Are Earnings Normalizing? At What Level?
By Barry Ritholtz - February 22nd, 2010, 1:00PM
Looking a numerous earnings charts, we can come to several conclusions:
First, the charts imply that the worst of the crisis and recession driven earnings collapse is over. Second, it appears that earnings are normalizing, i.e., returning to their prior range. Third, that stocks can no longer be described as cheap. Lastly, whether stocks are art fair value or are expensive will be determined by how much equity prices gain relative to ongoing improvements in earnings.
click for larger graphs, below
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How Cheap are Stocks ? (1871-2011)
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Inflation Adjusted S&P Earnings Show Normalization
via Chart of the Day
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Average Trailing P/E Ratio (1871-2011)
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February 22nd, 2010 at 1:13 pm
Interesting how all these companies are improving earnings in the midst of a consumer retraction from their seemingly endless spending binge, and with many of these companies reporting flat or lower revenues. Where are the earnings coming from?
February 22nd, 2010 at 1:16 pm
Perhaps deflation is reducing operating expenses?
Certainly the earnings gains are not a pullback from the compensation trough by senior management.
Could it be … the stimulus program? (I’m just asking … people confirming one possibility or another should do so with accompanying data to demonstrate the validity of their beliefs)
February 22nd, 2010 at 1:17 pm
Interesting to note that earnings are a place where the economy and the stock market intersect. Sales even more so. Stock prices … not so much.
February 22nd, 2010 at 1:28 pm
constantnormal Says:
“. . . Where are the earnings coming from?”
_______________
That was also my first question. For the economy, the old saying, “what comes around, goes around,” would seem to apply. Right now, the coming and going around has stopped because the key player — the upwardly mobile, wage-earning, consumer — has gone teats up.
I think the new, improved, fraudulent GAAP are being used to conjure growth where none exists. After all, they are still saying that unemployment is at 10%, even though we all know that that’s a damn filthy lie.
February 22nd, 2010 at 1:35 pm
Uh, S&P has not updated their “earnings estimates” since Nov 4th.
Bloomberg current has “consensus” estimates at:
– $77.93/shr for 2010
– $93.91/shr for 2011
– $106.28/shr for 2012
These estimates continue to get increased on a monthly basis, as good earnings come in, companies carefully increase guidance, and re-affirm they are having a good Q1 (CSCO, AAPL, MCD, PG, etc).
It is worth noting that estimate have “beat” expectations since basically Q1 of last year. In Jan/Feb 2009, estimates for the year fell into the $40-50/shr range, while actual EPS came in at $55-60.
So right now we are at 18.3x LTM, 13x NTM estimates. A few of the more bullish strategists estimate >$100/shr in 2011.
February 22nd, 2010 at 1:39 pm
@constantnormal
Truth be told these companies all got very very fluffy during the bubble years, along with households. And yes, as anyone can tell you with even the slightest experience in any kind of corporate America, there was tons of places for them to cut costs. Not the best way to grow earnings, but it IS real in my eyes.
And now, cash rich companies and households reap the rewards and debt laden households/companies take a beating.
As for the next phase of actual growth, that’s gonna take some time for the world to repair their balance sheets. Just time. (3-20 years?)
So as private America gets lean and mean despite overt GOVT incentives to lever up again, real structural changes are occurring, we are learning to to more with less.
Except for big finance and big GOV, they are learning to do less with more.
But your point is fair – nominal revenue numbers are never gonna be what they were in the bubble days, I just don’t know if that signals the end of days.
February 22nd, 2010 at 1:42 pm
Marcus Aurelius — Wow! Do you follow companies and earnings at all? MSFT just had $19B in revenue, AAPL is selling record iPhones and iPods and grew earnings over 50%. P&G had its best Q ever, record revenue up 10% over last year, earnings up 20%. HPQ, CSCO, WMT, all grew YoY earnings by ~10% and mainly had one of their strongest Qs. Energy and commodities firms had large bounces as commodities prices increased from 10-20yr lows 1-yr ago.
This is mainly a financials and housing driven recession. Lots of other companies… and employees are fine.
But yeah, AAPL is probably using fraudulent numbers to “conjure growth where none exists”. I mean, who has ANY money for an iPhone these days. I dont see them anywhere!
