EARNINGS TRENDS – MARGINS STILL EXPANDING

By Dirk Van Dijk

Key Points:

• 4Q earnings season almost done: 496 (99.2%) of S&P 500 reports in; median surprise of 3.64% and surprise ratio of 3.07 for EPS, 1.05% and 1.85 for revenues.
• Reported (496 firms) fourth quarter earnings growth of 30.7%, 19.9% excluding Financials. On Revenue side, 8.24% growth reported, 8.77% excluding Financials.
• Reported net margins (496 firms) rise to 8.98% from 7.29% a year ago, down from 9.06% in third quarter. Margins excluding Financials rise to 8.33% from 7.38% last year and 8.23% in third quarter.
• Full year total earnings for the S&P 500 jumps 45.1% in 2010, expected to rise 14.6% further in 2011. Growth to continue in 2012 with total net income expected to rise 13.4%.
• Total revenues for the S&P 500 rise 8.16% in 2010, expected to be up 2.66% in 2011 and 5.99% in 2012. Excluding Financials, revenues up 9.67% in 2010, expected to rise 6.42% in 2011 and 6.12% in 2012.
• Net Margins marching higher, from 5.88% in 2008 to 6.40% in 2009 to 8.58% for 2010, 9.57% expected for 2011 and 10.25% in 2012.
• Net Margins: major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 7.09% in 2009, 8.23% for 2010, 8.80% expected in 2011, and 9.31% in 2012.
• Revisions ratio for full S&P 500 at 1.51 for 2011, at 1.62 for 2012, both bullish readings. Ratio of firms with rising to falling mean estimates at 1.62 for 2011, 1.88 for 2012, also very positive readings. Total revisions activity passed peak, change in revisions ratios will be driven by old estimates dropping out more than by new revisions.
• S&P 500 earned $545.3 billion in 2009, rising to $791.3 billion in 2010, expected to climb to $906.5 billion in 2011. In 2012, the 500 are collectively expected to earn $1.0282 Trillion.
• S&P 500 earned $57.48 in 2009: $83.39 in 2010 and $95.58 in 2011 expected bottom up. For 2012, $108.38 expected in early read. Puts P/Es at 15.53x for 2010, and 13.55x for 2011 and 11.95x for 2012, very attractive relative to 10 year T-note rate of 3.36%.
• Top-down estimates: $92.68 for 2011 and 98.93 for 2012.
• With earnings season effectively over, we omit the tables for those yet to report.

Marvelous Margins

Stick a fork in fourth quarter earnings season — it’s done. We now have 496 or 99.2% of the S&P 500 reports in. However, the early reporting firms tend to be a bit bigger and more profitable than the stragglers, and those 496 firms actually represent 99.9% of the total expected net income.

That, of course, presupposes that the remaining firms report exactly as expected, which is unlikely. But at this point, even if they were to disappoint badly, it would really not change the overall picture at this point.

The earnings season has been a strong one, with total net income for those firms rising 30.7% over a year ago. The median surprise of 3.64% is also fairly strong, although the ratio of positive-to-negative surprises is only somewhat above normal at 3.07. The total net income growth of the reporting firms is an acceleration from the 25.0% year-over-year growth those same firms posted in the third quarter.

A Surprisingly Good Quarter

The median surprise understates just how surprisingly good the earnings season was. Before it started, total net income growth was expected to be less than 20%. A big part of the earnings story for the quarter was Financial firms setting aside much less than a year ago for bad debts. If the Financial sector is excluded, total net income rose 19.9% from a year ago, which is not bad either.

Tougher Comps Ahead

Earnings growth is expected to slow significantly in the first quarter to just 8.7%, in large part due to a tougher comparison a year ago. Given the trend of positive earnings surprises, I would be shocked if the actual growth rate is that low. It is almost certain to be in the double digits again.

Revenue growth was healthy at 8.24%, up from the 8.13% growth those 496 firms reported in the third quarter. Looking ahead to the first quarter, though, those firms are expected to post year-over-year revenue growth of just 1.84%. If the Financials are excluded, reported revenue growth is 8.77%, up from 8.34% in the third quarter, and slowing to 2.16% in the first quarter. Tougher year-over-year comparisons are a big part of the story.

Net Margins Excel Again

Thus, the stellar earnings growth is mostly due to the continued expansion of net margins. Much of the year-over-year margin expansion is due to the Financials, where the whole concept of revenues is a bit different from most companies, and thus the concept of net margins is also a bit different.

Much of the earnings growth in the Financials has come from firms setting aside less for bad debts than they did last year. One should be a bit on the doubtful side about the quality of those earnings, particularly in the absence of mark-to-market accounting. Net margins for the quarter were 8.98%, or 8.33% if one excludes the Financials, up from 7.29% (7.38% excluding Financials) a year ago, but down from 9.06% (up from 8.23% excluding Financials) in the third quarter.

