Posted by: Howard Silverblatt on February 12, 2011
Q4 OVERVIEW:(facts first, commentary at end)
I’ve completed my preliminary Q4 2010 review based on the current S.E.C. filings (finals in March) and the statistics that emerged show an improving corporate and economic environment. Comparisons to either the fourth quarter of 2009 or the full year of 2009 are strong, portraying the depth of the recovery, but comparisons over the prior third quarter of 2010 for some metrics show that growth has been much more moderate Going forward, 2011 will find tougher comparisons in the actual 2010 results, with companies needing to differentiate themselves
Q4 EPS show a 29.5% gain over Q4,’09, but just a 2.5% gain over Q3,’10
Q1,’11 is expected to be flat with Q4,’10; so given the ‘usual’ beat, slightly up
FY 2010 earnings are 47.6% higher than 2009, and are on par with 2007
2011 is expected to surpass the record earnings year of 2006, with a 14.6% gain over 2010 (9.6% above the record 2006 level)
Forward price-to-earnings ratios remain historically low, 13.8 for estimated 2011 S&P 500; 15.0 for preliminary 2010
EPS on par with 2007, applying 2007 P/E the S&P would be 1493, 12.3% higher than the current 1329
2011 sales estimates have been increasing over the past three weeks, with 2011 estimated to post a 12.1% gain 2010
Margins to remain high
Eventually, when sales outpace production, more corporate investment (and workers) will be needed which will reduce margins
That will be a good sign - more spending, more working, upward cycle (but inflationary)
Current sales continue to grow, but very slowly
CASH HELD BY S&P INDUSTRIALS:
Cash has set 8 consecutive quarters of record cash levels: Q4,’08 - Q3,’10
Q4,’10 is coming in 3.6% ahead of Q3,’10, implying a new record
The implied level would be 9.3% of market value and 68 weeks of estimated 2011
Materials and Consumer Discretionary increases are a double-digit gain over Q3,’10
Notable increases are Dow Chemical +$3.8B (Q4 is $6.9B, Q3 was $$3.1B); Gilead Sciences +$3.0B ($5.3B, $2.3B); Amazon.com +$2.9B ($8.8B, $5.9B). Decreases include AT&T -$1.8B ($1.4B, $3.2B), Cardinal Health -$1.3B ($1.3B, $2.7B), Archer Daniels Midland -$0.8B ($0.5B, $1.4B)
BUYBACKS (less than half the issues reported):
Buybacks are coming in 49% ahead of Q4,’09, but only 1% above Q3,’10
So far Microsoft (again) is spending the most on buybacks, $5.05B, up from $4.40B in Q3,’10; Coca-Cola is next, $2.96B up from $1.0B, with Cisco at $1.85B up from $2.7B. Procter & Gamble decreased to $0.52B from $3.01B in Q3
Companies continue to protect against earnings dilution, with some Share Count Reduction (SCR) in the quarter, but more ‘inching up’ over the year
SHARE COUNT (less than half the issues reported):
Initial share count has gone down 0.9%, with the year-over-year count down 1.6%.
Health Care count is 5.0% less than it was in Q4,’09; Financial shares are down, but need more data to interpret
Companies continue to cover options, with a slow move back to share count reduction
Announcements and program increases have escalated
Share Count Reduction Returns: Fidelity National decreased its shares 18% from Q4,’09, as Travelers, Biogenic Idec and WellPoint reduced their count 15.0%, with AutoZone down 10%, and both Visa and Quest Diagnostics down 8%; EPS impact starts, more coming in Q1,’11
CAPITAL EXPENDITURES (less than half the issues reported):
Q,’10 is showing a 9.2% gain over Q4,’09, and a 17.2% gain over Q3,’10
Expect companies will be spending more on replacement equipment and delayed maintenance, aided by full write-off schedule which ends 12/2011
DIVIDENDS - Q1,’11:
Dividend increases are very strong, with the average increase being 22.65% and the median being 12.20%
Dollar weighted increases are up 35% YTD compared the full first two months of 2010, with the increase estimated to be 100% by month end
Indicated rate continues to increase, but a full recovery is not expected to 2013
Five fundamental reasons adding to dividend growth:
Corporate earnings have significantly rebounded from their recession levels, and are now approaching record levels
Low interest rates
Corporate cash on hand stands at an all time high
Payouts remain low, partly due to the speed of earnings improvement and the slower rate of dividend increases
Coverage rates, earnings divided by dividends are very high
The market continues to move up, with the S&P 500 on its way to doubling its price since the index’s March 2009 low, 23 months ago. The index is now up 96.5%, and is looking to reclaim its October 2007 high, which it needs another 17.8% to match.
Investors continued to focus on the positive U.S. domestic market and fundamentals and this week discounted the Egyptian situation, another Chinese interest rate increase, and higher global food prices.
The U.S. market support is based on three items. First, earnings are coming in at a steady, strong pace, matching the pre-recessionary levels; second, most company guidance for 2011, which has come out over the past three weeks, is more upbeat and positive, which gives support to the estimation that second half earnings for 2011 will set an all-time record; and third, the economy is continuing to improve, with some progress on the employment issue.
Investors remained optimistic, but many now expect some consolidation due to the 26.9% run-up from the index’s recent low in August 2010. Therefore, a small consolidation should not upset investors. However, if selling programs or profit taking take hold during that sell-off, things could escalate quickly, which could test investors’ outlook.
Next week will bring Washington, and its politics, back to Wall Street. President Obama will release his budget for fiscal 2012 (which starts October 2011) Monday night, along with his specific areas in which he wishes to spend and cut. Congressional opposition leaders have already outlined their views (mostly cuts) to which discussions will fully start once the President presents his budget. Adding to the fun budget is the fact that the current budget was never finalized, with the government currently spending on an extended resolution which expires March 4th. Initially, the emphasis will be on completing the 2011 budget, with the 2012 budget taking much longer to work its way through the process.
While I expect the general economy to continue to improve, I also believe that corporate planning and strategy will play a greater role, which could result in a more volatile market as issues are rewarded or punished for their effects.
Finally, I think this twitter note hits home ( www.twitter.com/hsilverb )
Pensions are the iceberg, but OPEB (Other Post-Employment Benefits, such as medical) is the fact that there aren’t enough lifeboats
For the full report, including tables and charts, click here
A few Q4 preliminary stats.doc