Leigh Drogen

About the Author Leigh Drogen

Leigh Drogen is the Founder and CEO of Estimize. Estimize is an open financial estimates platform which facilitates the aggregation of fundamental estimates from independent, buy-side, and sell-side analysts, along with those of industry experts, private investors and students. By sourcing estimates from a diverse community of individuals, Estimize provides both a more accurate and more representative view of expectations compared to sell side only data. Leigh started his career as a quant trader at Geller Capital, a White Plains, NY based fund where he ran strategies that looked at earnings acceleration and analyst estimate revision models, as well as price momentum and several sentiment indicators. Leigh later went on to be the founder of Surfview Capital, a New York based asset management firm that used many of the same strategies as Geller Capital, with a focus on higher beta names on an intermediate term time frame. His educational background includes focus in economics and international relations, specifically war theory. He is a graduate with honors from Hunter College in New York City. You can contact Leigh by emailing him at Leigh@estimize.com

Fourth Quarter Earnings Season Halftime Report


Highlights:

– The biggest concerns this quarter remain the stronger dollar, global weakness and lower oil prices.

– The S&P 500 currently has a blended earnings growth rate of 6.6% and revenue growth of 2.0%.

Health Care leads earnings and revenue growth for Q4, growing 23.7% and 10.3%, respectively. Again this season, growth is mostly within Biotech, due to Gilead Sciences (NASDAQ:GILD) and the strength of their Hep C drugs, Sovaldi and Harvoni.

Information Technology is currently anticipated to post the second highest numbers, with profit growth of 17.4% and sales up 8.6%. The sector’s leading growth are the semiconductors and electronic equipment; however, the big standout this season is Apple (NASDAQ:AAPL). Without Apple, overall S&P 500 earnings growth drops to 3.5% from 6.6%. Standouts in each industry this season have been Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB).

– Lagging on EPS for Q4 is Energy, of course due to lower oil prices over the course of the quarter. Earnings growth is expected to be down 19% year-over-year, with revenues declining 13.2%.

– Beat/Miss/Match: 317 companies have reported. Compared to the Estimize consensus, 58% beat on EPS, 36% missed and 6% met, while on revenues 48% beat and 52% missed. For the Wall Street consensus, 72% beat on EPS, 19% missed and 9% met, while on revenues 57% beat and 43% missed.

With 317 S&P 500 companies reporting thus far, we are technically past the halfway mark for Q4 earnings season. One thing is for sure, results have been somewhat lackluster, with the exception of a handful of big blowouts. So far the fourth quarter season has taught us that US companies aren’t immune to global weakness, with nearly 20% of companies in the index mentioning the negative impact of a stronger dollar. However, we have seen that well-managed corporations are better equipped to cope with those currency headwinds, and still able to come out ahead. Lower oil has also been a pain point for companies within the energy and industrials sectors, yet has been a positive for retailers, airlines, and leisure names.

With only 6 of the 10 sectors expected to show YoY profit improvements for the fourth quarter, overall growth for the S&P 500 currently stands at 6.6%. This is actually a decent improvement from the beginning of peak season on January 26 when estimates were fairly lower at 4.6%. Revenues remain muted at 2.0%, only lifting about 0.8 percentage points in the last couple of weeks. Leading fourth quarter growth is the Health Care and Information Technology sectors, up 23.0% and 17.4%, respectively.

It is no surprise to see Health Care on a tear again this season, with Biotechnology companies driving growth for the sector. Biotech alone has increased a whopping 63% on the bottom line and 42% on the top line in comparison to Q4 2013. There are only seven companies within the sector, but once again Gilead Sciences is pushing the industry higher, with Q4 profit growth of 342% YoY. When the company reported on Wednesday, EPS came in at $2.43, beating the Street by $0.27 and the Estimize consensus by $0.16. Revenues came in at $7.3B, also beating both estimates. While the company saw continued success of its Hepatitis C drugs, Slovaldi and Harvoni, they admitted having to offer steeper-than-expected discounts to health insurers who had complained about the price, concessions that are necessary now that the company has competition with AbbVie in the Hep C market. With that said, the forward four-quarter outlook for biotech and Health Care as a whole looks rosy, with analysts anticipating double-digit profit growth to continue in 2015.

The biggest sector improvement seen this season is in Information Technology. That sector was only expected to grow 11% on Jan 1 and has now risen to be the second biggest leader among all 10 sectors at 17.4%, with accompanying revenue growth of 8.2%. The best performing industries are semiconductors, up 31.1%, and electronic equipment, instruments & components, up 25.6%. However, as many following this earnings season know, Apple, which is within the technology hardware, storage & peripherals industry, is doing most of the work. In fact, if you remove Apple from the index, S&P 500 growth would nearly be cut in half, reducing to 3.5% from the current 6.6%. Apple is the largest company by market capitalization in the S&P 500, making up 3.3%, and is therefore the most heavily weighted.

It shouldn’t be terribly shocking that the largest laggard this quarter is Energy. Energy was always expected to be the biggest loser with oil prices dipping 40% over the course of the quarter. However, Exxon Mobil (NYSE:XOM), the largest oil company in the S&P 500 quelled some of the sting when they surpassed earnings expectations last week. Exxon reported EPS of $1.56 vs. an expectation of $1.41. Revenues didn’t fare as well, coming in at $87.3B vs. an estimate of $93.4B. The better-than-expected bottom-line number pushed growth to -19.0% from -23.0%. Things don’t get easier for the sector in 2015, with growth expectations dipping to -45% for the year. There is a major debate about at what threshold lower gas prices stop being a good for the economy. We maintain that lower gas prices still have a net positive effect, and that consumers, who are 70% of GDP, will continue to benefit and offset any negatives.

After two quarters of what looked like recovering top-line growth, we’re now seeing a return to low single digit revenue growth, which currently stands at 2.0%. The usual suspects are responsible, with Energy down 13.2% and Materials down 2.6% on lower commodity prices throughout the quarter. Analysts expect we will continue on this low growth path for all of 2015, with full year expectations nearly flat at 0.2%.

As far as the beat/miss/match rate goes, of the 317 companies reported, 58% have beat the Estimize EPS consensus, 36% have missed and 6% have met. This is in comparison to the Wall Street consensus – 72% of companies have been able to beat, 19% have missed, and 9% have met. For revenues, 48% of companies have beat and 52% have missed the Estimize consensus, while 57% have beat and 43% have missed the Wall Street consensus.

Earnings season marches on this week with 67 S&P 500 components scheduled to release results.