EARNINGS INSIGHT John Butters, VP, Sr. Earnings Analyst jbutters@factset.com Media Questions/Requests media_request@factset.com S&P 500 June 24, 2016 Key Metrics Earnings Growth: For Q2 2016, the estimated earnings decline is -5.2%. If the index reports a decline in earnings for Q2, it will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009. Earnings Revisions: On March 31, the estimated earnings decline for Q2 2016 was -2.8%. Nine sectors have lower growth rates today (compared to March 31) due to downward revisions to earnings estimates, led by the Information Technology sector. Earnings Guidance: For Q2 2016, 81 companies have issued negative EPS guidance and 32 companies have issued positive EPS guidance. Valuation: The forward 12-month P/E ratio is 16.5. This P/E ratio is based on Wednesday s closing price (2085.45) and forward 12-month EPS estimate ($126.67). Earnings Scorecard: Of the 10 companies in the S&P 500 reporting earnings to date for Q2 2016, 4 have reported earnings above the mean estimate and 5 have reported sales above the mean estimate. To receive this report via e-mail, please go to: www.factset.com/data/news_research/researchdesk To view other market stories with FactSet content, please go to: www.factset.com/insight All data published in this report is available on FactSet. Please contact media_request@factset.com or 1-877-FACTSET for more information. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 1
Topic of the Week 1: EARNINGS INSIGHT June 24, 2016 Will S&P 500 Companies With Higher Global Exposure Report Larger Earnings Declines in Q2? This past quarter, the effects of currency movement were slightly less than expected with a 1% to 2% headwind in most revenue categories including 1% to total revenue and a $0.01 headwind to earnings per share. Oracle (June 16) In comparing our third quarter results year over year, there are a few items of note. As usual, FX. As compared to a year ago during the quarter, the foreign currencies in the countries where we operate weakened overall versus the U.S. dollar, primarily in Canada, Mexico and Korea. This resulted in our foreign earnings in Q3 when converted into U.S. dollars for reporting purposes being lower by about $15 million or $0.03 a share than they would have been, had the various foreign exchange rates versus the dollar been flat year over year. Costco (May 26) Coming into the start of the Q2 earnings season, there are concerns in the market about the impact of the stronger U.S. dollar (relative to last year) and the impact of lower global economic growth on the sales and earnings of companies in the S&P 500. Based on estimates as of today, are companies in the S&P 500 with more global exposure expected to report weaker sales and earnings growth relative to companies in the index with less global exposure for the quarter? The answer is yes. FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index) can be used to analyze global sales exposure for all the companies in the S&P 500. For this particular analysis, the index was divided into two groups: companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure). Aggregate earnings and revenue growth rates were then calculated based on these two groups. The results are listed below. The estimated earnings decline for the S&P 500 for Q2 2016 is -5.2%. For companies that generate more than 50% of sales inside the U.S., the estimated earnings decline is -2.8%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -9.9%. The estimated sales decline for the S&P 500 for Q2 2016 is -0.8%. For companies that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 2.5%. For companies that generate less than 50% of sales inside the U.S., the estimated sales decline is -9.0%. For the second quarter, the Energy sector is projected to be the largest contributor to the year-over-year declines in both earnings and revenues for the index. If the Energy sector is excluded from the analysis, are companies in the S&P 500 (ex-energy) with more global exposure expected to report weaker sales and earnings growth relative to companies (ex- Energy) in the index with less global exposure? The answer is still yes. The estimated earnings decline for the S&P 500 (ex-energy) for Q2 2016 is -1.7%. For companies (ex- Energy) that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 0.1%. For companies (ex- Energy) that generate less than 50% of sales inside the U.S., the estimated earnings decline is -5.3%. The estimated sales growth rate for the S&P 500 (ex-energy) for Q2 2016 is 2.2%. For companies (ex- Energy) that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 4.6%. For companies (ex- Energy) that generate less than 50% of sales inside the U.S., the estimated sales decline is -4.3%. Thus, S&P 500 companies with higher global exposure are expected to report lower earnings growth and lower revenue growth relative to S&P 500 companies with lower global exposure for the second quarter. When excluding the Energy sector from the analysis, the conclusions remain the same. For more information on FactSet global exposure data, please see the following link: http://solutions.factset.com/learn_georev FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 2
