Q1 Earnings Wrap: Biggest Surprises and Disappointments

q1-earningsA historically harsh and seemingly never-ending winter wasn’t the earnings killer many Wall Street analysts had expected.

First-quarter earnings have been a surprising success, at least in relation to relatively low expectations. With only a few S&P 500 companies left to report Q1 results, 75% of them have beaten consensus analyst estimates. That’s an improvement over the 71% average beat rate of the past year, and the 73% beat rate over the past four years.

After a slow start, this earnings season has been brimming with pleasant surprises. That said, there have been enough disappointments – especially early on – to prevent Q1 earnings season from sparking too much of a rally on Wall Street.

Here are some of the highlights and lowlights from Q1 earnings season:

Surprises

  • No sector performed nearly as well as telecommunications. As a whole, telecommunications companies on the S&P 500 grew earnings by an average of 30.9% year over year. Verizon Communications (NYSE: VZ) was the biggest contributor to the sector’s earnings growth. The company reported $0.91 in Q1 EPS, 34% higher than the $0.68 EPS it made a year ago.
  • Utility companies were also on fire, growing earnings by an average of 22.2%. Twenty-four of the 30 companies in the sector grew profits year over year. Thirteen utility companies in the S&P 500 surpassed EPS estimates by double-digits.
  • Overall, corporate earnings were 5.3% higher than analyst expectations. That’s well above the one-year average beat percentage of 3.1%, and the highest earnings surprise percentage since the first quarter of 2012.
  • Three companies beat consensus estimates by more than 400%: Cablevision Systems (NYSE: CVC), General Motors (NYSE: GM) and News Corp. Class A (Nasdaq: NWSA).

Disappointments

  • The banks tanked. The average U.S. bank on the S&P 500 reported earnings that were 14% lower than the first quarter of 2013. Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) were the biggest laggards. JPMorgan’s earnings declined 20% from a year ago. Bank of America actually lost money, reporting EPS of -$0.05, down from $0.20 a year ago. Fortunately, the poor performance from the banks wasn’t a harbinger of a bad earnings season, as is often the case.
  • The energy sector posted the second-largest decline with a 2.8% drop in earnings. Oil and gas refining companies especially took it on the chin, with a 29% earnings decline. Chevron (NYSE: CVX) was the highest-profile disappointment, with EPS declining 26% from 2013.
  • As most Americans outside places like California and Florida can tell you, this was an especially brutal winter. Detroit has its snowiest winter on record. New York, Philadelphia, Chicago and Boston each had one of their 10 snowiest winters. So did several other Midwestern cities. While the harsh winter didn’t kill Q1 earnings the way some analysts expected, it undoubtedly put a dent in a number of certain retailers’ bottom lines. FedEx (NYSE: FDX) lost $125 million in disrupted operations due to all the flight cancelations. Sales at General Mills (NYSE: GIS) were weaker than usual. Costco’s (Nasdaq: COST) February sales were down an estimated 1% due to bad weather. Record snow and cold weren’t enough to prevent Americans from spending. But some retailers had their worst quarters in quite some time.

Bottom Line

In the end, the ups outweighed the downs this earnings season. Stocks have risen 1.4% since Alcoa (NYSE: AA) unofficially kicked things off on April 8, a complete reversal from the 1.4% decline in the month that preceded it.

Sure, low expectations had a lot to do with the high beat rate, as overall earnings growth for the quarter was a modest 2.1%. But the quarter wasn’t the winter-impacted disaster some were expecting.

In the midst of this furious rally, that was more than enough.

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Published by Wyatt Investment Research at