Earnings:
MARKET EARNINGS
The last few 3Q01 earnings reports continue to stagger across the finish line. Two more cross the line this week, leaving only five to go. At least four will be next week, so the effective end of the 3Q01 earnings reporting will be 13 Dec. The final results will likely not be much different from the current results based on the actual earnings for the 99% that have reported, and estimates for the remaining 1%.
On that blended basis, 3Q01 S&P500 earnings are down 21.7% from those of 3Q00. This is the largest decline since the 24.8% in 2Q91. The actual results only beat the final estimates (those at the time each company reported) by 0.9%, well below the 3.0% average over the last eight years. And that slim margin was on estimates that had been slashed during the quarter, even before the 911 attack.
At the beginning of the third quarter, the industry analysts were expecting a 6.2% decline. However, in July with no deceleration in sight in earnings warnings, we believed analyst would continue slashing 3Q01 (as well as 4Q01) estimates. We thought the final results would be a 17% decline. By the eve of the attack, the analysts were expecting a 14.7% decline, and with only three weeks left in the quarter, it seemed the final results would be very close to the forecasted 17% decline.
Following the attack, our forecast changed to a 22% decline. By the eve of the start of the main 3Q01 reporting season in mid-October, the analysts were at a 22.4% decline. The final results are headed for 21.7%. Assuming the original 17% would have proved valid if the attack had not occurred, it would appear that the impact of the 911 attack added about 5 percentage points to the decline.
The outlook for 4Q01 also continues on track for a 22% decline. The analysts are currently at 17.8%. With 4Q01 earnings warnings continuing at a record pace for any quarter, further slashing of estimates for 4Q01 and at least 1Q02 are likely.
Because of the seasonal slowdown that occurs at this point in each quarter, the number of warnings have slowed from October. But do not be lulled into thinking that the worse is behind us. Last week there may have only been 26 warnings, but they continue to run ahead of the pace at the equivalent time for each of the first three quarters of this year. As of Friday, 4Q01 warnings stood at 430, compared to 370 in 1Q01, 392 in 2Q01, and 240 in 3Q01.
The earnings picture is somewhat worse for small caps. After showing better year-over-year earnings comparisons in the last three quarters, small cap earnings performance, as measured by the S&P600, under preformed that of large caps in 3Q01. Earnings for the S&P600 for 3Q01 are headed for a 26.9% decline, compared to "only" 21.6% for the S&P500. Similarly, analysts expect a 27.8% decline in 4Q01 for S&P600 earnings, and "only" 17.8% for the S&P500. The expected underperformance continues into at least 1Q02, with expected respective declines of 7.9% and 4.4%.
First Call S&P500 Earnings Model
The most encouraging sign is that industry analysts are cutting estimates for further out quarters than they had been before. Estimates for 1Q02 and 2Q02 are in free fall, but so far there is little movement on 3Q02 estimates. Although the pessimism has increased, it has not yet reached the over pessimism and capitulation that typically occurs before a turnaround in earnings or in the market.
We continue to believe that analyst and strategist estimates for CY02 are too high and expect meaningful downward revisions, particularly in mid December and in early January.
The industry analysts currently expect earnings will be up 14.7% in CY02. However, 1Q01 earnings will surely be much lower than the $11.52 analysts are expecting. Assuming that is true, it would take a huge ramp-up in earnings from our expected $10.20 in 1Q02 to get to the industry analyst's $14.62 in 4Q02. Our estimates for the four quarters of CY01 are based on what we believe is the best case scenario. That yields a 6.4% earnings gain for CY02 over CY01. We believe the more likely outcome would be a lesser gain, probably under 5%.
Charles L. Hill
Director of Research
617.856.2459
Thomas D. O'Keefe
Research Analyst
617.856.2055
www1.firstcall.com|market |
