Chart of the Week - Earnings

[arbitragr]

It's no secret that it's bad out there. This week's chart helps provide some perspective as to the magnitude of the current economic decline. 12-month, as-reported S&P 500 earnings have declined over 80% over the past 18 months, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a level not seen since the 1930s and 40s � the back end of the Great Depression. While earnings have been struggling since Q3 2007, it was the latest quarter (Q4 2008 the first full quarter following the financial meltdown), where the real damage was done. During Q4 2008, the S&P 500 came in with its first negative earnings quarter ever and the amount lost during the quarter was more than the index has ever earned during a single quarter.

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/chartoftheday-21mar2009.jpg

[Guest ericopoly]

It's no secret that it's bad out there. This week's chart helps provide some perspective as to the magnitude of the current economic decline. 12-month, as-reported S&P 500 earnings have declined over 80% over the past 18 months, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a level not seen since the 1930s and 40s � the back end of the Great Depression. While earnings have been struggling since Q3 2007, it was the latest quarter (Q4 2008 the first full quarter following the financial meltdown), where the real damage was done. During Q4 2008, the S&P 500 came in with its first negative earnings quarter ever and the amount lost during the quarter was more than the index has ever earned during a single quarter.

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/chartoftheday-21mar2009.jpg

 

 

I presume this chart is influenced by losses on asset writedowns.  Does any such chart exist that focuses strictly on operating income?

[Parsad]

Yup, that's an important distinction Eric.  I would propose that half that drop is also primarily related to financial stocks.  There are alot of non-financial companies that were dragged down with the market, even though their earnings are down less than 10-15%.  Investors should remember that they aren't buying the market, except those that jumped in with both feet and bought index funds or ETF's in the last few years!  >:(  Cheers!

[arbitragr]

Yeah, you make a valid point. I could probably dig up just operational data, however it might take a bit of work ... too much unfortunately.  :-\

I've a Busy weekend.

But you can imagine what it would probably be like in any event, probably down to the 1990 mark. Still a big drop.

 

S&P is currently at 768 ... so you can make your own conclusions about what sort of forward earnings yields the market is on. S&P Earnings of 20-45 wouldn't be too far off the mark.

[Guest ericopoly]

Yeah, you make a valid point. I could probably dig up just operational data, however it might take a bit of work ... too much unfortunately.  :-\

I've a Busy weekend.

But you can imagine what it would probably be like in any event, probably down to the 1990 mark. Still a big drop.

 

S&P is currently at 768 ... so you can make your own conclusions about what sort of forward earnings yields the market is on. S&P Earnings of 20-45 wouldn't be too far off the mark.

 

 

I don't know about the S&P500 as a whole, but Microsoft earnings dropped a "whopping" 10%.  Big deal.

 

[Santayana]

 

 

 

I don't know about the S&P500 as a whole, but Microsoft earnings dropped a "whopping" 10%.  Big deal.

 

 

It's a big deal if earnings contraction rather than growth becomes a trend for more than a couple of quarters.

[Santayana]

Oops, guess my quote didn't work...

 

Also, with those asset writedowns will come lower operating earnings as financial institutions have less capital to work with, and will be using less leverage to boot.

[Guest ericopoly]

It's a big deal if earnings contraction rather than growth becomes a trend for more than a couple of quarters.

 

Yes.  Right now as it is, the company trades at a P/E of about 9.  I brought up Microsoft but I might as well have brought up Coke, or Walmart, or Johnson & Johnson.

 

The point is that these companies (and similar ones) comprise a large chunk of the S&P but will not see P/E ratios anywhere near what is said in this statement:

 

S&P is currently at 768 ... so you can make your own conclusions about what sort of forward earnings yields the market is on. S&P Earnings of 20-45 wouldn't be too far off the mark.

 

My gut tells me it's primarily the writedowns in the financials, but what do I know.  I also don't think that just because financials are taking these extreme negative P/Es it says much about their further room for decline -- they are at huge book discounts.

 

[Guest ericopoly]

I find this link interesting for getting a quick view of the S&P500 today:

 

http://www.indexarb.com/capitalizationAnalysis.html

 

The largest 100 companies make up 89% of the index.  The next 400 just 11%.

 

The last column I find helpful, as you go down the list it computes the cumulative % weight inclusive of all the companies preceeding it on the list.

[Viking]

Earnings by financial companies were grossly overstated the past 7 or 8 years. The consumer WAY over consumed the past 5 years and many consumer stocks earnings are therefore overstated. Perhaps commodity stock earnings (i.e. big oil) also experienced peak earnings...

 

I agree that it is hard to look at current S&P earnings (around $30) and understand what they mean. It is also hard to look at S&P earnings for the past 5 years and understand much as well. How low will the S&P go? No idea... could be much higher OR much lower.

 

Eric, I think your point is bang on... we can look at specific companies and better understand THEIR earnings and THEIR stock price and therefore make an intelligent investment decision.

[Guest ericopoly]

I find this link interesting for getting a quick view of the S&P500 today:

 

http://www.indexarb.com/capitalizationAnalysis.html

 

The largest 100 companies make up 89% of the index.  The next 400 just 11%.

