UNEDITED
Since the fourth quarter started, earnings estimates for the S&P 500 have declined slightly. On October 1, analysts expected earnings to increase 15.5% during the fourth quarter, as of last Friday, it was down to 15.3%. Earnings growth estimates for the first quarter of 2005 have also declined by 20 basis points to 7.7% since the beginning of the fourth quarter. While earnings growth estimates have been relatively constant over the past three months for the S&P 500, several sectors have experienced large revisions.
| Fourth Quarter 2004 | First Quarter 2004 | |||
| Oct 1, 2004 | Jan 7, 2005 | Oct 1, 2004 | Jan 7, 2005 | |
| Consumer Disc. | 15% | 7% | 19% | 4% |
| Energy | 39% | 70% | -2% | 17% |
| Health Care | 13% | 8% | 10% | 4% |
| Materials | 74% | 76% | 36% | 42% |
| S&P 500 | 15.5% | 15.3% | 7.9% | 7.7% |
While the energy sector contributes only about 10% to the overall earnings of the S&P 500 index, if estimates prove accurate, it will account for just under half of the total earnings growth for the fourth quarter. Materials companies contribute only about three percent to the index earnings and financial companies are expected to contribute significantly to fourth quarter earnings growth as well.
The deceleration in earnings growth was discussed throughout 2004 as growth slowed from 28.3% in the second quarter to 16.8% in the third quarter. Currently, growth is expected to bottom out during the first and second quarters and start accelerating during the third quarter.
| 4Q04 | 1Q05 | 2Q05 | 3Q05 | |
| Consumer Discretionary | 7% | 4% | 9% | 20% |
| Consumer Staples | 8% | 8% | 9% | 10% |
| Energy | 70% | 17% | -4% | -6% |
| Financial | 10% | 0% | 7% | 20% |
| Health Care | 8% | 4% | 8% | 9% |
| Industrials | 13% | 15% | 15% | 20% |
| Materials | 76% | 42% | 22% | 20% |
| Technology | 15% | 14% | 11% | 10% |
| Telecom | -1% | 6% | 8% | 2% |
| Utilities | 4% | 7% | 10% | 19% |
| S&P 500 | 15.3% | 7.7% | 8.0% | 13.0% |
As the table indicates, a significant amount of the acceleration in earnings growth is expected to come from consumer discretionary and financial companies. It might prove difficult for financial companies to accelerate earnings growth during in a rising rate environment.
During the first few days of earnings season, technology stocks have reported mixed results. Advanced Micro Devices announced that while fourth quarter sales would be "slightly" below results from the third quarter, operating profit would be "significantly" below the third quarter's operating income of $68.4 million. As a results of AMD's pre-announcement, consensus estimates for the fourth quarter fell by about 50% to nine cents per share. Intel on the other hand reported better than expected earnings, $0.33 per share versus estimates of $0.31 per share. Apple Computer stole the spotlight Wednesday afternoon. The company blew away analysts estimates, earning $0.70 per share, over 40% higher than the $0.49 per share Wall Street expected. Sales increased 74% from last year with earnings increasing over 300%. iPod sales soared from $256 million last year to $1.21 billion in the fourth quarter. Increased iPod sales benefited its online music store as well. Its Other Music Products segment experienced a 250% increase in sales to $177 million.
M.D.C. Holdings reported fourth earnings of $3.17 per share, 56% higher than a year ago and $0.35 higher than analysts were estimating. Sales increased by 56% aided by a 21% increase in average home price. There were two items that could cause concern. First, net new orders decreased, albeit by only 1%, and the cancellation rate increased to 32.0% from 26.5% last year. Nevada accounted for the bulk of the decline in new orders, which fell by 65%. New orders also fell in Virginia, down 29%, and were up only 9% in Colorado. Total order backlog increased 16% from last year, while the value of backlog grew by 20% to $1.9 billion. M.D.C is starting the year with its backlog 45% higher than its revenues were in 2004.
Alcoa's fourth quarter results repeated a familiar chorus. Its revenue increased 12% due to higher aluminum prices and increased demand. Net income, however, was flat compared to last year. Higher energy and other input cost pressured margins and the weaker dollar weighted down its non-US manufacturing operations. The company said there was strength in its consumer products business that was "offset by seasonal weakness in can sheet, building products and closures."
The holiday shopping season got a big lift during the post-Christmas week, but it was not able to salvage the poor season. The ICSC reported that same store sales increased by 2.7%, below the 3.5% to 4.0% expected. Williams-Sonoma reported this week that its holiday-season sales were below expectations. Total sales increased 7.3%, but same store sales were flat compared to last year. The company did cite an increase in gift cards as a contributing factor. If this was in fact the case, then January sales should be strong. The consumer has given hints about starting to slow spending and retailers have reported mixed results. Teen apparel retailer, American Eagle, reported December same store sales were up 32.8%, while Gap saw same store sales slip 1%. Luxury goods continue to experience strong results. Coach, the luxury-leather goods company, reported that sales for the quarter ending January 1, 2005 increased 29% with earnings advancing at least by 34%. But toy sales faltered, at least according to the results at Hasbro. This week, Hasbro announced that its sales for the full year will be below last year's results due to "a retail environment that was tougher in the fourth quarter than we expected."
