Looking at Earnings season so far ...

by Wayne Ferbert on November 5th, 2013

We tend to obsess on earnings on this blog because we still believe that a company is ONLY worth some discounted value of its future cash flows. Future cash flows come from selling widgets for more than it cost you to build them. Hence, we obsess on earnings.
 
According to FactSet, of the 366 S&P500 companies that reported thru last week, 74% of the companies have beaten their average analyst EPS estimate. But only 53% beat the sales estimate for the company. 74% is a better than average result – but 53% on sales is just average. In fact, the discrepancy between the two results will make one believe that the EPS beats are coming from cost cutting – and not real organic growth.
 
Here is the link to the FactSet report.
 
In addition, FactSet points out that 66 companies issued negative forward guidance while only 13 provided positive guidance. The forward 12 month EPS estimate is now $119.05 which was a 14.8 forward PE based on Friday’s close.
 
Also, the bottoms-up EPS for Q4 dropped by 1.5% - while the market has rallied 4.5%. IN 7 of the last 9 quarters, the next quarter EPS estimate was revised down by analysts while the market actually rallied up. The average reduction in EPS estimate was 2.2% revision down – while the average market rally in that same month was 4.7%?
 
Say what?
 
Just more proof that this market rally is completely being driven by other factors – namely the Fed’s quantitative easing.
 
I have to admit – this data makes me queasy. But at the same time, I have to admit that a 14.8 forward PE multiple does NOT make me queasy.
 
In the end, it would be great to understand how much of the forward $119 in S&P 500 earnings is dependent on low interest rates and no more cuts in government spending – since it seems unlikely that we can keep both of those things going on for another 12 months.


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