Monthly Archives: February 2012

The Submariner — Deep Data Dive: Earnings Scorecard

Fri, FEB. 24th, 2012

The S&P 500 Index is up over 8% this year so far. As Q4 2011 earnings “season” wraps us, pausing for a moment to investigate the big picture of how businesses are doing is an important step in assessing the health of the economy and the market.

The below data includes the companies who have reported to-date in Q4 [~90%]. It was compiled with data from various sources, including FactSet and our market research team at Albion.

Earnings.

Of the over 450 S&P companies who have reported, ~66% have beat EPS expectations [trailing four quarter avg., ~73%]. The avg. beat above the estimate is 3.6%. The sectors seeing the largest EPS delta over expectations are Industrials and Technology, at 8% and 9%, respectively.

Earnings growth for the quarter is clocking in ~5.5% Y/Y. If you strip out results from AAPL and AIG, growth drops to ~1%. This will be the first quarter in eight where companies failed to reach double-digit profit growth.

Eight of the ten S&P sectors have reported earnings growth for the quarter, led by Industrials, Technology [~13% each] and Energy at ~7%. The worst were Materials and Telecom at -14% and -29%, respectively, followed by Utilities, roughly flat.

Revenue.

Aggregate revenue growth for S&P 500 companies is just over 7%. By sector, Technology is seeing the best growth at ~12%, followed by Utilities at just over 10% and Energy at just under 10%. Interesting enough [given the EPS decline for the quarter], the fourth position is Telecom at 9.5%. In the basement are Financials, just under 1% and Health Care at ~5%.

Guidance.

In a somewhat cautious sign, ~22% of companies have issued forward looking guidance. This is the lowest level since Q1 2009, and well below the historical avg. of ~32%. A number of companies have commented on their business conditions in Europe. Overall, companies have specifically expressed concerns about weaker sales and earnings in the region, headwinds to future growth due to less favorable foreign currency exchange rates, and general uncertainty about macroeconomic conditions. This is likely the reason for the lack of confidence in providing specific outlooks.

Also, as expected, there has been some activity slowdown in emerging markets. While this has had an impact on Q4 results and most companies’ near-term outlooks, most management teams expect this to be both slight and transitory. Indeed, the largest growth opportunities for many multinational companies are still in emerging markets.

FY 2011.

Aggregate revenue and earnings growth for the S&P 500 in FY2011 is 9.5% and 12%, respectively. Energy [21% and 31%] and Materials [15% and 30%] saw the best revenue and profit growth over the period, followed by Industrials [8.5% and 19%] and Technology[13% and 14%].

FY 2012.

Current expectations are for ~$105 in S&P 500 earnings [down from $113 in mid-2011]. At the Q4 run-rate, this represents ~7% growth. Top-line growth is expected to be ~3.5%.

In terms of current valuation, the current data assigns a trailing market multiple of 13.8x and a forward multiple of 13x. For reference, the 15-year mean multiple is 15.8x trailing and 14.7x forward earnings estimates.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200

Market Surveillance: Dividends, Demographics and the Fed

Wed, FEB 22nd, 2012

According to *widely-available market data, the last time the Fed held an explicitly capped interest rate policy [i.e. “rates held low until mid-2014”] was in 1945-51 [which ended with the Federal Reserve-Treasury Accord]. During this period, the 100 S&P 500 stocks with the highest dividend yield well outperformed the 100 with the lowest yields, as well as a good portion of the group with no yield. 2011 witnessed a run in strong dividend payers [utilities, health care, etc.]. Now in 2012, many have stated that these stocks will become laggards.

We think the rumors of their death are greatly exaggerated.

Given the above historical perspective in concert with the non-existent yields on present debt securities, the attractiveness of strong dividends backed by companies with sustainable free cash flow will continue to be just-the-ticket in a yield-starved world. Especially those with compelling relative-price valuation.

The lure of stability and dividends to investors was likely not a one-year fad. Because the U.S. is beginning a demographic transition to an aging population – indeed, a unique population group who has generally used the stock market to save for retirement – the stable dividend model of investing may be more of a generational play. That is, at least until fixed-income yields significantly rise.