On an annual basis, net margins continue to march northward on a yearly basis. In 2008, overall net margins were just 5.88%, rising to 6.39% in 2009. They hit 8.58% in 2010 and are expected to continue climbing to 9.57% in 2011 and 10.25% in 2012. The pattern is a bit different, particularly during the recession, if the Financials are excluded, as margins fell from 7.78% in 2008 to 7.09% in 2009, but have started a robust recovery and risen to 8.23% in 2010. They are expected to rise to 8.80% in 2011 and 9.31% in 2012.

The expectations for the full year are very healthy, with total net income for 2010 rising to $791.3 billion in 2010, up from $545.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $906.5 billion, or increases of 44.7% and 13.8%, respectively.

The early expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.0282 Trillion. That will also put the “EPS” for the S&P 500 over the $100 “per share” level for the first time at $108.38. That is up from $57.48 for 2009, $83.39 for 2010, and $95.58 for 2011. In an environment where the 10-year T-note is yielding 3.36%, a P/E of 15.5 based on 2010 and 13.6x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 11.9x.

Analysts Raising Projections

With more than three 2011 estimates being raised for every two being cut (revisions ratio of 1.51), one has to feel confident that the current expectations for 2011 will be hit, and more likely exceeded. Analysts are raising their 2012 projections at an even higher rate, with a revisions ratio of 1.62. While a lot can happen between now and the time the 2012 earnings are all in, upward estimate momentum means that the current 2012 earnings are more likely to be exceeded than for them to fall short.

This provides a strong fundamental backing for the market to continue to move higher. The bullish argument is further boosted by such historical factors such as being in the third year of the presidential cycle (almost always the best of the four) and having a Democrat in the White House. Just having a Democrat in the White House has historically meant good things for the stock market, with an average annualized return over the last 50 years more than triple that when the GOP holds the Oval Office. Few, if any, binomial variables have as much statistical significance.

Not All Smooth Sailing

That does not mean that all is smooth sailing ahead. We managed to avoid a government shutdown, but the reprieve only lasts until the end of this week. A government shutdown would not be good for either the market or the economy.

The economy does seem to have made a slow turn towards recovery. Even if we avoid a government shutdown, the House spending cuts of $61 billion would exert a very significant drag on the economy, as will the cuts that are happening on the State and Local levels. Mark Zandi, of Moody’s Economics, and a top economic advisor to the McCain campaign, has estimated that the spending cuts could result in as many as 700,000 fewer jobs being created in 2011 and 2012, combined.

The impact will probably be about 1% slower GDP growth than if the cuts had not happened. The lower growth will result in lower tax collections, so the impact on the budget deficit will be much less than the $60 billion advertised.

Job creation remains sluggish, but is starting to show signs of picking up. We created 222,000 jobs in the private sector in February, up from just 68,000 in January. However, State and Local governments laid off a total of 30,000 people for the month. Those jobs count just like private sector jobs, and are a major headwind to bringing down the total number of unemployed.

The household survey has been much more upbeat, showing growth of 250,000 jobs in February. The unemployment rate fell to 8.9%, and it was as high as 9.8% as recently as November. The drop in December and January was  the largest two-month drop in the unemployment rate since 1958, and many thought it was a fluke, but the continued fall in February is an indication that it was for real.

Higher Productivity

Most of the real growth in the economy has come from higher productivity, not more hours being worked. Those productivity gains are accruing to capital: higher profits, not labor (flat wages, slow hiring).

In the fourth quarter, productivity rose at 2.6% while unit labor costs dropped 0.6%. This is a major reason behind the rising net margins, and resulting strong earnings growth. Companies have been able so far to absorb higher commodity prices, and not pass them along to consumers (year-over-year core CPI is just 1.0%) due to those productivity gains. If earnings growth does weaken, I suspect it will be from a slower rise in net margins than currently expected, but there is no evidence of any margin slowdown so far.

Rising commodity prices, most importantly rising oil prices, have the potential to stop the margin expansion, but so far show little sign of actually doing so. Remember that net margins are after taxes, which makes businesses complaints about corporate taxes being too high ring a bit hollow. Federal Corporate taxes are at record lows as a share of GDP (1.29%), less than half what they have averaged since 1947 (3.06%).

Scorecard & Earnings Surprise 4Q Reported
Income Surprises	Yr/Yr Growth	% Reported	Surprise Median	EPS Surp Pos	EPS Surp Neg	# Grow Pos	# Grow Neg
Conglomerates	33.57%	100.00%	9.45	9	0	7	3
Oils and Energy	40.47%	100.00%	9.38	28	12	26	14
Aerospace	-2.87%	100.00%	5.43	8	2	9	1
Consumer Discretionary	21.91%	100.00%	5.18	25	7	27	5
Computer and Tech	26.07%	100.00%	4.94	52	9	59	12
Finance	165.47%	100.00%	4.57	53	22	59	19
Retail/Wholesale	11.56%	93.18%	4.55	30	9	34	7
Auto	-4.40%	100.00%	4.49	4	2	4	2
Basic Materials	47.68%	100.00%	3.88	19	3	20	3
Medical	7.90%	100.00%	3.61	37	5	38	9
Business Service	16.52%	94.74%	3.53	16	1	16	2
Consumer Staples	7.08%	100.00%	2.60	23	5	22	14
Industrial Products	64.79%	100.00%	1.20	13	6	19	2
Construction	24.83%	100.00%	0.00	5	4	3	8
Transportation	30.69%	100.00%	0.00	4	2	8	1
Utilities	1.02%	100.00%	-1.56	15	22	19	23
S&P 500	30.70%	99.20%	3.64	341	111	370	125

