The Lato Letter: Volume 1, Issue 22.

The Lato Letter: Volume 1, Issue 22.

Well, we are about half way through the current earnings reporting season and not surprisingly, results as a whole are better than expected.  Consensus estimates have decreased consistently over the year and particularly in the last few weeks.

The chart below is from the noted economist, Ed Yardeni’s blog and it shows the continued lowering of estimates for the S&P 500 throughout the year.

v1_i22_sp

The second quarter estimates have flattened out over the last couple of weeks as companies have reported their better than expected earnings, but third and fourth quarter estimates have continued to decline.  For 2012, the current consensus estimate for the S&P 500 is $104.11 which implies a current price/earnings (p/e) multiple of 12.8X which is below average.  For 2013, analysts are currently expecting growth of 12% to bring the earnings to $116.41 or a p/e multiple of 11.5X; a very low multiple in the current interest rate environment.

The updated scorecard of the earnings reported on the major holdings in the portfolios has been excellent with one glaring exception.  The results so far are shown below (please note that some of the consensus estimates changed from the time of my last letter to the actual day of the earnings report):

Date Company Estimate Actual
July 17 Goldman Sachs $1.18 $1.78
July 19 Shoppers Drug Mart $0.70 $0.71
Google $10.04 $10.12
July 24 Dupont $1.47 $1.48
Paccar $0.82 $0.83
Rogers Comm. $0.86 $0.91
Apple $10.36 $9.32
July 25 Pepsi $1.09 $1.12
Caterpillar $2.28 $2.54

Every company thus far has exceeded expectations and reported a positive surprise with the exception of Apple.  Apple still reported 20% year over year earnings growth but revenues and earnings for the quarter were well below analysts’ estimates.  The main shortfall in the quarter was in the sale of iPhones which were ONLY 26.0 million compared to estimates of 28.5 million.  That was still unit growth of 28% over the same quarter last year but well below the 34.0 million iPhones sold last quarter.

The stock has sold off dramatically today and is currently down over 4% at $573.75.  Assuming a slight reduction in the estimate for the year and factoring in the now $123 per share in cash, Apple is trading at approximately 11.0 times earnings for the year ending September 30, 2012.  The fundamentals have not changed and with a number of products now closer to their release date, last night’s disappointment does not change my view on the stock.

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