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My investing philosophy mostly centers around the Value discipline and GARP- Growth at a Reasonable Price. This blog includes commentary on market conditions as well as fundamental analysis of specific companies. Graduated from Rhodes College with a degree in Business with concentration in Finance & Marketing. Currently working on obtaining the CFA designation. Previously worked in Mortgage Trading for a major bank. Use MS Excel extensively for developing investment models, notably valuation models based on DCF methods.

Friday, April 4, 2008

EPS Revisions for S&P 500 Companies

Here is a brief summary of data I collected from Yahoo Finance for companies in the S&P 500 Index.

EPS Estimates for the current fiscal year compared to estimates 90 days ago:
UP: 166 (33%)
DN: 306 (62%)
UNCH: 24 (5%)

In aggregate, current year estimates were revised down 4.7%.
The average upward revision was 4.2%
The average downward revision was 9.9%

Not much of a surprise as to which type of companies received the largest revisions: Energy & commodities-Up and Financials & consumer goods-Down.

Out of the 496 companies I could find estimates for (current & 90 days ago), 479 have positive EPS estimates and 17 negative, up from 11 negative estimates 90 days ago.

I eliminated the negative EPS companies when calculating the revisions to consensus estimates since percentage changes for negative values do not make sense. Therefore, the 9.9% figure for average down revision is slightly understated.

Back in February, when the market was trading at 13.7x estimates I theorized that investors were thinking estimates were too high and would be revised down, opposed to the market being relatively cheap. (see low multiples mean market cheap?) Currently, the S&P 500 is trading slightly higher than it was in February when I made those comments, yet according the data from the WSJ, the estimated P/E has risen to about 14.5x. It appears logical, the multiple has risen close to 6% and estimates have fallen close to 5%, and the market price level has increased a touch as well.

The question remains: “Are earnings estimates still too high?”

The S&P is still trading at low multiple considering that the 10-year currently yields 3.48%, and that multiples have generally been in the high teens for the past couple decades. So, does suggest more downward revisions? Well, if the investors were to think the economic slowdown will be brief and shallow, it would stand to reason that the S&P would be trading at a much higher multiple- reflecting the expectations of a strong rebound and higher future earnings.

Many do believe that the economy will strengthen considerably in the second half of this year and that earnings will return to double-digit growth rates. However, the S&P’s P/E multiple doesn’t convincingly confirm that sentiment. Perhaps another explanation exists.

A point I touched on in my February commentary was the increase to the equity risk premium, or ERP. Investors require a premium to hold risky equities over holding risk-free assets, such as Treasury Bills. The ERP over history has been 5.5-6.5%, but in recent times it has fallen to 2-4%, depending on which method used and which expert one asks.

In the last several months to almost a year, that risk premium has definitely increased. Using the price level of the S&P 500 index and expected earnings growth to calculate the ERP, the current implied ERP is somewhere around 5.5%. A higher ERP translates into lower price multiples. On the margin, when investors perceive increased risk to holding equities, they will pay less for $1 of EPS, hence a lower P/E multiple.

Investors have been less willing to pay up for equities. There has been an explosion of market volatility. Volatility is another way of saying uncertainty, which could be described as risk, actually it's the definition of risk.

Current conditions make the future impossible to predict. Times such as - when today was like yesterday, which was like the day before that, and so on, with static market and economic conditions, then it’s easier to assume that the future will be similar to the present. Volatility in the market is absent; investors perceive there to be less risk, hence P/E multiples are higher.

Currently, today is rarely anything like yesterday, and tomorrow is anyone’s guess. Will there be another big bank write-down? Which market will seize up next? We’ve had mortgages, auction-rate, muni’s, Libor, etc. Bear Sterns saw something like more than 10 billion in liquidity evaporate in the span of a day. It’s been an extremely uncertain and volatile period.

Getting back to the earnings estimates question- Does the market think estimates are not too high? That there will not be a rash of revisions? It’s hard to say. What isn’t hard to say is that even if investors think earnings forecasts are reasonable, they have a low degree of confidence (or certainty) that those estimates will prove accurate. Whether estimates are too high or not, or if a recession will be shallow or deep- actually may not be the question. Either way, investors are not willing to take that bet, instead they are paying low multiples for equities and buying low risk assets yielding negative returns (after factoring in inflation).

I have included tables for the 25 largest (pct) revisions- Up and Down




john said...


Offhand, do you know the actual 06 and 07 earnings for the SP 500 as well as 08 earnings consensus estimate?

Turley M Muller said...


I don't know that I can be of much help....

I can't be sure because every one has a different method of measuring the earnings. Always see and hear different numbers quoted. I all depends what people want to strip out. And for estimates, depends on which and how may analyst are surveyed,

I don't know exactly what the consensus among equity WS analysts, but I think the '08 is around $92.

S&P has a spreadsheet with estimates and historical data, but there again, there are several numbers, core, op, as reported, top-up, top down, etc.

The ARP must be a GAAP number. and the operating eps is likely close to, or possibly is, WS estimates.

08e 93.79
07a 82.54
06a 87.72

08e 63.60
07a 66.18
06a 81.51

Here is the link to S&P data

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