Sales Surprises

• Sales Surprise ratio at 1.85, median surprise 1.05%, a strong showing, 64.3% of all firms do better than expected on top line.
• Growing Revenues outnumber falling revenues by ratio of 3.38, 77.0% of firms have higher revenues than a year ago.
• Construction and Autos lead in sales surprise. Conglomerates, Industrials, Discretionary and Finance also posting better than expected top lines. Aerospace and Utilities disappoint.
• Revenue growth healthy at 8.24% but still greatly lags earnings growth pointing to net margin expansion (see net margin tables below). Refer to the “% reported” column to assess the significance of individual sector information, and how much it is likely to change from here.

Sales Surprises
Sales Surprises	Yr/Yr Growth	% Reported	Surprise Median	Sales Surp Pos	Sales Surp Neg	# Grow Pos	# Grow Neg
Construction	-3.88%	100.00%	5.401	6	5	4	7
Auto	1.37%	100.00%	4.5	6	0	5	1
Conglomerates	4.39%	100.00%	2.202	8	1	9	1
Finance	7.76%	100.00%	2.064	57	17	49	29
Industrial Products	23.98%	100.00%	1.968	16	5	18	3
Consumer Discretionary	6.50%	100.00%	1.603	25	7	26	6
Basic Materials	18.16%	100.00%	1.53	16	7	23	0
Oils and Energy	17.12%	100.00%	1.445	23	17	31	8
Computer and Tech	15.65%	100.00%	1.364	47	25	62	10
Business Service	7.82%	94.74%	1.163	13	5	18	0
Medical	3.44%	100.00%	0.941	30	17	35	12
Retail/Wholesale	4.21%	93.18%	0.37	25	16	37	4
Consumer Staples	6.46%	100.00%	0.253	22	14	22	14
Transportation	12.71%	100.00%	0.103	5	4	9	0
Aerospace	0.19%	100.00%	-0.67	5	5	8	2
Utilities	1.00%	100.00%	-2.309	15	27	26	16
S&P 500	8.24%	99.20%	1.048	319	172	382	113

Reported Quarterly Growth: Total Net Income

• The total net income is 30.7% above what was reported in the fourth quarter of 2009, up from 25.0% growth these same 496 firms reported in the third quarter. These firms expected to slow to 6.8% year-over-year growth in the first quarter. Growth excluding Financials 19.9%, down from 24.4% in the third quarter.
• Sequential earnings growth is 4.32%. Sequential decline of 5.37% expected for first quarter.
• Massive growth for Financials mostly due to lower loss provisions, earnings quality questionable.  Industrials, Materials and Energy all reporting over 40% growth.
• Autos and Aerospace post lower total net income than last year, three sectors with positive, but only in single-digit growth.
• While 99.2% of the companies have reported, they represent 99.94% of all the expected net income, provided that the unreported all report in line with expectations. Projected final year-over-year growth of 30.7%.

Quarterly Growth: Total Net Income Reported
Income Growth	“Sequential Q1/Q4 E”	“Sequential Q4/Q3 A”	Year over Year 4Q 10 A	Year over Year 1Q 11 E	Year over Year 3Q 10 A
Finance	9.84%	-6.96%	165.47%	-2.94%	28.30%
Industrial Products	0.48%	-3.13%	64.79%	44.42%	50.58%
Basic Materials	27.98%	14.01%	47.68%	28.69%	42.34%
Oils and Energy	2.22%	16.22%	40.47%	21.17%	33.93%
Conglomerates	-29.78%	26.73%	33.57%	16.58%	6.20%
Transportation	-18.50%	-2.63%	30.69%	21.51%	65.17%
Computer and Tech	-19.48%	17.82%	26.07%	13.53%	45.68%
Construction	-33.22%	-17.16%	24.83%	-17.21%	1148.57%
Consumer Discretionary	-16.64%	1.39%	21.91%	6.36%	16.71%
Business Service	-6.78%	12.51%	16.52%	14.27%	15.62%
Retail/Wholesale	-20.38%	33.44%	11.56%	3.27%	9.69%
Medical	1.83%	-3.30%	7.90%	-1.46%	11.04%
Consumer Staples	-12.57%	-4.49%	7.08%	-0.40%	5.34%
Utilities	21.43%	-29.47%	1.02%	-2.83%	6.24%
Aerospace	-19.57%	9.18%	-2.87%	1.36%	144.50%
Auto	21.09%	-22.78%	-4.40%	2.21%	90.75%
S&P 500	-5.37%	4.32%	30.70%	6.75%	25.00%
S&P ex Financials	-7.48%	6.61%	19.88%	9.78%	24.35%