 

The last column I find helpful, as you go down the list it computes the cumulative % weight inclusive of all the companies preceeding it on the list.

 

 

Oops, I guess it was 68.8% for the 100 largest.  I think I read the 6 as an 8.  Anyhow, the last 100 smallest companies in the index comprise only 2.2% of the index weight collectively.  That's rather interesting.

 

 

 

Here is something I found on that site that is very cool:

http://www.indexarb.com/stockVsIndexesLeftColumn.html#sp500IndexAnalysis

 

Follow that link and look at the S&P500 table -- then click on the "Three months" link.  It will show you, for each company, how it performed relative to the index for the past 3 months.  Then you can change to 1 month if you like.  It is useful to illustrate visually where the dead weight is.

[Guest ericopoly]

As a result of an 11.4% headwind from currency translation, sales for the quarter were down 7.5% despite gains in organic sales and contributions from recent acquisitions.

 

That is a quote from Heinz Q4 2008 conference call.

 

11.4% headwind from currency translation?  Yikes. 

 

http://seekingalpha.com/article/122372-h-j-heinz-company-f3q09-qtr-end-1-28-09-earnings-call-transcript?page=3

 

 

Notice that they said gains from organic sales?  This stock is down 37% from 52 week high, because this recession is going to wipe out their earnings... or is it?

 

[Smazz]

by just reverting to the mean some of us are going to be making alot of Dinero.. ;D

Hopefully everyone took some profits as I always encourage people to do in times of excess.

 

Wait it out as always, accumulate if you can - be prudent and spend your next $ (investment wise) like its your last.

 

This has always helped me navigate.

 

 

[Guest ericopoly]

This link here has a few different ways of looking at things -- different charts for things like historical P/B of the S&P500. 

 

http://seekingalpha.com/article/124829-s-p-500-valuation-analysis-near-bottom

 

Looks like P/B in early March was about 29% higher than in 1981.

 

In addition, RBC Capital Markets has this chart showing that 1/3rd of index equities trade below book value in both Canada and the US, levels only seen in 1990.

 

 

There is also some mention of a "Rule of 20" there -- I wish I had known that when Mungerville thought I was babbling about the "Fed Model".  I had actually never heard of the Rule of 20, but it's possible that it was popular back in 1981 and might be why the market was priced where it was... here me out, it was at an 8 P/E at the time and inflation rate was 12%.  So, 8+12=20.  It's not the Fed Model, it's different.  Anyways, it is a relic.

 

 

The year over year drop in S&P500 banking stocks was more severe than during any such period before, inclusive of the Great Depression.  Here is a chart of that:

http://lh4.ggpht.com/_Iz4sLjjtkLc/SbKBaNThPoI/AAAAAAAAAZg/L2WP6iEHZbE/s1600-h/image40.png

 

 

[Guest ericopoly]

Yeah, you make a valid point. I could probably dig up just operational data, however it might take a bit of work ... too much unfortunately.  :-\

I've a Busy weekend.

But you can imagine what it would probably be like in any event, probably down to the 1990 mark. Still a big drop.

 

S&P is currently at 768 ... so you can make your own conclusions about what sort of forward earnings yields the market is on. S&P Earnings of 20-45 wouldn't be too far off the mark.

 

 

This article has a chart that shows operating vs reported earnings per share:

 

http://seekingalpha.com/article/126347-s-p-500-p-e-ratio-at-troughs-a-detailed-analysis-of-the-past-80-years?source=article_lb_author

 

Here is a link directly to the chart:

 

http://lh4.ggpht.com/_Iz4sLjjtkLc/Sb6Y-w9K4EI/AAAAAAAAAuk/TGVWjgpyp-c/s1600-h/image12.png

 

 

And here is a link to a chart that then factors it into P/E ratio:

 

http://lh3.ggpht.com/_Iz4sLjjtkLc/Sb6Y_vYqJuI/AAAAAAAAAus/6PavLpuaGS0/s1600-h/image13.png

 

 

 

With the release of its Q4 2008 results, AIG subtracted $5.13 to S&P 500 Index operating earnings and $7.10 to reported earnings in the December quarter. These losses will negatively impact the S&P 500 Index earnings throughout 2009. Yet, AIG is 0.02% of the S&P 500 Index so its market value has literally no meaning to the overall Index. Were the US government to completely nationalize AIG tomorrow, its removal from the Index would make no difference to the Index value but the removal of its losses, operating and reported, would immediately boost Index earnings by 7.8% for operating and 17% for reported.

[Uccmal]

Very interesting charts: 

 

Observations:

- As you guys mention the earnings are badly skewed downwards at the moment due to the AIGs, Cs, etc.  They make up a tiny part of the capitalization weighting but a huge part of the earnings.

- The earnings are also badly skewed downwards due to the US dollar going up last year.  So, The GE's of the world bought in less US cash, on conversion.  A dropping US dollar will raise earnings in US cash by a potential 20%. 

- Just a normalization without the one time writedowns, and the currency, could bring things up 20-50% (a guess).

- I personally thing that the earnings (2009) on an adjusted basis will probably be 20% lower at a maximum.  So that would put it around 60-65 at a low.   

 

Back to doing my income taxes.