February 22nd, 2010 at 2:05 pm
cognos says:
“This is mainly a financials and housing driven recession. Lots of other companies… and employees are fine.”
I am not sure too many people would agree with you on this one. Although there are always pockets of life in any economy (e.g., bankruptcy attorneys, etc), the width and breath of this downturn are as historic as the debt taken on by all concerned. This debt must play itself out before the economy can grow once again.
February 22nd, 2010 at 2:42 pm
Does anyone believe that what the accounting rules allow one to state as “earnings” is actually earned ? Who here , including Mr. Riholtz, is willing to say, after reading the Taibbi article linked on this blog that Goldman “earned” the money its earnings statement claimed it earned? Think some of the other “earnings” reflected in this chart might be similarly fudged? What would earnings be if accounted for properly?
The other shoe has yet to drop.
February 22nd, 2010 at 3:09 pm
@cognos — please don’t use Apple as a proxy for the market — Dell would be just as distorted a metric.
So where are all these great sales numbers coming from? People who have not had a real wage increase in over a decade? [http://jessescrossroadscafe.blogspot.com/2010/02/failure-of-bubble-nomics.html]
Or from goobermint borrowing from the future — when the pooblic cannot pay the toll today?
Or are they simply comparing 2009 sales to 2008 sales? How about a comparison to 2007 sales numbers?
February 22nd, 2010 at 3:45 pm
Perhaps more than ever, earnings and stock prices depend on what government does next. There is no “normal” here. (Or, maybe this *is* normal but I didn’t realize years ago just how much the government controls the market.)
If the government wants to triple its debt, then new dollars will find their way into corporate coffers. And nominal asset valuations will rise as “InvestTools” (tm – mannwich) “price in” those earnings.
It seems that the “bottom drops out” only when the Fed is both: (a) late to reduce liquidity and (b) slow in the face of crisis to start providing it again.
…
I had hoped the MA-Brown election signaled a reluctance to continue the deficit-spending and pumping money to Wall Street. But, the Luntz memo gave me pause. While the radical center maintains a majority in Congress, its policies (deficit-spending, extend-and-pretend) seems likely to continue. (It would take a majority of Bernie Sanders or Ron Pauls to change that.)
February 22nd, 2010 at 4:55 pm
It would be darned interesting to see the second chart ex-financials…
February 22nd, 2010 at 4:55 pm
Quarterly EPS per share on S&P 500 –
Q1 2009 = $10
Q2 2009 = $13
Q3 2009 = $16
Q4 2009 = $18
Hmm… where is that going?
(@constantnormal — as I said, MANY of those companies had there best revenue and profit Q EVER (or at least the last 7-8 years. MSFT had $19B in revenue in the Q. AAPL is doing $50B/yr in rev. While capitalism has winners (AAPL) and losers (DELL). There seem to be alot of people here saying, “Economy is F-ed, No one can afford anything”. Lots of evidence against that.)
February 22nd, 2010 at 7:47 pm
cognos,
Of course, “No one can afford anything” is nonsense. If it wasn’t there wouldn’t be more than 2 trillion dollar worth of sales in the economy each quarter by S&P500 companies alone. However, it appears to me that you just make up an absurd statement, against which you can argue vehemently.
I suspect you really want to say that everything was on track to things are going back right as they had been before the recession and even better. For this you would have to provide evidence. Cherry picking data (companies with very good sales) doesn’t provide any evidence for this, though.
For S&P500 companies:
Q2 2008: Sales per share: $278.53 divisor: 8720.75 total=sales/share*divisor: $2428990.5 million
Q3 2009: Sales per share: $227.34 divisor: 8832.37 total: $2007951.0 million
(Source: http://www.standardandpoors.com/)
I chose the Q2 2008, since this seems to be the quarter with the maximum of aggregate sales (whereas aggregate reported earnings peaked in Q2 2007. Interesting).
In Q3 2009, sales were about 17% below the maximum in Q2 2008. The aggregate data for Q4 2009 haven’t been published yet by S&P. I doubt sales have recovered as much in Q4 2009, so that your statement was valid summed over all S&P 500 companies.
