Thursday, January 26, 2012

S&P 500 Revenues, Margins, & Earnings

Most industry analysts who cover the S&P 500 companies are turning more upbeat about the outlook for revenues for this year and next year. However, the same cannot be said for their earnings forecasts. How can this divergence be explained? Obviously, they expect profit margins to narrow. The happy spin on this story is that analysts expect that their companies will be hiring more workers because their business has been so good that they must expand their payrolls. That will squeeze profit margins. But it will also boost sales. I don’t know if industry analysts are thinking this way, but it certainly explains the following facts on the ground:

(1) Revenues: After falling from a peak of $1,116 per share during the week of August 25, 2011 to $1,080 during the week of November 24, consensus expected S&P 500 revenues for 2012 flattened out around that level through the week of January 19. The 2013 consensus has been rising since late last year to a record high of $1,145.

(2) Earnings: Despite the stabilization in 2012 revenues expectations and their upturn for 2013, consensus expected earnings for the S&P 500 were at new lows for both years last week. This year’s estimate was down to $106.51, and next year’s was down to $118.96.

(3) Profit Margins: I use the consensus revenues and earnings data to calculate profit margins for the S&P 500 and its 10 sectors. These consensus expected margins have been falling for both years since last summer and are currently down to 9.7% for 2012 and 10.4% for 2013.

(4) Sectors: I also slice and dice the data for the 10 sectors of the S&P 500. Through the week of January 19, there remain upward trends in both 2012 and 2013 revenue estimates for the following: Consumer Discretionary (new highs), Consumer Staples (new highs), and Health Care (new highs). Flattening out recently are Energy, Industrials, Information Technology, and Utilities. Heading down are Financials and Materials. (More for subscribers.)

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