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Topic of the Week 2: EARNINGS INSIGHT June 24, 2016 Have Analysts Gone Soft on Coca-Cola and Pepsi Since Soda Tax Passed in Philadelphia? On June 16, the Philadelphia City Council approved a 1.5-cents-per-ounce tax on soft drinks (with added sugar or artificial sweeteners) that will be implemented in 2017. With concerns that more cities and municipalities may try to pass similar measures, did industry analysts revise their outlooks for beverage companies such as Coca-Cola Company or PepsiCo over the past week? The answer is no. In terms of EPS expectations, analysts did not make any significant changes to EPS estimates for 2017 for either Coca-Cola or PepsiCo over the past week. The mean EPS estimate for FY 2017 for Coca-Cola is $2.05 today, unchanged from June 16. The mean EPS estimate for FY 2017 for PepsiCo is $5.11 today, also unchanged from June 16. In terms of ratings, analysts did not make any changes to their recommendations over the past week. For Coca-Cola, the number of Buy (12), Hold (12), and Sell (1) ratings are unchanged from June 16. For PepsiCo, the number of Buy (17), Hold (10), and Sell (0) ratings are also unchanged from June 16. In terms of target prices, analysts did not make any changes to their projections over the past week. The mean target price for Coca-Cola is $47.95, which is unchanged from June 16. This mean target price is 6.4% above the June 23 closing price for Coca-Cola of $45.08. The mean target price for PepsiCo is $112.05, which is also unchanged from June 16. This mean target price is 7.3% above the June 23 closing price for PepsiCo of $104.44. In terms of the market reaction, the price of Coca-Cola has decreased slightly, while the price of PepsiCo has increased slightly. Since June 16, the price of Coca-Cola has fallen by 0.5% (to $45.08 from $45.31), while the price of PepsiCo has risen by 0.6% (to $104.44 from $103.89). FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 4
Q2 2016 Earnings Season: By the Numbers Overview In terms of estimate revisions for companies in the S&P 500, analysts have made smaller cuts than average to earnings estimates for Q2 2016 to date. On a per-share basis, estimated earnings for the second quarter have fallen by 2.4%. This percentage decline is smaller than the trailing 5-year average (-4.4%) and trailing 10-year average (-5.5%) for a quarter. At the sector level, the Information Technology sector has recorded the largest cuts to earnings estimates to date for the quarter. In addition, a slightly smaller percentage of S&P 500 companies have lowered the bar for earnings for Q2 2016 relative to recent averages. Of the 113 companies that have issued EPS guidance for the first quarter, 81 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 72% (81 out of 113), which is slightly below the 5-year average of 74%. As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q2 2016 is -5.2% today, which is larger than the expected earnings decline of -2.8% at the start of the quarter (March 31). Four sectors are predicted to report year-over-year earnings growth, led by the Telecom Services and Consumer Discretionary sectors. Six sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Information Technology sectors. As a result of downward revisions to sales estimates, the estimated sales decline for Q2 2016 is -0.8%, which is larger than the estimated sales decline of -0.5% at the start of the quarter. Six sectors are projected to report yearover-year growth in revenues, led by the Telecom Services and Health Care sectors. Four sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors. Looking at future quarters, analysts currently project earnings and revenue growth to return in Q3 2016. The forward 12-month P/E ratio is now 16.5, which is above the 5-year and 10-year averages. During the upcoming week, 11 S&P 500 companies (including 1 Dow component) are scheduled to report results for the second quarter. Earnings Revisions: Tech Sector Has Recorded Largest Drop in Expected Earnings for Q2 No Change in Estimated Earnings Decline for Q2 This Week The estimated earnings decline for the second quarter is -5.2% this week, which is unchanged from the estimated earnings decline of -5.2% last week. Overall, the estimated earnings decline for Q2 2016 of -5.2% today is larger than the estimated