With Q3 earnings season drawing to a close we would like to shine a spotlight this week on John Prestbo’s excellent coverage of if from B400’s perspective. Below you may find John’s last three posts on the subject, covering overall surprise levels at the market cap and sector levels as well as the change in overall grades following announcements by most of B400’s components. Please check out John’s B400 Diary regularly for insightful commentary on the state of B400 selections and overall trends affecting the index. Next week we’ll post a final summary of the latest earnings season in order to tally B400’s final overall results. Enjoy!
For B400 Companies, Smaller Surprises and Bigger Disappointments
By John Prestbo – 11/11/2013
Now that almost 80% of the Barron’s 400 Index companies have announced third-quarter results, a second assessment of profit and revenue is due.
On balance, the news is a little less favorable than when we last looked, about two weeks ago. Earnings surprises are somewhat smaller, though revenue surprises are bigger. But the disappointments, while still in a small minority, grew larger. The best news is that year-over-year results look very good.
Of the 319 that have disclosed sales and earnings, 224 (or 70%) had profits that were higher than securities analysts had predicted. The average “surprise” was 4.75% above expectations.
In our previous assessment, when 28% of the Barron’s 400 companies had reported, 70.5% had surprises averaging 6.8%. This time, only 27.5% of the companies have fallen short of profit forecasts, which is in line with our earlier assessment. However, the average disappointment expanded to 19.26% from 12.5% previously.
A brighter picture emerges in comparing this year’s third-quarter results with those in 2012. Overall, the reporting companies had per-share profits 18.7% higher than a year earlier. More than 70% with higher earnings averaged gains of 48.1%. Just 23% had lower year-over-year profits, but the deficits averaged 72%.
Turning to revenue, almost all the reporting companies confounded the analysts. For all of them, the average was 2.3% higher than expected, down a tad from 2.6% in our earlier assessment.
Of the 188 companies surprising on the upside, the average improvement was 6.7%—a full percentage point more than previously. The 129 that fell short had an average disappointment of 4%, nearly double the 2.5% we found last time.
Compared to the same quarter last year, the reporting companies averaged revenue gains of 14.4%. A whopping 85% of them averaged top-line growth of 18.7%. Only 43 companies reported lower revenue, averaging 12.6%.
With one-fifth of the Barron’s 400 companies remaining to report third-quarter results, some of these averages could change in the weeks ahead. We’ll tell you if they do and by how much.
As Results Roll In, B400 Sector Soft Spots Shift a Bit
By John Prestbo – 11/12/2013
There are still some sector soft spots showing up in the third-quarter results-reporting season for Barron’s 400 Index companies, but they aren’t the same ones as two weeks ago. Now, with nearly 80% of the index components announcing results, some sectors have fattened their earnings and revenue surprises while others are slimming theirs—and even are creating disappointments in a couple of cases. But almost without exception the comparisons to third quarter 2012 are impressive. Here is a table comparing this most recent assessment with the one two weeks ago, when just 28% of the Barron’s 400 companies had reported, as well as with year-earlier results.
| Sector | Average EPS Surprise | Previous EPS Surprise | EPS Gain vs. 3Q 2012 |
| Consumer Discretionary | -3.49% | 2.16% | 21.00% |
| Consumer Staples | 5.88% | 6.31% | 33.57% |
| Energy | -12.53% | 12.93% | 18.81% |
| Financials | 0.51% | -5.85% | 11.15% |
| Health Care | 16.56% | 6.52% | 20.87% |
| Industrials | 5.44% | 2.49% | 25.97% |
| Materials | 17.77% | 3.97% | 7.53% |
| Technology | 7.07% | 7.50% | 24.03% |
| Utilities | 10.19% | N/A | 4.64% |
Averages can be skewed by “outlier” data, and such is the case with three sectors. Consumer discretionary went from a positive to negative earnings surprise in large part because Entravision Communications Corp., a Spanish-language media company, reported a third-quarter loss of 24 cents a share instead of the forecasted profit of nine cents. In energy, DCP Midstream Partners LP also reported a loss of 24 cents a share instead of the expected profit of 31 cents. On the other hand, the materials sector benefitted from Renewable Energy Group Inc. reporting profit of $2.31 a share instead of 59 cents that had been anticipated. Health care saw a big jump in its average surprise as half of the companies that surpassed expectations did so by double-digit percentages. Financials edged into positive surprise territory by climbing out of the disappointment hole left by J. P. Morgan Chase & Co.’s third quarter loss of 17 cents a share. In revenue, four sectors improved their surprise standings, while four lowered theirs. Here is the summary:
| Sector | Average Rev Surprise | Previous Rev Surprise | Rev Gain vs. 3Q 2012 |
| Consumer Discretionary | 0.19% | 0.70% | 15.49% |
| Consumer Staples | 1.56% | 3.30% | 13.66% |
| Energy | 2.43% | 2.87% | 31.79% |
| Financials | 5.03% | 6.27% | 10.70% |
| Health Care | 3.23% | -0.63% | 21.95% |
| Industrials | -0.80% | -0.89% | 11.48% |
| Materials | 1.50% | 1.17% | 9.67% |
| Technology | 7.51% | 2.46% | 12.47% |
| Utilities | -14.56% | N/A | 1.77% |
Technology and health care were the two sectors showing the best improvement in average surprises. Industrials and materials also moved in the right direction, but not by a lot. The consumer sectors’ surprises deteriorated on a relative basis compared to the earlier assessment. Energy and financials also dropped, but not as much. About 20% of Barron’s 400 components still are to be heard from, so these numbers probably will shift again before it’s all wrapped up. The strong year-over-year comparisons show how well these companies are doing, even in a slow-recovering economy.
