Consumer, Retail and Medical Sector Overview

In my weekly Earnings Trends report, I rank the 16 economic sectors on a wide variety of earnings and sales metrics. The report just looks at the 500 firms in the S&P 500, not the whole Zacks Universe. However, since it is organized by the individual metric, such as Annual Earnings Growth or P/E, it can be hard to get an overall picture of a given economic sector.

In these posts I will try to rectify that. Since there is a lot to write about in each sector, I will cover four sectors in each post. The data is based on the bottom-up consensus estimates for each stock in the S&P 500 and is then aggregated into the economic sectors.

We are almost finished with the fourth quarter earnings season, but not quite — the percentage of reports in is noted just after the sector’s name. The quarterly data is based only on those firms that have actually reported. Keep in mind that even though I use the past tense to discuss the fourth quarter, the numbers could change (slightly) as the stragglers come in. The annual data is based on all S&P 500 firms in the sector. All data is as of the close 2/24/11.

S&P 500 (95.8% in)

To get an idea of how each sector will do, it is useful to have a common benchmark, such as the entire S&P 500. For the S&P 500 as a whole, earnings were up 29.6% year over year in the fourth quarter, up from 26.0% year-over-year growth in the third quarter. It is worth noting that as the earnings season began, year-over-year growth was expected to come in at just 19.8%.

What is true of the whole, must be true for at least most of the component parts. For the full year, earnings soared 44.2% for the S&P 500 as a whole in 2010. Then again, 2009 was not exactly a normal year, so it was working off some very easy comps. Growth is expected to slow to 15.0% in 2011, and then continue to fall to 12.0% in 2012 as the comparisons become more and more difficult.

Still, even the 2012 growth is pretty healthy. Revenue growth has been much slower and the market as a whole has been enjoying margin expansion, as have most of the sectors. Revenues are grew 6.86% in 2010 and expected to 4.03% grow in 2011 and then accelerate to 6.13% growth in 2012. The revenue picture (and thus the net margin picture) is significantly distorted by the Financial sector, but the distortion should fade a bit over time.

Excluding the Financials, revenues grew by 9.59% in 2010, and are expected to slow to 6.51% growth in 201 and 6.13% growth in 2012. Net margins for the whole S&P are expected to rise from 8.64% in 2010 to 9.56% in 2011, and continue rising to 10.08% in 2012. If one excludes the Financials, the margins are lower but still growing, rising to 8.80% in 2011 from 8.23% in 2010. In 2012 the net margins excluding the Financials are expected to increase to 9.31%.

The S&P 500 as a whole is selling for 15.7x 2010 earnings and 13.7x 2011 earnings expectations. If you are willing to look out to 2012 earnings the P/E ratio falls to 12.2x. The “per share” numbers work out to $83.03 for 2010 and $95.47 for 2011. In 2012, they are expected to pass the century mark for the first time ever, rising to $106.83.

S&P 500 ETF: (SPX)

Consumer Staples (94.4% in)

This is a steady, low-growth sort of sector. It accounts for 7.61% of all the earnings expected for the S&P 500 in 2011, down from 8.06% in 2010. That is not because earnings are expected to fall, but because they are going to grow more slowly than the rest of the S&P 500. In the 4th quarter, total net income for the sector was up 6.97%, after being up just 5.37% in the 3rd quarter. For both quarters, that puts it near the bottom of the list.

Looking forward to the first quarter, year-over-year net income is expected to fall 0.45%. For the full year, earnings were been up 11.73% from 2009 levels. Looking to 2011, growth is expected to slow to 8.59%, and more or less stay there in 2012 with growth of 9.74% expected. The growth is well below that of the S&P 500 as a whole for all three years, but on a relative basis, it will catch up as growth slows for the rest.

This is a relatively high net margin sector with 9.95% in 2010 and growing to 11.86% in 2011. In other words, most of its earnings growth is expected to come from margin expansion. Total revenues for the sector rose 11.6% in 2010 from 2009, but are actually expected to fall by 8.89% in 2011 before rebounding by a relatively slight 4.33% in 2012. The valuations on the sector are higher than average, with the sector as a whole selling for 15.9x 2010 earnings and 14.7x 2011 earnings expectations.

Overall the numbers suggest that this is not a particularly interesting sector right now, and at best you would want to market weight it, if not underweight it. That is bolstered by the fact that it is currently near bottom of the charts based on estimate revisions over the last month, with revisions ratios of 0.95 for 2011 and 0.94 for 2012.

Consumer Staples SPDR ETF: (XLP)

Consumer Discretionary (93.4% in)

This sector tends to be more volatile than the Consumer Staples sector. It is a much smaller sector than the staples sector, accounting for just 3.57% of all net income expected for the S&P 500 in 2011, but that is up from 3.25% in 2010. The earnings share is expected to expand to 3.67% in 2012.

Total net income growth for the sector rose sharply to just 22.61% in the fourth quarter, up from 16.15% in the third quarter. For the year as a whole, total net income was up 14.96% in 2010, rising to 26.46% growth in 2011 and then slowing to 15.21% in 2012. That, however, means that it will be moving from growing significantly slower than the S&P as a whole to faster than the S&P as a whole.

