February 25, 2013

Earnings Roundup: Bearish Corporate Guidance Threatens Q1 Profit Growth Estimates

by Greg Harrison

The fourth quarter earnings season is drawing to a close , but as the focus shifts to the first quarter of 2013, anxiety is building about the pessimistic forecasts coming from S&P 500 companies.

As the fourth quarter earnings season winds down, investors are turning their eyes to the outlook for corporate earnings for the first quarter, already two-thirds of the way towards its end. As analysts continue to refine their own forecasts for the period, they have received a steady stream of information and guidance from the companies themselves, much of it very conservative in nature. That has been the pattern in recent quarters, and there seems to be little sign of any more bullish outlook taking hold of corporate America: So far, of the 500 companies in the Standard & Poor’s 500 index, 79 have issued negative preannouncements for the first quarter, while only 19 have published positive ones. While the conservative trend isn’t unusual, the magnitude of the ratio between negative and positive preannouncements is: If the current ratio of 4.2 negative preannouncements for every positive one remains intact, it would not only dwarf the typical ratio of 2.4, but mark the most negative guidance sentiment that we have witnessed the third quarter of 2001.

This bearishness isn’t the result of problems in any single sector, either. The pessimism is widespread, as eight of the ten sectors have N/P ratios more bearish than the long-term average. (For details see the table below.) In some cases the bearishness is so acute that it isn’t even possible to calculate an N/P ratio. For instance, the Consumer Staples, Energy and Materials sectors offer not a single case of a company that has published positive guidance at this point.


This overwhelmingly negative guidance has taken a toll on analysts’ earnings estimates for the first quarter. Exhibit 2, below, depicts the changes to earnings growth expectations for the first quarter since the beginning of the year. In each sector except for Energy, analysts have cut their earnings forecasts. This downward move in growth estimates contrasts with the upward trend in fourth-quarter growth rates, as companies have tended to report better than expected growth, increasing the blended growth rate.


For some months now, Europe’s economic woes have been cited frequently as a reason for negative earnings preannouncements. Now that is being joined by other causes for anxiety, with S&P 500 companies citing factors such as restructuring-related expenses, anticipated cuts in government spending and weaker consumer spending as reasons they believe their own earnings won’t be as robust as analysts have estimated.

While Dean Foods (DF.N) delivered a positive earnings surprise for its fourth quarter, the company disappointed analysts by suggesting that its first quarter earnings might be only 25 cents per share rather than the 30 cents a share that represented the consensus. The company, said CEO Greg Tanner during the company’s earnings conference call is “accelerating structural cost savings initiatives, including multiple plant closures and route reductions this year to significantly reduce excess capacity, and increase our asset utilization and reduce costs.” That process will last until the second quarter of the year, Tanner said.

Although the fiscal cliff crisis was averted, the specter of sequestration still looms on the horizon and the continued uncertainty surrounding government spending levels is one factor causing companies to be conservative with their forecasts. One such company, Agilent Technologies (A.N) recently forecast that its first-quarter earnings will be closer to 67 cents than to the 74 cents that analysts had estimated. During earnings call, Bill Sullivan, Agilent’s CEO, explained that “we are widening our quarterly guidance range to set better expectations for our investors.” Defense spending accounts for about 10% of Agilent’s business, he added, and the company anticipates cutbacks there as well as “continued softness” in other businesses. “As a result, we are lowering our revenue guidance for the year, as well as our EPS range.” Both Agilent and Dean Foods said they are planning to consolidate their manufacturing operations, bringing capacity more in line with new demand levels.

On the consumer side, Wal-Mart Stores, Inc. (WMT.N) reported slower-than-normal January sales and cautioned investors that first-quarter earnings may be lower than analysts had forecast. The delayed start to this year’s tax refund season – which traditionally sparks sales at Wal-Mart’s stores – has weighed on sales levels, and the retailer also said it expects higher regulator costs to put downward pressure on first-quarter profits.

As the flow of earnings reports slows and more companies provide first-quarter earnings guidance, the expectations picture for the first quarter will become clearer. As it stands now, the recovery from the near-flat earnings growth in the Q3 2012 looks less certain than it did even a few weeks ago, thanks to this decline in expectations. At the current rate of forecast earnings growth for the first quarter – analysts currently predict it will be around 1.5% — it wouldn’t take much for first-quarter earnings expectations to fall into negative territory. Moreover, as we have noted in a recent special report, analysts’ initial estimates tend to be too optimistic; only over time do they come into line with what emerge as a company’s actual earnings. Certainly, if corporate guidance remains at today’s very bearish levels, analysts will continue to revise their first-quarter forecasts downward.

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