BTW: You have to register with the S&P-website now to get the updated data.
rc
February 22nd, 2010 at 7:58 pm
@cognos — I believe that the folks who are dismal on the economy are looking at the wastage going on in government spending, which is producing “stuff” at a very low efficiency, and at the huge disconnect between spending and revenue generation — at both ends of the economy, both personal and governmental.
While the corporate world can tighten up by holding down wage increases (check outside the financial sector — it’s happening) and deferring expansion plans, and some companies are benefitting from either demographic shifts (boomers buying more drugs as they age) or new product introductions (Windows 7, iPhones), the real story is that small businesses are starving to death (check your local strip mall, or wake up and see what the CRE calamity is all about), while we have about 1 in 6 potentially working people who either cannot find work or are grossly under-employed. Add the weak-as-kitten industrial capacity utilization into the mix, and you might see why people are really just saying “Economy is F-ed” — it doesn’t matter whether they are buying things or not.
Apparently there are plenty of people who are losing their homes while at the same time buying iPhones. I don’t necessarily think that is a Good Thing for Apple, long-term.
So while you can revel in your “happy days are here again” stance, others might be focussing on the other side of the coin. Doesn’t mean that you are wrong, or that they are wrong. There were companies that did just fine during the Great Depression (Ford, RCA), and others that simply went away.
February 22nd, 2010 at 10:30 pm
rc — How am I “cherry picking”? I named 6 of the top 25 companies… the others are not much different. MCD had its best Q4 revenue ever. Best EPS. Name a company? SBUX… slightly lower revs than same Q in 2007 (which was the peak)… 20% greater eps. WFMI… 10% greater revs than ANY other Q. Best eps since 07. WMT best rechev and eps Q ever. FDX… sales off 10% from peak… but 1/2 way back from trough. UPS… sales closer to peak and 20% up from trough. EPS off 25% from late 07.
Sales in the largest companies are somewhat geared to commodity prices — XOM, CHV, etc. I dont think that a great indicator. Profits are far more important. The lower profit Q on SPX was $0. Were now back to $18 in the last Q. Peak is $25/shr in a Q. Thats 75% of the way from trough back to peak.
NO ONE… is saying, “this is 1999, full-on boom”. Duh! But the recovery from the bottom looks very very strong. Its AT LEAST half-way back. And nothing really should stop the recovery from moving right on through to new highs over the next 2 years. Unless policy causes a new recession (raise rates, tax profits, create uncertainty). Recovery is 9 months old… and looks stronger than ever.
February 23rd, 2010 at 2:48 am
[...] – How cheap are stocks? [...]
February 23rd, 2010 at 12:37 pm
[...] Earnings have normalized but stocks are no longer cheap. (Big Picture) [...]
February 23rd, 2010 at 1:13 pm
[...] also: Are Earnings Normalizing? At What Level? (February 22nd, 2010) http://www.ritholtz.com/blog/2010/02/are-earnings-normalizing/ [...]
February 23rd, 2010 at 3:28 pm
@Cognos
S&P changed the link to their Earnings and Estimates spreadsheet a while back if that’s why you think they haven’t updated since Nov (ran in to that same issue a while back)
New data can be found at http://www.standardandpoors.com/indices/market-attributes/en/us
under “Latest Standard & Poor’s 500 Market Attributes” you’ll find “S&P 500 Earnings and Estimates”
Direct link is ugly and probably won’t work but here goes:
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DSP500EPSEST.XLS&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fexcel&blobkey=id&blobheadername1=content-type&blobwhere=1243655734579&blobheadervalue3=UTF-8
February 23rd, 2010 at 7:01 pm
Krugger – thanks! Those are good links. My numbers are right on… looks like $18/shr in EPS for Q4. Quickly moving back to $20/shr per Q. S&P estimate have been comfortably beat and raised for 4 straight Qs and “net eps” are very close to “op eps” … again the gap has consistently been much smaller than S&P est.
Looks like $80+ eps in 2010 and some chance to do $100/shr if the recovery tracks even moderately. So whats that worth? Pretty comfortably 1200 moving to 1400 on SPX over next 12 to 18 months. Buy on dips in the recovery.