Quarterly Growth: Total Revenues Reported

• Revenue growth strong at 8.24%, up from the 8.13% growth the same firms posted in the third quarter. Excluding Financials, revenue growth is 8.77%, up from 8.34% in 3Q.
• Sequentially, revenues 6.58% higher than in the third quarter, 6.57% higher ex-Financials.
• Five sectors reporting double-digit revenue gains, Construction, Retail and Finance reporting revenue declines.
• Industrials, Materials, Energy and Tech posting revenue growth of over 15%.
• Looking to first quarter, total revenue among these 496 firms expected to rise 1.84% year over year, and be down 7.45% sequentially.
• Revenue growth accelerates for nine sectors, slows from third quarter pace for seven sectors.

Quarterly Growth: Total Revenues Reported
Sales Growth	“Sequential Q1/Q4 E”	“Sequential Q4/Q3 A”	Year over Year 4Q 10 A	Year over Year 1Q 11 E	Year over Year 3Q 09 A
Industrial Products	0.52%	0.82%	23.98%	18.83%	22.92%
Basic Materials	1.59%	6.61%	18.16%	12.51%	17.45%
Oils and Energy	0.83%	8.03%	17.12%	15.73%	15.95%
Computer and Tech	-7.36%	10.79%	15.65%	13.31%	20.08%
Transportation	-0.99%	2.96%	12.71%	11.96%	16.71%
Business Service	-4.62%	7.16%	7.82%	7.24%	7.68%
Finance	-26.45%	6.55%	7.76%	-24.45%	1.82%
Consumer Discretionary	-6.31%	7.64%	6.50%	7.78%	3.08%
Consumer Staples	-16.32%	7.42%	6.46%	-4.12%	3.69%
Conglomerates	-14.57%	11.62%	4.39%	-1.58%	-0.11%
Retail/Wholesale	-6.57%	10.62%	4.21%	3.80%	3.75%
Medical	-0.56%	3.86%	3.44%	3.80%	8.45%
Auto	-6.63%	8.20%	1.37%	3.61%	5.02%
Utilities	3.42%	-5.79%	1.00%	-2.20%	5.46%
Aerospace	-8.51%	4.31%	0.19%	1.50%	2.36%
Construction	-3.18%	-4.75%	-3.88%	5.01%	3.06%
S&P	-7.45%	6.58%	8.24%	1.84%	8.13%
Excluding Financial	-7.44%	6.57%	8.77%	2.16%	8.34%

Quarterly Net Margins Reported

• Sector and S&P net margins are calculated as total net income for the sector divided by total revenues for the sector.
• Net margins for S&P 500 expand to 8.98% from 7.29% a year ago, but down from 9.06% in the third quarter. Net margins ex-Financials rise to 8.33% from 7.38% a year ago and up from 8.23% in the third quarter.
• Utilities and Aerospace only sectors to post lower margins than last year, huge margin expansion among the Financials as they slash bad debt provisions.
• Looking to the first quarter, net margins expected to rise to 9.10% from 8.56% in the first quarter of 2010. Ex-Financials margins expected to rise to 8.08% from 7.61%.
• Margin expansion the key driver behind earnings growth.

Quarterly: Net Margins Reported
Net Margins	Q1 2011 Estimated	Q4 2010 Reported	3Q 2010 Reported	2Q 2010 Reported	1Q 2010 Reported	4Q 2009 Reported
Computer and Tech	15.26%	17.50%	16.51%	15.80%	15.23%	16.11%
Business Service	13.22%	13.53%	12.89%	12.74%	12.41%	12.52%
Conglomerates	8.74%	10.61%	9.35%	8.64%	7.36%	8.29%
Consumer Staples	11.06%	10.57%	11.88%	10.85%	10.65%	10.52%
Consumer Discretionary	8.29%	10.05%	10.77%	9.49%	8.30%	8.75%
Finance	14.27%	9.93%	11.38%	12.09%	11.11%	3.23%
Medical	9.65%	9.41%	10.13%	10.17%	10.17%	9.03%
Transportation	6.64%	8.03%	8.49%	8.17%	6.09%	6.93%
Oils and Energy	7.93%	7.70%	7.16%	8.05%	7.46%	6.42%
Industrial Products	7.51%	7.41%	7.83%	7.85%	6.11%	5.66%
Utilities	8.03%	6.81%	9.08%	8.27%	8.03%	6.82%
Aerospace	5.95%	6.74%	6.44%	6.79%	5.94%	6.96%
Basic Materials	8.45%	6.71%	6.27%	7.15%	7.39%	5.37%
Retail/Wholesale	3.80%	4.84%	3.69%	3.91%	3.82%	4.16%
Auto	5.02%	3.89%	5.45%	6.26%	5.12%	4.13%
Construction	1.44%	2.04%	2.34%	3.66%	1.78%	1.57%
S&P 500	9.10%	8.98%	9.06%	9.10%	8.56%	7.29%
Excluding Financial	8.08%	8.33%	8.23%	8.07%	7.61%	7.38%

