A low bar for Q1 earnings

Earnings season gets underway shortly as companies begin to report their first quarter numbers. Much will be made about the distinction between weather-impacted reports and genuine signs that the recovery has stalled.

Savita Subramanian of Bank of America Merrill Lynch’s Equity and Quant Strategy group is saying to watch for management commentary and guidance related to Capex, M&A and R&D spend as a signal that corporations are ready to invest again. She believes tech and industrials will outperform should big spending plans materialize. She also believes that sales growth will be healthy (with revenue expansion coming in at 3% year-over-year) and that earnings estimates have been sufficiently slashed to provide an environment conducive to upside beats for the S&P 500 names…

Bar is set low for 1Q; weather a risk, but a beat is likely
As we have seen every quarter over the last several years, analysts have slashed their initially-too-optimistic forecasts ahead of earnings season. But estimates have come down more dramatically than usual for 1Q due to weather, concurrent with increasingly negative management guidance. Consensus now expects EPS of $26.74, exactly flat from year-ago EPS. At the start of this year, analysts had been expecting $28.22 for the quarter (5% YoY growth). Downward revisions have also been due to Financials sector earnings cuts from legal costs and currency volatility in EMs. While weather could pressure our long-standing forecast of $28.00, we think another earnings beat versus consensus is likely given lowered expectations. Earnings have beat by 2-4% each quarter since 2Q12. A few Early reporters—like FDX and DRI—highlighted negative impacts from the winter storms, 52% of the 21 early reporters have exceeded on both earnings and sales, higher than last quarter’s 42% hit rate, and the best result from the early reporters since 1Q12.

Remember, The Street doesn’t care about “good” or “bad” – only better or worse than expectations. Having estimates cut by 5% over the last 90 days offers a good set-up for better-than-expected reports. It’s silly, of course, but “don’t hate the player” as they say.

Source:

1Q14 preview: Look through the weather
Bank of America Merrill Lynch – April 7th 2014