Review the Bidding, Count the Cards: EPS Growth Rates
Well after puzzling some more on the outlook for the economy, profits, earnings and EPS I may have stumbled across an explanation for why the prognosticators have such a sanguine view of things. Just to review, the economy is slowing and faces more and more headwinds. In fact recent polls show a majority expect a recession in '08 and feel that we may be in one now.
- Americans Turn Negative on Economy, Expect Recession, Poll Says
- 2/3rds Americans Say Recession is Likely
In digging into earnings we found that EPS growth is not organic in the sense that it's based on growth in revenue, profits or earnings. And we found that to be consistent across three, no four, different and major data sources: GDP accounts, National Income accounts, WSJ reported earnings/profits by industry and S&P reported EPS by industry most recently. As they say - it's a puzzlement.
BUT...but...but if you look at the accompanying table it starts to become clearer. EPS growth rates
by sector from the most recent S&P numbers. Take a look and see what you think. EPS growth as reported actuals and estimates from Q106-Q407, based on YOY% growth, lines up with the other data. When you add the '08 numbers the averages show some uplift but not big jumps. In other words it's the going forward expectations for Q108-Q408 that make you shake your head.
For the SP1500 overall EPS growth in '06 & '07 averaged 10.6% and is estimated to grow to 11.7%, which results in the 13.8% estimate for '08 as a whole. The sectors projected to perform exceptionally well are Technology, Telecom and Consumer Discretionary. Only Energy and Materials are estimated to have rates less than 10% and all the other sectors are projected to do well, with growth of EPS in the 10-14% range.
For another view consider the accompanying chart which shows YOY% EPS growth rates from Q106 to Q408, in two groupings. Notice that, roughly speaking, most of the sectors show declining growth to and thru '07 and a pickup on a quarterly basis into '08. More specifically the first sub-chart shows Consumer related sectors (blue-shades) and Energy/Materials (green). Overall four of the sectors are shown as declining and then return to a rather flat 10% outlook, which may have something to do with YoY comps. Con. Discreationary though is shown taking off !
In the second sub-chart Industrial (blue) and Tech (green) are shown doing well, with Telecom in particular projected to turn in a fabulous performance, rising to 50% EPS growth in early '08. Even Finance is shown returning to 20-30% growth rates in late '08.
And there you have IT - the nub of several matters. If any of these projections turn out to be in the ballpark any dips right now are buying opportunities. Of course that all hinges, in general, on a U-shaped path for the economy with the current low growth ( < 2%) being followed by more robust > 2% growth and eventually getting back over 3%. And of course with no further impacts from Housing or the Credit Market problems, especially in the Finance sector.
Fascinating isn't it ? The gap between current economic outlook and earnings projections I mean. Let alone all the major risk factors. It'll be interesting to see how S&P and other analysts change their forecasts over the next few months.
The question of course is how credible do you find them ?