How will commodity prices impact the Restaurants and Materials sectors in Q4 2011?

This past week was a focus week for restaurants in the S&P 500. McDonald’s reported strong sales growth for November and Yum! Brands raised EPS guidance for 2011. However, Darden Restaurants issued EPs guidance for Q4 2011 that was below the mean EPS estimate, and cited increased commodity costs as a factor in their earnings projection for the quarter. Using the Reuters/Jefferies CRB Index as a proxy for commodity prices, commodity prices have increased slightly (2.7%) since September 30. During this same time frame, the projected earnings growth rate for the S&P 500 Materials sector has declined substantially (from 24.3% to -2.4%).

Given the small increase in the Reuters/Jefferies CRB Index, have analysts cut estimates in the Materials sector by too much? Or do they anticipate future drops in commodity prices and are getting ahead of the curve in their estimate revisions? We’ll have to wait for Q4 earnings season for the answers.

Overall, analysts and corporations have significantly tempered expectations for earnings growth for Q4 2011 for the S&P 500.  Since the start of the quarter, the estimated earnings growth rate for the S&P 500 has dropped to 13.6% today from 19.0% on September 30, due to broad-based cuts to earnings estimates. On a percentage basis, share-weighted earnings for the quarter have fallen by 4.5% during this time. This 4.5% cut reflects the sharpest reduction in estimates through the first ten weeks of a quarter since Q2 2009 (-5.7%). In terms of EPS guidance, companies have issued 84 negative preannouncements for the current quarter.

The estimated earnings growth for the fourth quarter currently stands at 13.6%. If the final earnings growth rate is 13.6%, it will mark the ninth consecutive quarter of double-digit earnings growth for the index. The Financials sector is predicted to have the highest earnings growth (83%) and be the largest contributor to dollar-level earnings growth.  However, one company accounts for most of the growth in the Financials sector and more than half of the growth for the entire index: AIG.  If AIG is excluded from the index, the Q4 2011 earnings growth rate for the S&P 500 drops by more than 50%, from 13.6% to 6.1%.  Comparisons to weak year-ago earnings are driving the unusually high dollar-level growth for AIG.

During the next couple of weeks, the first few companies will report earnings for Q4 2011. During the upcoming week, six companies in the S&P 500 are scheduled to report earnings for the fourth quarter.

Read more about expectations for Q4 2011 in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.