Sunday, April 12, 2015

Expecting A Weak Q1 2015 Earnings Season, But Looking At Forward Guidance

With first quarter 2015 earnings season beginning to hit full stride in the coming two weeks, earnings growth expectations for Q1 2015 are now negative at -4.6%. The last negative quarterly growth result was Q3 2012 as can be seen in the below table from Factset.

From The Blog of HORAN Capital Advisors
Source: Factset

Out of the small percentage of S&P 500 companies that have reported to date, 70% have cited the strong Dollar as the cause of their negative Q1 2015 report. As noted at the beginning of the article, the last negative earnings growth quarter occurred in Q3 2012. Importantly, these earnings reports are reflective of past results and investors will want to pay attention to forward guidance. Subsequent to the Q3 2012 negative growth quarter, the S&P 500 Index went on to generate outsized gains of 30% in 2013 as can be seen in the below table.

From The Blog of HORAN Capital Advisors

To provide some insight on the US Dollar strength and noted in the Factset report,
  • "During the course of the first quarter, the dollar strengthened relative to the euro. On December 31, one euro was equal to $1.21 dollars. On March 31, one euro was worth about $1.07 dollars."
  • "The dollar has also strengthened relative to year-ago values for both the euro and the yen. In the year ago quarter (Q1 2014), one euro was equal to $1.37 dollars on average. For Q1 2015, one euro was equal to $1.13 dollars on average. In the year-ago quarter (Q1 2014), one dollar was equal to $102.76 yen on average. For Q1 2015, one dollar has been equal to $119.17 yen on average."
Lastly, it should be noted the earnings and revenue expectations from the energy sector are a significant contributor to the Indexes overall decline in earnings and revenue growth. We believe, though, the lower energy prices are a net plus to the economy via the benefit the consumer receives from lower energy prices.

The first quarter reports almost seem like a replay from the first quarter of 2014 when weather across the country was a significant drag on economic growth. In Q1 2015 we had weather effects as well. On top of the weather, the West Coast Port shutdown also negatively impacted the retail segment. For investors, hearing forward guidance comments from the conference calls this quarter will be important in ascertaining future earnings expectations.

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