For B400 Companies, Smaller Surprises and Bigger Disappointments
By John Prestbo – 11/13/2013
Small is surprising, big-time. With 80% of the Barron’s 400 Index components reporting third-quarter financial results, small stocks showed a big upsurge in averages of earnings and revenue surprises over analysts’ estimates. The other size segments also showed improvement in earnings surprises, though not nearly as substantially as small stocks surpassed forecasts. That said, large stocks’ surprises did turn positive, erasing the earlier disappointment left by J.P. Morgan Chase & Co. reporting a third-quarter loss of 17 cents a share rather than the expected profit of $1.19. But large and mid-sized stocks also showed reduced average surprises in revenue results. Only small stocks posted plumper surprises. Here is the summary of surprises by size segment in the Barron’s 400, once again using the market-capitalization divisions of the Dow Jones U.S. Total Stock Market Index:
| Average Surprise @ 80% Reporting | Average Surprise @ 28% Reporting | |||
| EPS | Revenue | EPS | Revenue | |
| Large (~> $14 billion | 1.97% | 1.42% | -0.46% | 1.61% |
| Mid (~$3.9 to $14 billion | 2.88% | 1.70% | 2.33% | 4.75% |
| Small (~<$3.9 billion | 7.29% | 3.78% | 2.60% | 1.75% |
The strong showing by small stocks is especially important for the Barron’s 400, which is equally weighted. The Barron’s 400 Index is comprised of 94 large stocks (23.5%), 100 mid-sized stocks (25%) and 206 small stocks (51.5%). About 20% of the companies remain to report, so some adjustments to these averages are inevitable. But barring catastrophe, the big upswing in small stocks’ average surprises augurs well for Barron’s 400 Index performance.
B400 Companies’ Grade Slippage Is Minimal After 3Q Results
By John Prestbo – 11/14/2013
Grades of Barron’s 400 Index components are slipping in the wake of third-quarter earnings reports, but not significantly. The average grade of companies before they announced results was 68. One week later, they averaged 66.6, down 2%. By comparison, the average MarketGrader score for Dow Jones Industrial Average components is 58.6; for the S&P 500 it is 53.4. To be sure, these averages are not based on the 319 companies that have issued third-quarter reports so far. Rather, they are the averages of 201 companies that reported at least one week ago, so that the newer grades could be compared. MarketGrader computes company grades daily. On a sector basis, the grade slippage ranged from 0.82% for financials to 2.69% for materials companies. One sector—energy—improved its average grade by 2.62%. Here is a table summarizing the grades by sector; there is no comparison for utilities because those companies reported too recently.
| Sector | Avg. Grade Before Report | Avg. Grade 1 Week After | % Change |
| Consumer Discretionary | 67.88 | 67.08 | -1.17% |
| Consumer Staples | 68.33 | 67.41 | -1.35% |
| Energy | 68.43 | 70.23 | 2.62% |
| Financials | 66.08 | 65.53 | -0.82% |
| Health Care | 68.40 | 67.24 | -1.70% |
| Industrials | 66.83 | 65.89 | -1.41% |
| Materials | 66.69 | 64.89 | -2.69% |
| Technology | 69.05 | 68.33 | -1.04% |
| Utilities | 63.81 | N/A | N/A |
It may seem odd that grades are slipping even though the vast majority of Barron’s 400 companies not only boosted earnings and revenues handsomely but also surpassed the expectations of usually optimistic securities analysts. There are several reasons why it is happening. First, the minority of companies with disappointing earnings and/or revenues is almost surely lowering the grade averages. Second, grades take into account long-term as well as short-term financial performance, so even some companies with strong third-quarter results may have longer-term issues dogging them. Finally, as we have written before, fast-rising prices can lower companies’ grades in the value aspect of the assessment. In the past month, the Barron’s 400 Index is up nearly 2.5%. No one is going to turn down that performance, but it does dim the value appeal of many companies in the index.