Annual Total Net Income Growth

• Following a rise of just 1.95% in 2009, total earnings for the S&P 500 jumps 45.1% in 2010, 14.6% further in 2011. Growth ex-Financials 27.2% in 2010, 13.9% in 2011.
• Early read of 2012 growth looking for 13.4% growth. 12.2% ex-Financials.
• Auto net income expands more than 20x in 2010, Financial net income more than quadruples.
• All sectors expected to show total net income rise in 2011 and in 2012. Utilities only (small) decliner in 2010. Ten sectors expected to post double-digit growth in 2011 and 13 in 2012. No sector expected to grow less than 5% in 2012.
• Cyclical sectors expected to lead in earnings growth again in 2011 and into 2012.

Annual Total Net Income Growth
Net Income Growth	2009	2010	2011	2012
Basic Materials	-50.13%	71.63%	33.46%	13.89%
Industrial Products	-37.39%	40.99%	29.70%	19.83%
Consumer Discretionary	-15.67%	15.07%	26.63%	15.42%
Construction	- to -	- to +	22.02%	49.08%
Oils and Energy	-55.03%	49.98%	20.95%	14.70%
Transportation	-30.17%	44.19%	19.98%	18.25%
Finance	- to +	326.47%	17.87%	18.99%
Computer and Tech	-5.02%	47.78%	17.85%	12.20%
Business Service	1.14%	16.13%	14.43%	14.52%
Retail/Wholesale	2.44%	15.65%	11.08%	12.58%
Auto	- to +	2078.10%	9.67%	17.11%
Consumer Staples	6.80%	11.73%	8.60%	9.69%
Conglomerates	-23.83%	11.24%	7.84%	17.92%
Medical	2.29%	9.78%	4.46%	6.29%
Utilities	-13.62%	-0.90%	3.99%	5.75%
Aerospace	-15.04%	18.14%	2.52%	16.74%
S&P 500	1.95%	45.10%	14.57%	13.42%

Annual Total Revenue Growth

• Total S&P 500 Revenue in 2010 expected to be 8.16% above 2009 levels, a rebound from a 6.57% 2009 decline.
• Total revenues for the S&P 500 expected to rise 2.66% in 2011, 5.99% in 2012.
• Energy to lead revenue race in 2010. Industrials now expected to edge it out in 2011. Materials, Tech and Transports also expected to continue to show double-digit revenue growth in 2011.
• All sectors but Staples and Finance expected to show positive top line growth in 2011, but four sectors expected to show positive growth below 5%.
• Financials the only sector with negative 2010 revenue growth, Aerospace the only other sector to post a lower top line for the year. Revenues for Financials are notoriously flakey, low interest rates depress interest income (but also interest expense).
• Construction the only sector expected to post double-digit top line growth in 2012. No sector expected to post falling revenues.
• Revenue growth significantly different if Financials are excluded, down 10.46% in 2009 but growth of 9.67% in 2010, 6.42% in 2011, and 6.12% in 2012.

Annual Total Revenue Growth
Sales Growth	2009	2010	2011	2012
Industrial Products	-18.33%	13.46%	13.29%	9.71%
Oils and Energy	-34.41%	23.04%	13.02%	8.86%
Basic Materials	-19.30%	12.78%	12.19%	5.13%
Computer and Tech	-4.50%	15.33%	10.47%	8.00%
Transportation	-13.65%	10.83%	10.14%	8.11%
Consumer Discretionary	-10.05%	3.84%	9.39%	5.38%
Auto	-21.36%	8.77%	7.87%	8.57%
Business Service	-2.35%	6.09%	6.39%	6.10%
Construction	-15.92%	0.47%	6.17%	10.99%
Retail/Wholesale	1.45%	4.35%	5.96%	5.50%
Utilities	-5.90%	2.31%	4.33%	2.99%
Aerospace	6.30%	-0.89%	4.32%	6.10%
Medical	6.07%	8.78%	3.62%	3.21%
Conglomerates	-13.27%	1.06%	0.45%	5.68%
Consumer Staples	-2.03%	11.60%	-8.93%	4.45%
Finance	21.18%	-0.24%	-20.41%	4.94%
S&P	-6.57%	8.16%	2.66%	5.99%
Excluding Financial	-10.46%	9.67%	6.42%	6.12%

Annual Net Margins

• Net Margins marching higher, from 5.88% in 2008 to 6.40% in 2009 to 8.54% for 2010, 9.57% expected for 2011. Trend expected to continue into 2012 with net margins of 10.25% expected in early going.  Major source of earnings growth.
• Financials significantly distort overall net margins. Net margins ex-Financials 7.78% in 2008, 7.09% in 2009, 8.23% for 2010, 8.80% expected in 2011. Expected to grow to 9.31% in 2012.
• Financials net margins soar from -8.42% in 2008 to 18.01% expected for 2012, taking the margin crown from Tech.
• All sectors but Utilities see higher net margins in 2010 than in 2009. All sectors but Aerospace and Utilities expected to post higher net margins in 2011 than in 2010. Widespread margin expansion currently expected for 2012 as well with all sectors expected to post expansion in margins.
• Seven sectors to boast double-digit net margins in 2012, up from just two in 2009.
• Sector net margins are calculated as total net income for sector divided by total revenues. However, there are generally fewer revenue estimates than earnings estimates for individual companies.

