Adam Parker from Morgan Stanley recently reported that 88% of the earnings growth is concentrated in 10 companies in the S&P500. See the story here. I looked over the earnings data, and although this statement might be accurate in the context he used to gather this data, and the story doesn’t tell how he came to this conclusion, I do feel this statement is very misleading.
Earnings are really good in a lot of companies, not just ten. Fact is many of the ten he claims are making 88% of the earnings growth aren’t doing anywhere near as well as most of the other companies in the S&P 500 at increasing earnings.
Let’s take a quick look at these ten companies and do some comparisons of their earnings to the rest of the S&P500. The ten include Citigroup Inc. (C), J.P. Morgan Chase & Co (JMP), General Electric (GE), Wells Fargo & Company (WFC), Bank of America (BAC), International Business Machines (IBM), Goldman Sachs (GS), Western Digital Corp (WDC), Apple Computer (AAPL), and American International Group (AIG).
The following is based on the difference of the un-weighted operating earnings of the current trailing twelve months (TTM) and the prior year TTM:
Compared to the prior year’s TTM, Citigroup lost $0.24 per share, J.P. Morgan added $0.01, General Electric added $0.14, Wells Fargo & Company added $0.48, and Bank of America added $0.50 (BAC lost $0.13 in prior TTM, so really only earned $0.37). There were 134 companies in the S&P500 not included on this list that had higher per share increases in the trailing twelve months than these five, and three more matched the $0.50 increase seen by Bank of America. Most of these five companies had average to below average growth.
The remaining five saw much better earnings increases, IBM added $1.66 and there were 24 that did not make the list with larger increases, Goldman Sachs added $4.03 and there were seven better, Western Digital added $6.21 with four better, Apple added $16.49 and AIG added $20.34 (AIG had a loss of $15.81 in prior TTM and is making $4.53 in the current TTM).
Based on the dollar value of the un-weighted per share earnings growth only APPL, WDC, AIG and GS actually made the top ten in earnings growth in the trailing twelve months, none of the rest did.
The way I look at it, earnings growth doesn’t really start until the company reaches zero, before that it is just covering losses. A company can increase earnings and not report a profit, but it is still negative earnings, so I don’t look at it as real “earnings growth”. Not that companies that cover large losses and begin to be profitable aren’t worth investing in, many are, but if we are talking “earnings growth” I believe it starts at zero and goes up.
With that in mind, here is how I see the top ten in per share earnings growth in the past twelve months: Apple added $16.49, Washington Post (WPO) added $15.25, CF Industries Holdings Inc. (CF) added $9.20, Priceline.com Inc. (PCLN) added $8.40, Seagate Technology plc (STX) added $6.62, Western Digital added $6.21, Allstate Corporation (ALL) added $4.87, AIG added $4.53, Goldman Sachs added $4.03, and AutoZone Inc. (AZO) added $3.99 a share.
Note: ProLogis Trust (PLD) added $6.22 but had a $5.41 loss in prior year, being the seventh company with a higher year over year increase than Goldman Sachs. Other than the adjustment made for AIG and the PLD exclusion from the top ten, there were no others that saw losses in the prior year that would have made the top ten, or that were in the top ten that had earnings adjusted.
A few notes on the just finished third quarter: There were 94 companies that reported the highest quarter ever. There were 202 companies that reported TTM that were the best ever. There were 222 that reported their highest third quarter ever. There were 354 companies that increased earnings over the prior twelve months. Many of those that didn’t increase their TTM earnings in the third quarter saw decreases from prior TTM earnings records in the prior quarter(s). Several of the companies in Parker’s top ten, didn’t make it into one of these tallies.
There is a margin of error in the aforementioned statements, although I believe they are fairly accurate. I do not have earnings prior to 2006 on several of the S&P500 constituents, but based on the majority of companies, it isn’t very likely they had higher earnings prior to this time. Also the older data I do have was separate from the data I used to gather this information, so I may have overlooked higher earnings in prior data when screening for accuracy. If by chance some of the above are not the highest ever, they are the highest since 2006.
Many of these sources of information were used in this article.
Have a great day trading,
Disclosure: I have investments in GE, BAC, ALL and PLD. I do not currently have investments in C, JPM, WFC, IBM, GS, WDC, AAPL, AIG, WPO, CF, PCLN, STX, AZO although I have owed several of these in the past and I am interested in some of these stocks. I am currently about 95% invested long in stocks in my trading accounts.
Disclaimer: This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.