Friday, March 1, 2013

FY13 EPS: Growth Expected Where There Has Been None

With 97% of 4Q12 earnings in the book, S&P has FY12 EPS at $97, a 0.5% increase over FY11. For FY13, consensus bottom-up is $112 and top-down is $108. That works out to 11-15% annual growth. Their data is here.

To make matters more interesting, FY13 is not getting off to a good start: Factset reports that 77% of the companies issuing 1Q13 guidance, issued negative guidance, the highest rate of negative guidance since they started tracking in 2006. More to the point, 1Q13 EPS is expected to come in 0.4% lower.

In the first chart below, the 11-15% growth in FY13 EPS all comes after 1Q. What is impressive is EPS will have not grown at all in the prior 7 quarters.

Relatedly, year over year GDP growth this week was reported to be just 0.1% higher in the US; in Europe, it was 0.9% lower and the continent is officially in recession. Recall that half the earnings for $SPX is from overseas.

Despite this, SPX companies expect more than 3% growth in revenues. Which means that the growth in earnings is primarily margin expansion. But, as GS explains, margins have actually contracted four quarters in a row (second chart). Consensus nonetheless expects margins to expand to their highest ever.

Charts below.

From Factset: EPS will have not grown at all in the prior 7 quarters before shooting higher starting in 2Q13.

From Goldman: margins have contracted four quarters in a row, but the consensus expects them to reach new highs in 2013.

For illustrative purposes, here is the trend in European retail PMI. Note that less than 50 represents contraction. Today, European manufacturing PMI was reported at 47.9.