*data sourced from St. Louis Federal Reserve and Standard and Poor’s.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200

The Submariner — Deep Data Dive: January’s Jobs Report

Fri, FEB 3rd, 2012

Friday’s January Employment Situation report showed strong gains. Across most measures the release told an encouraging story in U.S. labor. On the surface, 234,000 jobs were added last month with the prior two months [combined] enjoying a bonus of 60,000 more jobs than previous thought. We have been and continue to be sanguine on continued upward revisions as economic history tells us that they typically follow broad labor trends. Meanwhile, the unemployment figure dipped to 8.3%, the lowest in 3 years. The 234,000 net gain was the best addition since last April and marks the 16th straight month of job gains.

Beneath the surface, the report continued its cheerful tone. The gains were, for the most part, broad-based with manufacturing, construction, retail and service sectors all seeing gains [ex-financial at -5,000]. Indeed, 64 industries boasted new job adds verse 62 in the prior month [Dec.]. Too, hours worked held steady at 34.5 a week, which is at the high-end of the historical range and symbolic of solid stable output. At America’s factories this number rose to 41.9 per week – the highest since January 1998 – while simultaneously 50,000 jobs were added, the most in a year. Given that manufacturing [~12% of GDP] has been the recovery’s growth engine, it is a positive sign for momentum in this sector.

January’s report marked the fifth-straight drop in the unemployment rate. This is a nice trajectory, but it is important to understand the calculus behind the rate drop. As we’ve said before, when the rate declines it is not always due to more people finding jobs. The unemployment rate can change up or down even when no jobs are created or lost. This is due to how the unemployment rate is crunched. The math seems simple enough: number of unemployed over the total number of people in the labor force. The trick to determining whether a drop is “clean” – that is, positively affected by new jobs as opposed a decline in labor force participation – rests in analyzing these inputs. The Bureau of Labor Statistics [BLS] defines unemployed as those currently not working but are willing and able to work and have actively searched for work in the past four-weeks.

The last piece of this definition is key.

People start and stop looking for work for varying reasons. Some return to school, people retire or immigration can slow. In tough economies, however, people who were looking for work often become discouraged and quit [referred to as discouraged workers]. That is what happened during and after the Great Recession and in many before that. It is a natural occurrence. As this happens, these individuals are no longer considered unemployed as far as the BLS calculation is concerned. Taking nothing away from the nearly 3.8 million jobs created during this recovery to date, one cannot deny that this statistical subtly has been part of the reason the unemployment rate has dropped since the recession ended. It works the other way, too. When the economy expands and optimism springs anew, these once discouraged workers reenter the labor fold and can temporarily bring the rate up until sufficient job creation can absorb them.

The drop in the jobless rate in January reflected a 381,000 decrease in unemployment while at the same time 250,000 Americans entered the labor force. The labor force participation rate [employment-population ratio] decreased by 0.3%. But, digging deeper into the BLS report uncovers that without the recently updated census adjustment – which showed a marked increase in population of those 55 and older – it would have been flat. This is important because the non-institutional population data negatively impacted the participation rate, but in a less meaningful way than the raw number suggests as those over 55 naturally have lower participation rates than the general population. Regardless, while the actual participation rate might in fact be this new lower number, that would also suggest that prior numbers were lower. In other words, according to the Ross Kaminsky at the American Spectator, the top-line change – caused almost entirely by using new census population numbers – is an artifact of the new census data. It needs to be an apples-to-apples comparison.

Finally, the underemployment rate, which includes underutilized workers and people forced to work part-time because they can’t find full-time work, clocked in at 15.1 percent in January, down from 15.2 in December and 16.1 percent one year ago. This number encompasses a larger population base and is therefore often cited as a truer representation of labor market hardship.

All told, January’s report was rather unblemished. Nevertheless, financial markets – like many of life’s quizzes – care less about what you’ve done in the past favoring more focus toward what you’ll do in the future. We must keep adding jobs at the 200,000+ rate if we are to significantly bring down the unemployment rate and place the economic recovery on a more secure footing.

Indeed, improvement in the employment picture must continue.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200