Few investors could be blamed for failing to notice that a new earnings season is kicking off this week, with the financial news media largely dominated during the last ten days by the budget and debt ceiling fight in Washington. We expect, however, to see investor attention shift very rapidly within the next week to the state of corporate earnings among U.S. public companies both as a proxy for the health of the U.S. private economy and as a leading indicator of the stock market’s direction in 2014. We will therefore devote considerable space in our Barron’s 400 Diary in coming weeks to reporting on the upcoming earnings season, from the perspective of B400, of course. We start things off below with John Prestbo’s preview of the analyst community’s expectations for the upcoming season and how these have been shifting over the last six months; in his second column, also appearing below, he breaks down expected revenue and EPS estimates for B400 components on a sector basis.
Before we get into the nitty-gritty of the numbers it is worth defining how long earnings season lasts and what investors may expect in the weeks ahead. For starters, earnings season never really fits nicely into calendar quarters, in large part because companies don’t close their fiscal quarters or years in coincidence with the calendar. In this upcoming season, for example, there is one B400 component, IDT Corporation, which announced earnings last week for the quarter ended July 31. 12 companies will be reporting earnings for the quarter ended August 31 and 39 will report earnings booked during the quarter ended on October 31. The remaining 348 companies, or 87% of B400, will report earnings for the period ended on September 30.
While the unofficial start of earnings season is typically marked by former DJIA member Alcoa’s report, which took place on Tuesday, a few companies will have already reported earnings and some will report weeks after the bulk of the season has passed. In the case of B400, six companies reported earnings in September and five have reported so far during October. Another 210 will report earnings during the remainder of this month while 155 will report during November. B400’s earnings season begins in full force today when financial heavyweights JPMorgan Chase and Wells Fargo report. Earnings season will therefore last six weeks, starting now and ending right before Thanksgiving week near the end of November. Stay tuned for updates as it unfolds.
B400 Companies Expected to Post Higher Revenues and Profits
By John Prestbo
The third quarter earnings-report season is underway, and to no one’s surprise the Barron’s 400 Index companies are expected to post higher profits and revenues. Current profit estimates for the index components total $383.46, or 2.4% higher than the same companies reported a year earlier. Revenue estimates sum to a shade over $1 billion, which is 4.4% more than reported for the comparable 2012 quarter.
Because of two intervening reconstitutions, 52% of those companies weren’t in the index a year earlier. Profit expectations for these companies aren’t so good: Analysts predict a 3.4% decline in per-share earnings from last year. Revenue forecasts are much better at a 3.9% increase. The outlook is much brighter for the 48% of the current Barron’s 400 components that were in the index at this point last year. For them, per-share earnings are expected to jump 5.1% on a 4.2% gain in revenues.
There isn’t any readily identifiable explanation for why the newer components have dimmer outlooks than the companies that have been in the index for the past year. Security analysts’ estimates sometimes vary considerably from actual reports. However, we note that the average financial-strength grade of the newcomers is 66.56 versus 69.38 for the veterans. In general, analysts’ estimates start out high and then edge lower as each quarter rolls by. But for the Barron’s 400, there was one upward revision each for earnings and revenues over the past six months. The overall trend was lower, though, as usual. The table below shows how third-quarter estimates for current Barron’s 400 components have been adjusted since April. The most recent change in the revenue column should read “negative zero” because the revision downward was so slight as not to register at three places past the decimal.
| Aggregate Estimates | EPS | Revenue |
| Change from 6 mos ago to 3 mos ago | -0.277% | -1.369% |
| Change from 3 mos ago to 2 mos ago | -1.038% | 0.314% |
| Change from 2 mos ago to 1 mo ago | -0.731% | -0.573% |
| Change from 1 mo ago to current | 0.077% | 0.000% |
Predicted Results Are Strong for Two B400 Sectors
By John Prestbo
Some sectors in the Barron’s 400 Index are predicted to do very well in this third quarter earnings-reporting season. Others, not so much.
Consumer staples and health care are two sectors that analysts believe will post strong increases in earnings-per-share over the same period last year. Energy and technology will experience profit pratfalls, according to their forecasts. In revenue, only financials are expected to come up short of year-ago results. Here are the percentage predictions for nine of the Barron’s 400 ten sectors:
| Sector | Number of Companies | Forecast EPS | 3Q Change Revenue |
| Consumer Discretionary | 80 | 3.38% | 4.86% |
| Consumer Staples | 21 | 26.58% | 5.24% |
| Energy | 39 | -12.36% | 7.42% |
| Financials | 73 | -0.50% | -6.26% |
| Health Care | 34 | 10.63% | 11.16% |
| Industrials | 72 | 7.97% | 4.58% |
| Materials | 22 | 0.32% | 6.84% |
| Technology | 55 | -2.75% | 3.07% |
| Utilities | 3 | -76.37% | 26.31% |
The utilities sector needs some explanation for the expected plunge in per-share earnings. The decline comes wholly from forecasts for Inergy L.P., which as of this week was merged into Crestwood Equity Partners L.P. Both are involved in distributing natural gas. They foresee substantial cost-reduction synergies from their merger, but reorganization expenses will come first.
Only one company is in the telecommunications sector. It was eliminated from this list not because of that but because few analysts follow the company, IDT Corp.
It is difficult to judge which sector is better perched on the catbird seat for the third quarter. The consumer staples sector has the largest predicted profit increase, but a so-so gain on the top line. Health care’s anticipated results are better balanced between revenue and profit.
Industrials are expected to post modest but nonetheless solid advances in both profit and revenue. Technology remains a disappointment. The materials sector’s outlook suggests it is clawing its way out of recession. We’ll post updates on how third-quarter results actually are turning out as more Barron’s 400 companies’ reports roll in.