earnings decline of -2.8% at the start of the quarter (March 31). Nine of the ten sectors have recorded a decline in expected earnings growth since the beginning of the quarter due to downward revisions to earnings estimates, led by the Information Technology sector. The only sector that has recorded an increase in expected earnings growth since the start of the quarter due to upward revisions to earnings estimates is the Industrials sector. Information Technology: Largest Increase in Expected Earnings Decline, Led by Apple The Information Technology sector has recorded the largest decrease in expectations for year-over-year earnings since the start of the quarter (to -7.2% from -0.2%). Overall, 38 of the 67 companies in this sector have seen downward revisions to EPS estimates to date. Of these 38 companies, 14 have recorded EPS estimate cuts of 10% or more, led by Electronic Arts (to -0.02 from $0.21), Autodesk (to -$0.13 from -$0.07), and Seagate Technology (to $0.14 from $0.78). However, the downward revisions to EPS estimates for Apple (to $1.40 from $1.78), Microsoft (to $0.58 from $0.67), and IBM (to $2.89 from $3.44) have been the largest contributors to the increase in the projected earnings decline for this sector. The Information Technology sector has also witnessed the largest decrease in price (-2.8%) of all ten sectors since the start of the quarter. Industrials: Largest Decrease in Expected Earnings Decline, Led by GE On the other hand, the Industrials sector has recorded the largest increase in expectations for year-over-year earnings since the start of the quarter (to -1.9% from -4.2%). However, only 23 of the 67 companies in this sector have seen upward revisions to EPS estimates to date, led by General Electric (to $0.45 from $0.29). Despite the increase in estimated earnings, General Electric has recorded a decrease in price of 1.9% since March 31. The Industrials sector overall has witnessed an increase in price of 0.7% since the start of the quarter. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 5
Index-Level (Bottom-Up) EPS Estimate: Smaller Decline than Average to Date Downward revisions to earnings estimates in aggregate for the second quarter to date have been below recent averages. On a per-share basis, the Q2 bottom-up EPS estimate (which is an aggregation of the earnings estimates for all 500 companies in the index and can be used as a proxy for the earnings for the index) has fallen by 2.4% (to $28.73 from $29.43) to date. This decline in the EPS estimate for Q2 2016 is below the trailing 1-year average decline (-4.8%), the trailing 5-year average decline (-4.4%), and the trailing 10- year average decline (-5.5%) in the bottom-up EPS estimate for a quarter. Guidance: Negative EPS Guidance (72%) for Q2 Slightly Below Average A slightly smaller percentage of S&P 500 companies have lowered the bar for earnings for Q2 2016 relative to recent averages. At this point in time, 113 companies in the index have issued EPS guidance for Q2 2016. Of these 113 companies, 81 have issued negative EPS guidance and 32 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 72% (81 out of 113), which is slightly below the 5-year average of 74%. Earnings Growth: Fifth Consecutive Quarter of Year-Over-Year Earnings Declines (-5.2%) The estimated earnings decline for Q2 2016 is -5.2%. If the index reports a decrease in earnings for the quarter, it will mark the first time the index has seen five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009. Four sectors are projected to report year-over-year growth in earnings, led by the Telecom Services and Consumer Discretionary sectors. Six sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Information Technology sectors. Telecom Services: AT&T Leads Growth The Telecom Services sector is expected to report the highest earnings growth at 7.8%. Of the five companies in the sector, AT&T is projected to be the largest contributor to earnings growth. The mean EPS estimate for Q2 2016 (which reflects the combination of AT&T and DIRECTV) is $0.72, compared to year-ago EPS (which reflects standalone AT&T) of $0.69. If this company is excluded, the estimated earnings growth rate for the Telecom Services sector would fall to -4.4%. Consumer Discretionary: Internet Retail, Home Goods, and Autos Lead Growth The Consumer Discretionary sector is expected to report the second highest earnings growth at 6.4%. At the industry level, 8 of the 12 industries in this sector are projected to report earnings growth for the quarter. Of these 8 industries, 4 are predicted to report double-digit earnings growth: Internet & Catalog Retail (41%), Household Durables (25%), Automobile Manufacturers (18%), and Auto Components (12%). On the other hand, the Leisure Products (-25%) industry is expected to