CHICAGO, Jan. 11, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: S&P 500 ETF (NYSE: SPX), Consumer Staples SPDR ETF (NYSE: XLP), Consumer Discretionary SPDR ETF (NYSE: XLY), Retail SPDR ETF (NYSE: XRT) and Medical Dow Jones ETF (NYSE: IHI).

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Here are highlights from Monday's Analyst Blog:

Sector Watch: Consumer, Retail, Medical

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.

S&P 500

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 are expected to be up 19.83% year over year in the fourth quarter, down from 25.07% year-over-year growth in the third quarter.

Given that positive earnings surprises almost always outnumber earnings disappointments, the actual growth is likely to be somewhat higher than forecasted, perhaps even matching the third quarter level. What is true of the whole must be true for at least most of the component parts. In other words, if the sector estimates prove to be off, they are more likely to be too low than too high. For the full year, earnings are expected to have soared 42.85% 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 15.13% in 2011, and then continue to fall to 11.97% 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 expected to grow 4.03% in 2010 and then actually accelerate to 5.38% growth in 2011 and to 5.58% 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 are expected to have grow by 8.18% in 2010, and then slow to 5.88% growth in 201 and 5.58% growth in 2012.

Net margins for the whole S&P are expected to rise from 8.80 2010 to 9.61 2011. If one excludes the financials, the margins are lower but still growing, rising to 8.83% in 2011 from 8.25% in 2010. The S&P 500 as a whole is selling for 15.5x 2010 earnings and 13.4x 2011 earnings expectations. The "per share" numbers work out to $82.18 for 2010 and $95.06 for 2011.

S&P 500 ETF: (NYSE: SPX)

Consumer Staples

This is a steady low growth sort of sector. It accounts for 7.73% of all the earnings expected for the S&P 500 in 2011, down from 8.11% in 2010. That is not because earnings are expected to fall, just 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 is expected to be up just 2.92%, after being up just 5.83% in the third quarter. For both quarters, that puts it near the bottom of the list. For the full year, earnings are expected to have been up 11.03% from 2009 levels.

Looking into 2011, growth is expected to slow to 9.74%, and more or less stay there in 2012 with growth of 9.70% 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 10.77% expected for 2010 and growing to 12.04% in 2011.

In other words, most of its earnings growth is expected to come from margin expansion. Total revenues for the sector are expected to have risen only 2.4% in 2010 from 2009, and are actually expected to fall by 1.82% in 2011 before rebounding by a relatively slight 3.95% in 2012. The valuations on the sector are significantly higher than average, with the sector as a whole selling for 16.9x 2010 earnings and 14.5x 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 at the very bottom of the charts based on estimate revisions over the last month, with more than two cuts for every increase based on both FY1 (mostly 2011) and FY2 (mostly 2012) earnings estimates.

Consumer Staples SPDR ETF: (NYSE: XLP)

Consumer Discretionary

This sector tends to be more volatile than the Consumer Staples sector. It is a much smaller sector than the staples sector -- expected to account for just 3.55% of all net income in the S&P 500 in 2011, but that is up from 3.42% in 2010. Total net income growth for the sector is expected to slow sharply to just 2.06% in the fourth quarter, down from 16.06% in the third quarter.

For the year as a whole, total net income is expected to be up 19.72% in 2010, slowing ever so slightly to 19.35% growth in 2011 and then further slowing to 14.2% 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 8.94% in 2010. Revenue growth is expected to be 3.43% in 2010, rising to 7.56% in 2011, before slowing to 5.41% in 2012. The sector is not particularly cheap, selling at 18.9x 2010 earnings and 15.8x 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 ratio of increased estimates over the last four weeks is 2.69:1 based on FY1 Earnings (mostly 2011) and 2.60:1 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: (NYSE: XLY)

Retail

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 7.23% of total net income in 2011, down from 7.38% in 2010.

For the fourth quarter, earnings are expected to actually fall a sharp 19.26% from year-ago levels, after growing 8.72% year over year in the third quarter. This sector though has the most spread out reporting. Of the companies that have already reported their fourth quarter earnings, fully one third of them are retailers, and then many of them will not report until the very end of the reporting season (many of them have January fiscal year ends, and we count those as part of the fourth quarter).

For the full year, earnings growth has been well below par for the sector, with total net income up only 14.14% in 2010, and expected to slow to 12.86% in 2011 and fall to 6.38% growth in 2012. Retail is almost always the lowest net margin sector, but margins are growing, expected to rise to 4.24% in 2011 from 3.87% in 2010.

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 16.79% of all the revenues in the S&P 500 down from 16.93% in 2010. Revenues are expected to have grown 4.51% in 2010, with a slowdown to 2.93% growth expected for 2011 followed by a rebound to 5.18% growth in 2012.

Valuations are higher than average, with the sector selling for 17.2x 2010 earnings and 15.2x 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 2.21 for FY1 and 2.60 for FY2. We make the switch from a forecast being FY1 to being FY0 when the fiscal year ends. Given the high proportion of firms in the sector that have January fiscal year ends, that means that there are many firms where the revisions for FY1 are referring to what are essentially 2010 earnings rather than 2011 as is the case with most of the other sectors, so there is a little bit of apples and oranges here.

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: (NYSE: XRT)

Medical

In the fourth quarter, earnings growth is expected to be well below average for the health care stocks, with total net income growing just 2.17% over year-ago levels, down from 10.96% growth in the third quarter. Slow and steady seems to be the theme when it comes to full-year earnings as well, with total net income expected to rise just 8.46% for the full year of 2010, and slowing to 7.16% in 2011 and down to 5.41% growth in 2012.

This is a big and 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 is expected to plunge to 13.08% and continue to decline to 12.71% in 2011 and to 12.03% 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 8.69% growth, but it is expected to slow below the overall S&P 500 in 2011 to just 3.39% with further slowing to just 2.74% growth in 2012. Net margins are expected to expand to 10.05% in 2011 from 9.70% in 2010, and making it one of only four sectors with double-digit net margins.

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 1.56 or more than three increases for each cut. Looking out to FY2, it is 2.04, or more than tow increases for 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 12.0x 2010 earnings and 11.2x 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.

Tomorrow I plan to provide a similar analysis for the Auto, Basic Materials, Industrial and Construction sectors. On Wednesday look for an analysis of Conglomerates, Technology, Aerospace and Energy. I plan to finish up on Thursday with an analysis of the Financial, Utilities, Transportation and Business Services sectors. You can find the underlying numbers in the Earnings Trends report if you are not inclined to wait.

Medical Dow Jones ETF (NYSE: IHI)

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