This is the third edition of our new feature: Blogger’s Take. This week, at about the halfway point through quarterly reporting, we have a go at Earnings, Revenue and Guidance.
Good upside surprises, weak upside guidance: According to Birinyi Associates, the current quarter has so far matched last quarter with the second highest “beat rate” since the bull market began – so far, 72% of S&P 500 companies have beaten estimates. On the opposite side, only ten percent have missed estimates, which is the lowest quarterly figure of the bull market. Upside guidance this earnings season has not been as positive. Just six percent of companies have guided higher, which is the lowest level seen since the first quarter of 2003.
And while we have had some enormous success stories, we all have seeen quite a few blow ups. I would characterize this quarter as "Very strong, but with some significant dissappointments."
What does our blogging crew think? Let’s have a look:
Are we having a good earnings season, a bad one or something in between? We can all name some of each. I think a bull or a bear could spin this go around to make their argument.
Instead of trying cherry pick certain reports to fit my opinion I think it makes sense to look at how the market is reacting. The market is working higher, maybe grinding higher is a better description but either way I don’t think the net result, so far, after factoring in the good, the bad and the ugly is an obstacle for the market. Quite the opposite actually, blowups notwithstanding, as the market has defied the skeptics, me included.
My net conclusion is that I still think the market will correct and when/if it does earnings will play no part in a turning point. There are many obstacles, indicators and supposed truisms that say the market “has” to correct and I think it will be these things, things Barry for one has written about, that carry more weight than earnings.
Roger Nusbaum, Random Roger
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I’m siding with the Bears on this one. The Bulls are pointing to a few pockets of great earnings as evidence of a larger trend that doesn’t exist. Google’s earnings are about as good an indicator of the state of the economy as Peyton Manning’s completion percentage is to who wins the World Series. Pockets of good and bad always exist, regardless of overall economic trends, but pundits tend to see what they want to see in the news. I expect many more earnings disappointments over the next year.
-Rob May, Business Pundit
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Even though third-quarter earnings season has been welcomed by Dow 12,000, some interesting trends have emerged thus far.
While we are less than two weeks into earnings season (Alcoa’s report on 10/10 marked the start), 125 S&P 500 companies have reported. Using quarterly comparisons, the current quarter has so far matched last quarter with the second highest beat rate since the bull market began — 72% of S&P 500 companies have beaten estimates. On the opposite side, just ten percent have missed estimates, which is the lowest quarterly figure of the bull market.
Upside guidance this earnings season has not been as positive. Just six percent of companies have guided higher, which is the lowest level seen since the first quarter of 2003.
Analyzing the one-day price impact from earnings reports, companies that have beaten estimates have gone up an average of just 26 bps while companies that have missed have averaged a loss of 5.4%. We realize that as earnings season continues, the averages should become more inline with prior quarters, but the current figures show that misses are being punished while beats are not being rewarded.
On a sector basis, energy, tech and health care have had the highest beat rates while consumer staples, industrials and materials are missing estimates the most.
Justin Walters, Ticker Sense
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From 1960 to the present, the S&P 500 Index stocks have paid out an average of 50% of their earnings as dividends. The low point for this proportion was 2000-2001, when dividends dropped to 29% of earnings. The present time period is the second lowest since 1960, as we now stand at 33%. The drop in the market from 2000 to 2002 corresponded to a period in which dividends went from 29% up to almost 65% of earnings. In other words, the dividend:earnings ratio reverted to its long-term mean by earnings taking more of a tumble than dividends. Indeed, dividends remained relatively stable from 2000-2002; it was earnings that took the hit.
While we don’t know the exact timing of any future reversion to this historical mean, we do know it can only happen in one of two ways: by dividends rising much faster than earnings or by earnings falling much faster than dividends. S&P earnings have risen sharply since 2003, from $27.59 to the current $74.49. During this period, dividends have not kept pace with the earnings rise: we’ve actually seen a decline in the dividend:earnings ratio. If companies aren’t going to increase the proportion of earnings they pay out as dividends when times are this good, it’s hard to know what will make them raise the allocation.
Which leaves us only falling earnings to return us to historical norms.
-Brett N. Steenbarger, Ph.D. Traderfeed
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yeah yeah yeah. when all the data that wasn’t being dissected by the mainstream media showed up on contrarian blogs like this one including this piece, if you acted and pulled all your positions you watched as the DOW hit 9k, then 10k, then 11k, now 12k. you missed out big time. i don’t question the numbers, i always question the timing. the market is dominantly about psychology. reality and logic take a back seat.
As with all cyclical things, earnings are not likely to sustain their lofty levels. And the dividend ratio seems like a good touchstone to remind us of how high the earnings are (relative to historical norms).
However, using the dividend ratio as a normative trend line could be a mirage.
In each of the past three years, corporations have returned a record amount of cash to shareholders. Not in the form of dividends, but as share buybacks.
Simply looking at dividend payout ratios, today versus previous periods ignores the simple fact that stock buybacks have become extremely prominent as a way to return capital to shareholders over the last 10 years. The rise of stock options (and the need to offset their dilution) is a huge reason, and not something that was an issue in the 1960’s or 1970’s. What happens to the payout ratio if both dividends AND share repurchases are accounted for? I bet we would be a lot closer to 50%.
Here is the economic news I heard today:
So I’d say the economy is not all that good right now, in spite of the general tenor of the press.
And with the unprecedented and unmitigated corruption and incompetence in our federal government, the direction is clear…
Dividends plus buybacks yield. If you want to know the raw data, click through to S&P’s PDF (PDF, natch). In 06Q2, buybacks were twice dividends. I like that traderfeed guy otherwise, but on dividends he is missing 2/3 of the story.
Don’t guess the data; know them.
FD: not bullish, but realistic and despite buying puts today and probably tomorrow going into GDP, net long.
Detroit Dan, your response could’ve been written 5 years ago or today. makes no difference. there’s always news to spin in the direction you want. the key to making money is float with the tide until it turns against you then run for cover before the sheeple catch on. it’s pretty simple to stay ahead of them.
you know what.. people have gotten so used to getting screwed the last six years they think it’s normal… the market could go down 20% tomorrow and most people would barely notice, or care.
heh heh
sheeple . . . I love that word