Kass: A Deeper Dive Unearths the Ugly
By Doug Kass 01/24/13 - 06:00 AM EST
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This column originally appeared on Real Money Pro at 8:04 a.m. EST on Jan. 23.
NEW YORK (Real Money) -- Let's take a deeper dive into the profit and sales progress, or lack thereof, in the three months that just ended. Fourth-quarter 2012 EPS have slightly beaten consensus expectations, but most of the beat has been due to better numbers in the financial sector. Financials have dominated the earnings reports so far, as they are typically early reporters. Excluding results in the financial sector, S&P 500 EPS (benefiting from share buybacks) are flat year over year. Adjusted for share buybacks, net income has come in slightly lower (-0.5%). Of the 67 companies in the S&P that had reported as of Friday night, 26 were financials. Nearly two thirds of reporting companies have beaten consensus compared to about 62% a year ago. About 20% have had negative surprises relative to consensus vs. 27% a year ago. In terms of sales for reporting companies (excluding financials), they are lower at -0.5% year over year. While 42% of the reports (excluding financials) have beat on revenue, 51% have disappointed relative to the consensus on sales. I expect the trend in disappointing revenue to surface in the first half of this year. In terms of profit margins (excluding financials), margins are down slightly from fourth quarter 2011. So far, the U.S. stock market has disregarded and has been disconnected to what is essentially flat profits, slightly weaker margins and a lower revenue backdrop. Sometimes the demarcation between progress and fantasy gets disconnected in the markets, and this might be such a time. Importantly, if the remainder of the S&P comes in at consensus, fourth-quarter 2012 profits should be +3% in the aggregate, but excluding financials only +1%. Taking out buybacks, it means that net income is essentially flat year over year. Quarterly S&P earnings have been between $25 a share and $26 a share since third quarter 2011, and I find it difficult to see an upside breakout in the quarters ahead (which would be required to reach top-down 2013 consensus), as both fiscal and monetary policy will be a governor to economic and profit growth in the U.S. in 2013-2014. Indeed, I see downside risks to S&P earnings to slightly below the recent range.