As with most of the sectors, net margin expansion will play a big part of the earnings growth, with margins expected to grow to 9.92% in 2011 from 8.54% in 2010. Revenue growth was to be 3.84% in 2010, rising to 8.90% in 2011, before slowing to 5.31% in 2012.

The sector is not particularly cheap, selling at 20.7x 2010 earnings and 16.3x 2011 earnings. While there is some pent up demand, consumers are still trying to repair their balance sheets. To do so they are saving more and paying down their debt. The money to do so is probably coming more from putting off purchases of discretionary items than from cutting back on staples.

Overall, this sector does not look particularly interesting to me. Not awful, but not particularly compelling either. It looks worse than average on a growth-to-valuation basis, but it is doing better than average in terms of earnings estimate revisions. The revisions ratio over the last four weeks is 4.41 based on FY1 Earnings (mostly 2011) and 3.48 based on FY2 earnings (mostly 2012). Thus there might be some interesting short-term trading opportunities in the sector, but overall it does not look particularly compelling for long-term investments.

Consumer Discretionary  SPDR ETF: (XLY)

Retail (84.1% in)

While Christmas sales were pretty good, they were very promotional, and the analysts do not seem to have been particularly impressed. This is a medium-sized sector in the S&P 500, expected to account for 7.09% of total net income in 2011, down from 7.34% in 2010. For the fourth quarter, it is the one sector with a significant number of firms left to report, but earnings for those that have already reported are up 11.85% from year-ago levels, after growing 9.75% year over year in the third quarter.

In the first quarter, year over year earnings growth is expected to slow to 2.91%. For the full year, earnings growth has been well below par for the sector, with total net income up only 15.66% in 2010, and expected to slow to 11.10% in 2011 and rebound to 12.79% growth in 2012. Retail is almost always the lowest net margin sector, but margins are growing, expected to rise to 4.11% in 2011 from 3.93% in 2010, and grow further to 4.40% in 2012.

Given it low margins, it accounts for a much larger percentage of the overall revenues than it does for either earnings or market capitalization. In 2011 it is expected to account for 17.63% of all the revenues in the S&P 500 up from 17.28% in 2010. Revenues grew 3.79% in 2010, rising to 6.11% growth expected for 2011 followed by a slowdown to 5.34% growth in 2012.

Valuations are higher than average, with the sector selling for 17.2x 2010 earnings and 15.4x 2011 earnings. In that respect, and also with respect to estimate revisions it looks similar to the Discretionary sector it is sometimes lumped in with. The revisions ratio is 1.91 for FY1 and 1.86 for FY2.

Perhaps there are some interesting short term trading opportunities in the sector, but it does not look particularly compelling from a long-term investing point of view at this point. I would market-weight to underweight the sector.

Retail SPDR ETF: (XRT)

Medical (97.9% in)

In the fourth quarter, earnings growth is expected to be well below average for the health care stocks, with total net income growing just 7.86% over year-ago levels, down from 10.96% growth in the third quarter. Total net income is currently expected to be 0.78% lower in the first quarter of 2011 than it was in the first quarter of 2010.

Slow and steady seems to be the theme when it comes to full year earnings as well, with total net income rising just 9.61% for the full year of 2010, and slowing to 4.33% in 2011 and rising to just 6.70% growth in 2012. This is a big an important sector of the overall S&P 500 when it comes to earnings, but the slow growth is making it fade somewhat in importance. Then again, when earnings totally fell apart in 2008 and 2009 for many other sectors its earnings importance soared.

In 2009 during the downturn, it accounted for 17.20% of all earnings in the S&P 500. For 2010, that fell to 13.10% and is expected to continue to decline to 11.88% in 2011 and to 11.32% in 2012. As with almost all the sectors, earnings growth is expected to be better than revenue growth, leading to net margin expansion.

Revenue growth as actually slightly better than average in 2010, with 8.91% growth, but it is expected to slow below the overall S&P 500 in 2011 to just 3.56% with further slowing to just 3.02% growth in 2012. Net margins are expected to expand to 9.87% in 2011 from 9.80% in 2010, and expand to 10.23% in 2012.

In terms of estimate revisions, it is currently sort of in the middle of the pack, but that is not all bad, as for the S&P 500 more estimates are being raised than cut. For FY1, the Medical sector has a revisions ratio of 1.27 or more than five increases for each four cut. Looking out to FY2, it is 1.48, or almost three increases for two each cut. Thus, there may well be some interesting short-term trading opportunities in the sector.

From a longer-term investing point of view, the sector is extremely interesting, selling for just 11.8x 2010 earnings and 11.4x 2011 expected earnings. For both years those are the lowest P/Es of any sector. That makes the sector extremely interesting to me and I would be inclined to overweight it. It has the same sort of steady low growth profile as the Staples sector, but is selling for a very significant discount instead of a small premium the way the staples are.

Medical Dow Jones ETF: (IHI)

Tomorrow, time permitting I plan to provide a similar analysis for the Auto, Basic Materials, Industrial and Construction sectors. The final eight sectors will probably be addressed next week (using the data as of the 3/311 close). You can find the underlying numbers in the Earnings Trends report if you are not inclined to wait.

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About Dirk van Dijk 112 Articles

Affiliation: Zacks Investment Research

Dirk van Dijk, CFA is the Chief Equity Strategist for 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.

Visit: Zacks Investment Research

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