Annual Net Margins
Net Margins	2009A	2010E	2011E	2012E
Computer and Tech	11.91%	15.26%	16.28%	16.91%
Finance	2.51%	10.73%	15.89%	18.01%
Business Service	11.05%	12.09%	13.01%	14.04%
Consumer Staples	9.92%	9.93%	11.84%	12.44%
Medical	9.71%	9.80%	9.88%	10.18%
Consumer Discretionary	7.67%	8.50%	9.84%	10.77%
Conglomerates	8.15%	8.97%	9.63%	10.75%
Transportation	5.84%	7.59%	8.27%	9.05%
Industrial Products	5.80%	7.21%	8.25%	9.01%
Oils and Energy	6.27%	7.64%	8.18%	8.61%
Basic Materials	4.46%	6.79%	8.08%	8.75%
Utilities	8.09%	7.84%	7.81%	8.02%
Aerospace	5.36%	6.38%	6.27%	6.90%
Auto	0.25%	4.91%	4.99%	5.38%
Retail/Wholesale	3.52%	3.90%	4.09%	4.36%
Construction	-0.50%	2.69%	3.09%	4.15%
S&P 500	6.40%	8.58%	9.57%	10.25%
Excluding Financials	7.09%	8.23%	8.80%	9.31%

Earnings Estimate Revisions: Current Fiscal Year
The Zacks Revisions Ratio: 2011

• Revisions ratio for full S&P 500 at 1.51, down from 1.53, a very bullish reading. However, change in revisions ratio now driven more by old estimates falling out than new ones coming in.
• Four sectors with revisions ratios above 2.0.
• Eleven sectors with positive revisions ratios, five below 1.0.
• Ratio of firms with rising to falling mean estimates at 1.55, down from 1.60, still a bullish reading.
• Total number of revisions (4-week total) passed seasonal peak at 2,663, down from 3,416 last week (-22.0%).
• Increases at 1,604 down from 2,065 (-22.3%), cuts at 1,059, down from 1,351 (-21.6%).

The Zacks Revisions Ratio: 2011
Sector	%Ch Curr Fiscal Yr Est – 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Consumer Discretionary	1.48	19	9	176	25	7.04	2.11
Conglomerates	-0.03	5	2	12	3	4.00	2.50
Industrial Products	0.72	10	4	52	21	2.48	2.50
Auto	-6.16	4	2	17	8	2.13	2.00
Retail/Wholesale	0.47	23	17	268	147	1.82	1.35
Computer and Tech	-0.60	35	20	215	120	1.79	1.75
Oils and Energy	1.71	29	11	238	137	1.74	2.64
Finance	-0.26	48	24	210	130	1.62	2.00
Medical	0.45	27	18	126	81	1.56	1.50
Basic Materials	1.66	16	5	57	37	1.54	3.20
Business Service	0.19	9	7	37	28	1.32	1.29
Utilities	-1.79	14	23	95	122	0.78	0.61
Consumer Staples	-0.88	17	13	75	101	0.74	1.31
Aerospace	0.08	6	3	11	15	0.73	2.00
Construction	-6.05	4	6	10	46	0.22	0.67
Transportation	-1.27	1	8	5	38	0.13	0.13
S&P 500	-0.14	267	172	1604	1059	1.51	1.55

Earnings Estimate Revisions: Next Fiscal Year
The Zacks Revisions Ratio: 2012

• Revisions ratio for full S&P 500 at 1.62, up from 1.55 last week, in bullish territory.
• Eight sectors have at least two increases per cut, four have more than four increases per cut. Discretionary, Conglomerates and Autos lead, other cyclical sectors strong.
• Three sectors with negative revisions ratios (below 1.0), 13 with ratios above 1.0. Construction, Utilities weak.
• Ratio of firms with rising estimate to falling mean estimates at 1.88, up from 1.54, in very bullish territory.
• Total number of revisions (4-week total) at 1,967, up from 2,414 last week (-18.5%).
• Increases at 1,217 down from 1,469 last week (-17.2%), cuts fall to 750 from 945 last week (-20.6%).

