirds of S&P 500 companies beating earnings expectations in any reporting cycle, actual Q1 results will almost certainly be better than these pre-season expectations. But Q1 is unlikely to repeat the performance of the last few quarters where we would witness a new all-time earnings total record each quarter. Total earnings for the S&P 500 reached a new all-time record of $267.6 billion in 2013 Q4.

Current estimates for 2014 Q1 aggregate to a quarterly total of $248.8 billion, but the expectation is that Q1 will be the low point for earnings this year, both in terms of earnings totals as well as the growth rate. Consensus expectations reflect a rebound in Q2, with the earnings totals in each of the following three quarters of the year setting new all-time records one after the other.

The chart below shows the aggregate quarterly earnings for the S&P 500 as whole.

 

Given the low Q1 expectations, it wouldn’t take much for companies to come out ahead of them. Roughly two-thirds of the S&P 500 members beat earnings expectations every quarter any way. So, more results along those lines would be nothing new and wouldn’t tell us much about the health of corporate earnings.

What we haven’t seen for a while instead is some evidence of strength on the revenue front and favorable comments from management teams about business outlook. Corporate guidance has been negative for almost two years now, causing estimates to keep coming down and the long hoped-for earnings growth turnaround getting pushed forward.  Guidance is important in any earnings season, but it is particularly important this time around given the relatively elevated expectations for the second half of the year and beyond.

Scorecard for 2014 Q1 (as of Friday, April 4th)

Total earnings for the 21 S&P 500 members were up +14.2% from the same period last year, with a ‘beat ratio’ of 57.1% and a median surprise of +1.9%. Total revenues were in the positive column as well, up +6.1%, with a revenue ‘beat ratio’ of 47.6% and a median surprise of +0.1%.

It’s premature to draw any conclusions from this small sample of results, but the growth rates and beat ratios for these 21 companies in Q1 are weaker than what we have seen from the same group of companies in other recent quarters. It has overall been a fairly uninspiring start to the Q1 earnings season.

For a detailed look at the earnings picture, please check out our weekly Earnings Trends report.

Monday-4/7

• Not much on the economic or earnings calendars.

Tuesday -4/8

• Not much on the economic calendar, though Alcoa will be reporting results after the close.
• Alcoa’s estimates have inched up in recent days, with the current Zacks Consensus EPS of 5 cents up a penny over the last 7 days.
• WD-40 Company (WDFC) is the other notable company reporting results after the close.

Wednesday-4/9

• We will get minutes of the Fed’s March 19 meeting in the afternoon, where it will be interesting to see discussion about the economic outlook. Unfortunately for all of us, we will most likely nothing about the ‘6 months’ comment that the Fed Chairwoman made in her news conference after the meeting.
• Constellation Brands (STZ) and Progressive Corp (PGR) will report in the morning, while Bed, Bath & Beyond (BBBY) will report after the close.

Thursday -4/10

• While weekly Jobless Claims numbers will come out in the morning, we will get details about Federal Budget in the afternoon.
• Family Dollar (FDO), Rite Aid (RAD), and Pier 1 Imports (PIR) are the notable companies reporting today, all in the morning.

Friday-4/11

• We will get the March PPI and the advance read on the University of Michigan Sentiment survey.
• J.P. Morgan (JPM), Wells Fargo (WFC) and Fastenal (FAST) are the key reports today, all in the morning.

Here is a list of the 33 companies reporting this week, including 8 S&P 500 members.

Company	Ticker	Current Qtr	Year-Ago Qtr	Last EPS Surprise %	Report Day	Time
NOVAGOLD RSRCS	NG	-0.03	-0.04	-100	Monday	AMC
SCHULMAN(A) INC	SHLM	0.34	0.27	18.75	Monday	AMC
TEAM INC	TISI	-0.01	-0.01	0	Monday	AMC
ZEP INC	ZEP	0.09	0.17	6.25	Monday	AMC
ALCOA INC	AA	0.05	0.11	-33.33	Tuesday	AMC
INTL SPEEDWAY	ISCA	0.33	0.33	-6.78	Tuesday	BTO
MISTRAS GROUP	MG	0.12	0.07	3.33	Tuesday	AMC
SCIENCE APP INT	SAIC	0.65	N/A	-12	Tuesday	AMC
WD 40 CO	WDFC	0.67	0.66	1.37	Tuesday	AMC
BED BATH&BEYOND	BBBY	1.6	1.68	-2.61	Wednesday	AMC
PROGRESSIVE COR	PGR	0.4	0.42	0	Wednesday	BTO
CONSTELLATN BRD	STZ	0.76	0.47	20.88	Wednesday	BTO
ANGIODYNAMICS	ANGO	0.1	0.08	0	Wednesday	AMC
APOGEE ENTRPRS	APOG	0.31	0.15	0	Wednesday	AMC
API TECH CORP	ATNY	0	-0.12	-800	Wednesday	AMC
JOES JEANS INC	JOEZ	-0.01	0.03	-50	Wednesday	AMC
MSC INDL DIRECT	MSM	0.86	0.9	5.32	Wednesday	BTO
NORTHRN OIL&GAS	NOG	0.22	0.29	-4.35	Wednesday	AMC
PENFORD CORP	PENX	0.09	0.1	-172.73	Wednesday	BTO
PRICESMART INC	PSMT	0.87	0.82	-2.74	Wednesday	BTO
RICHARDSON ELEC	RELL	0.05	0.04	66.67	Wednesday	AMC
RUBY TUESDAY	RT	-0.07	0.1	-79.17	Wednesday	AMC
SIGMA DESIGNS	SIGM	0.01	-0.61	0	Wednesday	AMC
FAMILY DOLLAR	FDO	0.91	1.21	-1.45	Thursday	BTO
COMMERCE BANCSH	CBSH	0.68	0.64	-2.82	Thursday	BTO
IGATE CORP	IGTE	0.37	0.47	2.27	Thursday	BTO
PIER 1 IMPORTS	PIR	0.4	0.6	-7.14	Thursday	BTO
RITE AID CORP	RAD	0.05	0.21	0	Thursday	BTO
SHAW COMMS-CL B	SJR	0.38	0.37	-4.17	Thursday	BTO
TITAN MACHINERY	TITN	0.18	0.73	-46	Thursday	BTO
FASTENAL	FAST	0.37	0.37	-2.94	Friday	BTO
JPMORGAN CHASE	JPM	1.43	1.59	6.87	Friday	BTO
WELLS FARGO-NEW	WFC	0.96	0.92	2.04	Friday	BTO

 
ALCOA INC (AA): Free Stock Analysis Report
 
BED BATH&BEYOND (BBBY): Free Stock Analysis Report
 
FASTENAL (FAST): Free Stock Analysis Report
 
FAMILY DOLLAR (FDO): Free Stock Analysis Report
 
FEDEX CORP (FDX): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
NIKE INC-B (NKE): Free Stock Analysis Report
 
PROGRESSIVE COR (PGR): Free Stock Analysis Report
 
PIER 1 IMPORTS (PIR): Free Stock Analysis Report
 
RITE AID CORP (RAD): Free Stock Analysis Report
 
CONSTELLATN BRD (STZ): Free Stock Analysis Report
 
WD 40 CO (WDFC): Free Stock Analysis Report
 
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
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