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US Companies Have Beaten Estimates…Again

3rd Quarter US Earnings

We are currently in the midst of US earnings season – the period of time during which a large number of publicly traded companies release their quarterly earnings reports. Most companies’ third quarter earnings have already been announced, and as always it strikes me as curious just how many companies manage to beat their earnings estimates!

About three quarters of companies have now reported and over 70% have beaten analyst estimates this quarter. Is it a case that the companies are better than they are perceived to be or is it that the analysts are not that good at estimating earnings?

 

Looking back

Let’s look at the estimates themselves. As you would expect, these estimates are prone to change over time. My monthly outgoing estimate changes as fuel, childcare and food costs fluctuate so I would probably find it hard to believe if the first earnings estimates were left unchanged. When looking at earnings estimates what is apparent is that they always seem to go down - unlike my own outgoings unfortunately!

Over the past four years the quarterly earnings estimates have gone down during the respective quarter in each instance. Now, this isn’t to say that the estimates have indicated a fall in earnings, only a fall in the estimate (which typically may still reflect earnings growth, just more subdued).

Quarter three earnings were expected to fall by 5.1% compared to the previous quarter, but with the majority of companies beating expectations the fall in actual earnings should be less than anticipated. It is the third quarter in a row where earnings are expected to fall, however it will only be the second in a row to see earnings actually fall (Q1 saw actual earnings growth when earnings were expected to contract) – something that hasn’t happened since 2009.

Looking forward, Q4 earnings per share (EPS) are estimated to contract by around 2.4%. At the end of June, estimates for Q4 pointed to a growth of 4.3%. Unless something miraculous happens I would expect these EPS estimates to be trimmed further before the end of the year, and I’d also expect actual Q4 earnings to beat the estimates.

 

Our approach

Short term sentiment only stretches so far and it goes without saying that the lower the estimations the more likely companies are to beat them. What is more important, and will offer sustained support for a share price, is actual earnings and earnings growth.

We use fundamental analysis when analysing equity regions. Price to earnings ratio (PE) is a simple calculation to determine how much you are paying for earnings: price over earnings. The higher the PE, the more expensive the earnings are. If earnings fall, the PE will become more and more expensive, unless you then see earnings recover or a fall in the price.

The actual earnings and the current price help determine whether a stock or company is worth buying. You could beat every estimate every year but if the price is too high it is conciliatory at best!