report the largest year-over-year decline in earnings at the industry level for the quarter. Energy: Largest Contributor to Earnings Decline in the S&P 500 The Energy sector is expected to report the largest year-over-year decline in earnings (-77.0%) of all ten sectors. Five of the six sub-industries in this sector are projected to report a year-over-year decrease in earnings: Oil & Gas Exploration & Production (-811%), Oil & Gas Equipment & Services (-108%), Oil & Gas Drilling (-106%), Integrated Oil & Gas (-44%), and Oil & Gas Refining & Marketing (-35%). The Oil & Gas Storage & Transportation (14%) subindustry is the only sub-industry in the sector expected to report earnings growth for the quarter. This sector is also expected to be the largest contributor to the earnings decline for the S&P 500 as a whole. If the Energy sector is excluded, the estimated earnings decline for the S&P 500 would improve to -1.7% from -5.2%. Materials: Weakness in Metals & Mining and Chemicals The Materials sector is expected to report the second largest year-over-year decline in earnings (-11.3%) of all ten sectors. At the industry level, three of the four industries in the sector are projected to report a year-over-year decrease in earnings, led by the Metals & Mining (-31%) and Chemicals (-12%) industries. Information Technology: Apple Leads Decline The Information Technology sector is expected to report the third largest year-over-year decline in earnings (-7.2%) of all ten sectors. At the industry level, five of the seven industries in the sector are projected to report a year-overyear decrease in earnings, led by the Technology Hardware, Storage, & Peripherals (-25%) industry. At the company level, Apple is predicted to be the largest contributor to the estimated year-over-year decline in earnings for the sector. The mean EPS estimate for Q2 2016 is $1.40, compared to year-ago EPS of $1.85. If this company is excluded, the estimated earnings decline for the Information Technology sector would improve to -2.0%. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 6
Revenues: Sixth Consecutive Quarter of Year-Over-Year Revenue Declines (-0.8%) The estimated revenue decline for Q2 2016 is -0.8%. If the index reports a decrease in sales for the quarter, it will mark the first time the index has seen six consecutive quarters of year-over-year declines in sales since FactSet began tracking the data in Q3 2008. Six sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Four sectors are projected to report a year-over-year decline in revenues, led by the Energy and Materials sectors. Telecom Services: AT&T Leads Growth The Telecom Services sector is expected to report the highest revenue growth of all ten sectors at 11.1%. At the company level, AT&T is projected to be the largest contributor to revenue growth for the sector. The mean sales estimate for Q2 2016 (which reflects the combination of AT&T and DIRECTV) is $40.7 billion, compared to year-ago sales (which reflects standalone AT&T) of $33.0 billion. If AT&T is excluded, the blended revenue growth rate for the sector would fall to 1.0%. Health Care: Broad-Based Growth The Health Care sector is expected to report the second highest revenue growth of all ten sectors at 7.7%. All six industries in this sector are projected to report sales growth for the quarter, led by the Health Care Providers & Services (10%) industry. Energy: Largest Contributor to Earnings Decline in the S&P 500 The Energy sector is expected to report the largest year-over-year decrease in sales (-27.8%) for the quarter. All six sub-industries in the sector are projected to report a year-over-year decrease in revenues: Oil & Gas Drilling (-50%), Oil & Gas Equipment & Services (-34%), Oil & Gas Exploration & Production (-30%), Oil & Gas Refining & Marketing (-28%), Integrated Oil & Gas (-28%), and Oil & Gas Storage & Transportation (-1%). This sector is also expected to be the largest contributor to the sales decline for the S&P 500 as a whole. If the Energy sector is excluded, the estimated revenue decline for the S&P 500 would improve to 2.2% from -0.8%. Materials: Weakness in Chemicals and Metals & Mining The Materials (-6.4%) sector is expected to report the second largest year-over-year decrease in revenues of all ten sectors. Two of the four industries in this sector are projected to report a year-over-year decline in sales for the quarter: Chemicals (-10%) and Metals & Mining (-7%). FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 7
