Q3 Earnings Season Preview

The Q3 earnings season has gotten underway, with results from 24 S&P 500 members already out. The reporting pace picks up this week, with 78 companies coming out with Q2 results, including 34 S&P 500 members. All the big banks are on this week’s reporting docket, but we have plenty of bellwethers from other sectors as well to give us a good flavor of this earnings season.   

Banks had to deal with a tough operating environment over the summer, with modest gains in the core loan portfolios offsetting the mixed capital market business, soft advisory activity levels, and the seemingly never-ending low interest backdrop. Adjusting for easy comparisons at Bank of America (BAC), overall profitability for the group is expected to be essentially flat from the same period last year, with revenues constrained by continued net-interest margin pressures and cost cuts as the major tool for earnings growth. Total earnings for the Finance sector are expected to be up +6.5% on -4.2% lower revenues in Q3. Excluding Bank of America, the sector’s Q3 earnings would be flat from the year-earlier level (up only +0.1%).

Here are this week’s key earnings reports:

• Tuesday (10/13) – Johnson & Johnson (JNJ) is the key report in the morning while Intel (INTC) and J.P. Morgan (JPM) will report after the close.

PC makers were hoping to get a boost from the Windows 10 rollout, but IDC and Gartner data indicates that PC shipments were down in Q3, with IDC putting the year-over-year decline at a bigger-than-expected -11%. It will be interesting to see if Intel was able to buck the trend with the help of its new Skylark chip. Intel beat on the top and the bottom lines in Q2 and is expected to earn 59 cents on $14.2 billion in revenues vs. EPS of 66 cents and revenues of $14.55 billion in the year-earlier quarter.

• Wednesday (10/14) – Netflix (NFLX) is the key report after the close, while Bank of America (BAC) and Wells Fargo (WFC) will be reporting in the morning.

Easy comparisons are expected to help Bank of America, with the bank expected to earn 34 cents on $21 billion in revenues vs a one cent loss on $21.2 billion in revenue in the year-earlier quarter on a big charge. The Bank of America earnings ‘growth’ is the primary driver for the better growth picture for the Finance sector as whole.

Netflix is expected to earn 7 cents on $1.74 billion in revenues vs. EPS of 14 cents on $1.4 billion in revenues in the 2014 quarter. More than EPS and revenue, the focus will be on subscriber growth, which the company guided at 1.15 million for the domestic market and 2.4 million for the international segment. Recent price increases across the international and domestic markets indicate that demand trends remain favorable.

• Thursday (10/15) - Goldman Sachs (GS) and Citigroup (C) will be the key reports in the morning, while Schlumberger (SLB) will be reporting after the close.

 Recent forecasts from the U.S. government’s Energy Information Administration about coming declines in domestic oil production makes the Schlumberger earnings call very interesting. They are the largest oilfield services player whose comments about the state of the oil patch carry a lot of credibility. With respect to earnings, Schlumberger typically comes out ahead of estimates – the last time they missed EPS estimates was in 2011. They are expected to earn 77 cents per share on $8.6 billion in revenues vs. EPS of $1.49 on $12.6 billion in revenues in the year-earlier quarter.

• Friday (10/16) – General Electric (GE), Honeywell (HON) and Kansas City Southern (KSU) are some of the key reports on Friday, all in the morning.

GE’s energy business has suffered as a result of weakness in that sector, a major reason for the conglomerate’s tough comparisons in Q3. The company is expected to earn 26 cents per share on $28.7 billion in revenues vs. EPS of 38 cents on $36.2 billion in revenues in the year-earlier quarter. The company is going through a transition phase at present, as a result of which it will exit the Finance business altogether. The recent interest of activist investors in the company will likely accelerate the transformation process.

The chart below shows the weekly reporting calendar for companies in the S&P 500 index.

Q3 Scorecard (as of Friday, October 9th)

With Q3 results from 24 S&P 500 members already on the books, total earnings are down -0.2% on +6.3% higher revenues, with 70.8% beating EPS estimates and 58.3% coming ahead of top-line expectations. The table below provides the current Q3 scorecard.

This is better performance than we have seen from the same group of 24 S&P 500 members in other recent periods, particularly on the revenue side. Hard to draw any conclusions from this small sample of results. But persistence of this trend over the coming days will represent a notable improvement in the earnings picture.

Q3 Estimates As a Whole

Combining the actual results from the 24 S&P 500 members that have reported results with estimates for the still-to-come reports, total earnings for the index are expected to be down -5.7% from the same period last year on -5.7% lower revenues.

The headwinds from Q2 are at play in Q3 as well, with a combination of Energy sector weakness, dollar strength and global growth uncertainties weighing on the outlook. Excluding the drag from the Energy sector (Energy sector earnings expected to be down -64.8% year over year), total earnings for the index would be up +1.4% on -0.7% lower revenues.

Energy stands out for the wrong reasons, as briefly mentioned earlier, but it is hardly the only one with negative earnings growth in Q3. In fact, half of the 16 Zacks sectors are expected to have lower earnings in 2015 Q3 relative to the year-earlier period, with Industrial Products (earnings decline of -23.7%), Basic Materials (-22.6%) and Conglomerates (-15.3%) as the big decliners.

On the positive side, the Finance sector is expected to have positive growth.  But that’s largely thanks to easy comparisons at Bank of America, as indicated earlier. Other sectors with positive earnings growth in Q3 include Transportation (earnings growth of +17.1%), Autos (+20.9%), Construction (+7.4%) and Medical (+8.0%). Total earnings for the Technology sector are expected to be up +1.8% from the same period last year, but the sector’s growth rate drops into negative territory once Apple’s (AAPL) strong contribution is excluded from the numbers.

The table below presents the summary picture for Q3 contrasted with what companies actually reported in the 2015 Q2 earnings season.

 
Looking Beyond Q3

The chart below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q3 and what was actually achieved in Q2. As you can see, this year has effectively been washed out, with growth expected to resume early next year and accelerate from there onwards. Total earnings for the S&P 500 index are effectively flat this year, but are expected to be up in double-digits next year.

Economists define two back-to-back quarters of negative GDP growth as a recession. If the Q3 earnings growth rate stays in the negative territory as currently projected, then we will be well within out rights to call it an earnings recession. As you can see in the above chart, analysts expect the earnings growth picture to start turning around next year and really accelerate towards the back-half of 2016.

The relatively optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well…and we will likely see something similar to current 2016 estimates as well.

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Note: For a complete analysis of 2015 Q3 estimates and actual Q2 results, please check out weekly Earnings Trends report.


Here is a list of the 78 companies reporting this week, including 34 S&P 500 members.

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