The Zacks Revisions Ratio: 2012
Sector	%Ch Next Fiscal Yr Est – 4 wks	# Firms Up	# Firms Down	# Ests Up	# Ests Down	Revisions Ratio	Firms up/down
Consumer Discretionary	1.62	20	7	121	21	5.76	2.86
Conglomerates	0.24	7	2	14	3	4.67	3.50
Auto	0.14	4	2	13	3	4.33	2.00
Industrial Products	1.04	12	4	58	14	4.14	3.00
Oils and Energy	2.08	31	9	200	76	2.63	3.44
Retail/Wholesale	1.89	27	15	171	75	2.28	1.80
Basic Materials	1.78	18	4	44	20	2.20	4.50
Aerospace	0.81	8	1	15	7	2.14	8.00
Finance	0.40	47	24	145	88	1.65	1.96
Business Service	0.42	11	5	24	15	1.60	2.20
Medical	0.45	31	15	136	94	1.45	2.07
Computer and Tech	-0.23	34	20	146	119	1.23	1.70
Transportation	0.08	4	5	10	11	0.91	0.80
Construction	-3.42	4	3	15	23	0.65	1.33
Consumer Staples	-1.55	18	14	52	85	0.61	1.29
Utilities	-2.58	15	25	53	96	0.55	0.60
S&P 500	0.26	291	155	1217	750	1.62	1.88

Total Income and Share

• S&P 500 earned $545.3 billion in 2009, rising to earn $791.3 billion in 2010, $906.5 billion expected in 2011.
• Early expectations that the S&P 500 total earnings will hit the $1 Trillion mark in 2012 at $1.0282 Trillion.
• Finance share of total earnings moves from 5.9% in 2009 to 17.2% in 2010. Rise to 18.1% expected for 2011, 18.9% in 2012, but still well below 2007 peak of over 30%. Energy share also rising going from 11.9% in 2009 to 13.1% in 2012.
• Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 11.2% in 2012, down each year.
• Market Cap shares of Construction, Staples, Retail, Transportation, Industrials and Business Service sectors far exceed earnings shares of any of the years from 2010 through 2012.
• Earnings shares of Energy, Finance and Medical well above market-cap shares.
• As a general rule, one should try to overweight sectors with rising earnings shares, underweight falling earnings shares, but also over weight sectors where earnings shares exceed market-cap shares.

Total Income and Share
Income ($ Bill)	Total Net Income $ 2010	Total Net Income $ 2011	Total Net Income $ 2012	% Total S&P Earn 2010	% Total S&P Earn 2011	% Total S&P Earn 2012	% Total S&P Mkt Cap
Finance	$138,826	$163,630	$194,701	17.54%	18.05%	18.94%	16.08%
Computer and Tech	$135,188	$159,322	$178,759	17.08%	17.57%	17.39%	18.11%
Oils and Energy	$97,225	$117,593	$134,875	12.29%	12.97%	13.12%	12.12%
Medical	$104,100	$108,740	$115,582	13.16%	11.99%	11.24%	10.20%
Consumer Staples	$63,260	$68,701	$75,360	7.99%	7.58%	7.33%	8.28%
Retail/Wholesale	$57,676	$64,064	$72,125	7.29%	7.07%	7.01%	8.09%
Utilities	$49,295	$51,263	$54,211	6.23%	5.65%	5.27%	5.97%
Consumer Discretionary	$25,427	$32,197	$37,162	3.21%	3.55%	3.61%	4.27%
Conglomerates	$29,130	$31,414	$37,045	3.68%	3.47%	3.60%	3.96%
Basic Materials	$23,070	$30,788	$35,065	2.92%	3.40%	3.41%	3.25%
Industrial Products	$15,863	$20,574	$24,655	2.00%	2.27%	2.40%	2.58%
Aerospace	$15,111	$15,492	$18,085	1.91%	1.71%	1.76%	1.63%
Business Service	$13,275	$15,191	$17,396	1.68%	1.68%	1.69%	1.97%
Transportation	$11,686	$14,022	$16,580	1.48%	1.55%	1.61%	1.88%
Auto	$10,197	$11,183	$13,096	1.29%	1.23%	1.27%	1.02%
Construction	$1,942	$2,369	$3,532	0.25%	0.26%	0.34%	0.57%
S&P 500	$791,271	$906,544	$1,028,229	100.00%	100.00%	100.00%	100.00%

P/E Ratios

• Trading at 15.53x 2010, 13.55x 2011 earnings, or earnings yields of 6.44% and 7.38%, respectively. Early 2012 P/E at 11.95x or earnings yield of 8.37%.
• Earnings Yields still attractive relative to 10-year T-Note rate of 3.36%.
• Medical has lowest P/E based on 2010 earnings. Autos cheapest on 2011 and 2012 earnings.
• Construction has highest P/E for all three years, but falling fast.
• Auto and Finance high 2009 P/Es to fall dramatically in 2010 and 2011, continue down in 2012.
• S&P 500 earned $57.48 in 2009: $83.39 in 2010 and $95.58 in 2011 expected. Early expectation for $108.38 for 2012.

