The Running of the Bulls or On the Horns of a Dilemma?

Throughout the second quarter, even as we were still digesting first quarter earnings announcements, analysts were quite busy following their modus operandi from prior years.  As the June quarter progressed, corporate earnings estimates were given a haircut by Wall Street analysts.

FactSet, a well-known provider of financial information, compared the bottom-up earnings per share estimate revisions for the second quarter to historical averages. For the second quarter of 2015, EPS projections for the Standard and Poor’s 500 index decreased by             -2.30% to $28.72 from the $29.39 estimate on March 31st. FactSet noted that, historically, average declines during a quarter on a bottom-up basis were -5%, -3.4%, and -5% for the past year, five years and ten years, respectively.

The fact that we had a trim, versus an all-around haircut on earnings appears to be explained by a partial offset to decreasing earnings projections in some sectors, such as Industrials, by upward revisions in the Energy sector. As is often the case, during periods of stress in a particular economic sector/industry such as we recently experienced with the oil price drop of over 50% last year, analysts’ consensus estimate cuts may be too extreme. At the end of March 2015, corporate earnings for the Energy sector were forecast to decline by 62.3% for the June quarter, currently the decrease is for 60%. Looking at some of the large-cap energy names, for example, we see that estimates for the quarter and all of 2015 have been substantially raised in the past 30 days for BP, Exxon Mobil, Chevron, Conoco Phillips, Marathon Pete, etc. Most of these companies will be announcing earnings at the very end of July.

Although a handful of companies have reported this last week, second quarter earnings season really kicks off around mid-July. So far, we have had some notable positive reports, PepsiCo surprised to the upside on earnings and revenues and Walgreens Boots Alliance, handily beat earnings estimates but came in a bit short on revenues. The estimated decline for second quarter EPS growth is now at -4.50%. Health Care is again expected to report the highest increase in earnings growth and Energy the worst. It is projected that, excluding Energy, earnings growth estimates for the S&P 500 Index companies would be a positive 2.2%.

As always during earnings season, the managers at Alhambra will be avidly reading, watching and listening to corporate earnings announcements. Following and analyzing the results for the positions that are held in our clients’ accounts is supremely important; additionally, earnings announcements are a very opportunistic time. If you pay close attention, you may have the occasion to buy a stock that you have wanted to own but looked too pricey. Invariably there will be at least a couple of companies that have earnings reports which are initially misunderstood or investors have an overreaction to some piece of news. If you do your homework, these can be good long-term buying opportunities.

Disclosure: Alhambra Investment Partners and/or its clients have positions in XOM, CVX, COP, MRO, PEP and WBA.