by David Templeton, Horan Capital Advisors
With about 20% of companies in the S&P 500 Index reporting earnings, 70% have reported earnings exceeding analyst expectations. This is above the long term average beat rate of 63%. However, only 44% have reported revenue above analyst expectations, which is below the long term average of 62%. This suggests the EPS beat rate is being driven by cost cutting versus higher demand. As the below chart shows, 58% of the reporting companies that beat their EPS estimate also missed on revenue.
Source: Thomson Reuters
The growth rate of earnings on a year over year (YOY) basis for Q1 2013 is a low 2.1% in spite of the fact analyst had cut earnings estimates going into the first quarter.
Lastly, the number of negative pre-announcements remains high. Thomson Reuters reports there have been 112 negative EPS pre-announcements versus 26 positive ones. This results in a negative to positive ratio of 4.3 for the S&P 500 Index companies. Thomson notes, this would be the highest N/P ratio since Q3 of 2001.
One factor that seems to be driving revenue growth weakness for the larger companies that comprise the S&P 500 Index appears to be weakness in business outside the U.S. The Bespoke Investment Group prepared a chart showing sector performance versus percentage of revenue in the U.S. Those sectors that have companies that generate a smaller percentage of their revenue in the U.S. have been the weaker performers.
Source: Bespoke Investment Group
A part of this is related to issues in the euro zone as well as a slow down in the emerging market economies. The other factor is the strength of the U.S. Dollar, as we wrote about earlier this week in an article titled, Stronger U.S. Dollar Attracting Investment Flows To U.S. Assets.
For investors the economies around the world continue to adjust to higher debt levels and artificial stimulus by central banks. The resulting economic growth rates are ones that are slower or slowing resulting in a separation of the winners and losers at the company level.