P/E Ratios
P/E	2009	2010	2011	2012
Auto	267.8	12.3	11.2	9.6
Medical	13.2	12.0	11.5	10.8
Finance	60.7	14.2	12.1	10.1
Oils and Energy	23.0	15.3	12.7	11.0
Aerospace	15.7	13.3	12.9	11.1
Basic Materials	29.7	17.3	13.0	11.4
Computer and Tech	24.3	16.5	14.0	12.4
Utilities	14.7	14.9	14.3	13.5
Consumer Staples	18.0	16.1	14.8	13.5
Industrial Products	28.2	20.0	15.4	12.9
Conglomerates	18.6	16.7	15.5	13.1
Retail/Wholesale	19.9	17.2	15.5	13.8
Business Service	21.2	18.2	15.9	13.9
Consumer Discretionary	23.8	20.6	16.3	14.1
Transportation	28.6	19.8	16.5	14.0
Construction	NM	36.3	29.7	19.9
S&P 500	22.53	15.53	13.55	11.95

Biggest FY1 Revisions

The first table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. The second shows the largest declines. To qualify there must be more than 3 estimates for FY1, and have a mean estimate of more than $0.50. In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year’s earnings is shown.

Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit. On the other hand, if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.

Biggest FY1 Revisions
Company	Ticker	%Ch Curr Fiscal Yr Est – 4 wks	%Ch Next Fiscal Yr Est – 4 wks	# Up-Dn/Tot %Ch Curr Fiscal Yr Est – 4 wks	# Up-Dn/Tot %Ch Next Fiscal Yr Est – 4 wks	P/E using Curr FY Est	P/E using Next FY Est
Cabot Oil & Gas	COG	122.76%	8.51%	0.45	0.18	55.28	33.86
Cliffs Natural	CLF	23.96%	25.42%	0.73	0.44	6.90	6.42
Tesoro Corp	TSO	21.54%	1.23%	0.41	0.36	12.12	10.94
Appld Matls Inc	AMAT	20.42%	12.22%	1.00	0.44	9.85	9.56
Valero Energy	VLO	16.09%	11.95%	0.53	0.53	9.76	8.37
Nvidia Corp	NVDA	14.28%	12.85%	0.55	0.44	17.67	14.51
Wynn Resrts Ltd	WYNN	13.88%	13.72%	0.70	0.57	40.20	30.24
Dell Inc	DELL	13.32%	12.32%	0.94	0.33	9.03	8.58
Penney (Jc) Inc	JCP	13.24%	9.83%	1.00	0.57	18.23	15.72
Denbury Res Inc	DNR	13.16%	10.87%	0.58	0.50	23.14	19.71
Rowan Cos Inc	RDC	12.83%	16.33%	0.61	0.75	17.13	10.82
Deere & Co	DE	12.07%	11.21%	0.89	0.89	14.23	12.20
Cf Indus Hldgs	CF	8.47%	8.95%	0.71	0.83	9.25	10.11
Cbs Corp	CBS	7.55%	4.80%	0.76	0.37	15.80	12.51

Biggest FY1 Revisions(Largest Declines)
Company	Ticker	%Ch Curr Fiscal Yr Est – 4 wks	%Ch Next Fiscal Yr Est – 4 wks	# Up-Dn/Tot %Ch Curr Fiscal Yr Est – 4 wks	# Up-Dn/Tot %Ch Next Fiscal Yr Est – 4 wks	P/E using Curr FY Est	P/E using Next FY Est
Goodyear Tire	GT	-38.49%	-2.74%	-0.56	0.00	21.82	7.99
Dean Foods Co	DF	-25.09%	-24.60%	-1.00	-0.54	17.22	13.25
Quanta Services	PWR	-16.84%	-6.83%	-1.00	-0.55	25.40	18.79
Newmont Mining	NEM	-14.82%	-11.49%	-0.59	-0.47	12.12	11.15
Allstate Corp	ALL	-11.61%	-9.13%	-0.76	-0.55	9.41	8.51
Amer Tower Corp	AMT	-10.83%	-12.91%	-0.93	-0.64	50.71	38.89
Nicor Inc	GAS	-10.46%	-4.84%	-0.50	-0.50	20.38	19.34
Noble Energy	NBL	-9.82%	-5.43%	-0.38	-0.06	20.45	15.33
Expedia Inc	EXPE	-9.09%	-9.13%	-1.00	-0.40	13.12	11.38
Sunoco Inc	SUN	-9.06%	-8.50%	-0.25	0.08	22.57	17.06
Sears Hldg Cp	SHLD	-8.86%	73.19%	-0.29	0.17	81.85	70.45
Nrg Energy Inc	NRG	-8.39%	-29.97%	0.10	-0.33	19.85	20.15
Urban Outfitter	URBN	-8.38%	-6.67%	-0.88	-0.48	18.01	15.1
Newfield Expl	NFX	-7.96%	0.06%	-0.63	-0.26	15.08	12.23
Centurytel Inc	CTL	-7.29%	-6.72%	-0.79	-0.50	13.63	13.23
Edison Intl	EIX	-7.19%	-6.45%	-0.43	-0.27	13.45	14.41

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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