Earnings in 4Q13 were marked by two distinct trends.
- The first was the resurgent import of fundamentals. Relative to prior quarters where Macro completely monopolized price action, "The Print" mattered with companies missing EPS estimates being sold aggressively.
- The second was the pitiful operating performance (both absolute & relative to expectations) for consumer companies as only 30% of Staples companies beat revenue estimates and less than half of Staples & Consumer Discretionary companies reported accelerating top/bottom-line growth or sequential margin expansion.
At the midpoint in 1Q14 earnings, the trends are looking very much the same as those that prevailed in 4Q13.
BEAT-MISS: With ~50% of SPX constituent companies having reported 1Q14 results, the Sales BEAT-MISS spread is trailing both the 4Q and TTM averages while the EPS beat percentage stands at 74.5% - ahead of both the 4Q13 and TTM average of 72%.
Of course, as has been the case for the last 4 years, the progressive deflation of expectations ahead of the quarter remains the best means to manufacturing a “beat”.
This quarter has not been an exception as topline estimates for 1Q14 have drifted steadily lower for SPX constituents into and through the new year.
BEAT/MISS vs SUBSEQUENT PERFORMANCE: Of the minority of companies that have missed bottom line estimates, 81% have gone on to materially underperform (-3.2% on ave.) the market over the subsequent 3 trading days.
Similarly, 69% of companies missing topline estimates have subsequently underperformed the market by -2.9% on average over the following three days.
OPERATING PERFORMANCE: Despite the generally positive Beat-Miss trends, operating performance has once again been underwhelming with just 42% and 40% of companies registering sequential acceleration in sales and earnings growth, respectively.
Margin performance has been similarly unimpressive with only 47% of companies reporting sequential operating margin expansion according to bloomberg data.
From a sector perspective, Utilities and Energy have led operating performance while everyone else sits on the wrong side of the 50% Mendoza line.
STYLE FACTOR PERFORMANCE: From a style factor perspective, High Short Interest. Low Yield, and High Sales Growth names have performed notably better vs. prevailing topline expectations than their inverses.
Christian B. Drake