Looking Ahead: Forward Estimates and Valuation Earnings and Revenue Growth Expected to Return In 2 nd Half of 2016 For Q2 2016, S&P 500 companies are expected to report year-over-year declines in both earnings (-5.2%) and sales (-0.8%). However, analysts currently expect earnings growth and revenue growth to return in the second half of 2016. In terms of earnings, the estimated growth rates for Q3 2016 and Q4 2016 are 1.2% and 7.5%. In terms of revenues, the estimated growth rates for Q3 2016 and Q4 2016 are 2.3% and 5.1%. For all of 2016, analysts are still projecting earnings (+0.7%) and revenues (+1.8%) to increase slightly year-overyear. Valuation: Forward P/E Ratio is 16.5, above the 10-Year Average (14.3) The forward 12-month P/E ratio is 16.5. This P/E ratio is based on Wednesday s closing price (2085.45) and forward 12-month EPS estimate ($126.67). The P/E ratio of 16.5 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 14.6, and above the prior 10-year average forward 12-month P/E ratio of 14.3. However, it is below the forward 12-month P/E ratio of 16.6 recorded at the start of the second quarter (March 31). Since the start of the second quarter, the price of the index has increased by 1.2%, while the forward 12-month EPS estimate has increased by 1.9%. At the sector level, the Energy (67.9) sector has the highest forward 12-month P/E ratio, while the Financials (12.6) sector has the lowest forward 12-month P/E ratio. Nine sectors have forward 12-month P/E ratios that are above their 10-year averages, led by the Energy (67.9 vs. 15.4) sector. The Telecom Services sector (14.1 vs. 14.6) is the only sector with a forward 12-month P/E ratio below the 10-year average. Companies Reporting Next Week: 11 During the upcoming week, 11 S&P 500 companies (including 1 Dow component) are scheduled to report results for the second quarter. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 8
Q1 2016: Scorecard FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 9
Q1 2016: Scorecard FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 10
Q1 2016: Scorecard FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 11
Q1 2016: Projected EPS Surprises (Sharp Estimates) FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 12
Q1 2016: Growth FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 13
Q2 2016: EPS Guidance EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 14
Q2 2016: EPS Revisions EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 15
Q2 2016: Growth FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 16
CY 2016: Growth FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 17
CY 2017: Growth FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 18
Geographic Revenue Exposure EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 19
Bottom-Up EPS Estimates: Revisions EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 20
Bottom-Up EPS: Current & Historical EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 21
Bottom-Up SPS: Current & Historical EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 22
Net Margins: Current & Historical EARNINGS INSIGHT June 24, 2016 FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 23
Forward 12M Price / Earnings Ratio: Sector Level FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 24
Forward 12M Price / Earnings Ratio: Long-Term Averages FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 25
Trailing 12M Price / Earnings Ratio: Long-Term Averages FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 26
Important Notice The information contained in this report is provided as is and all representations, warranties, terms and conditions, oral or written, express or implied (by common law, statute or otherwise), in relation to the information are hereby excluded and disclaimed to the fullest extent permitted by law. In particular, FactSet, its affiliates and its suppliers disclaim implied warranties of merchantability and fitness for a particular purpose and make no warranty of accuracy, completeness or reliability of the information. This report is for informational purposes and does not constitute a solicitation or an offer to buy or sell any securities mentioned within it. The information in this report is not investment advice. FactSet, its affiliates and its suppliers assume no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this report. About FactSet FactSet is a leading provider of integrated financial information and analytical applications. More than 63,000 users stay ahead of global market trends, access extensive company and industry intelligence, and monitor performance with FactSet s desktop analytics, mobile applications, and comprehensive data feeds. The Company has been included in FORTUNE's Top 100 Best Companies to Work For, the United Kingdom s Great Places to Work and France s Best Workplaces. FactSet is listed on the New York Stock Exchange and NASDAQ (NYSE:FDS) (NASDAQ:FDS). Learn more at www.factset.com, and follow us on Twitter: www.twitter.com/factset. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 27