Hover over the chart bars and lines to learn more about the earnings and revenue growth and probability of default of the companies in the Telecommunications sector.
We have been watching the S&P 500® Telecommunication Services Index throughout earning season and have seen some interesting trends. The week ending April 24th saw earnings estimates rising 40%, and though they pulled back slightly in the following weeks they held at a 7.3% estimated growth for 2015 fairly well. Top line numbers told a different story with 2015 revenue growth estimates falling from 2.2% to 1.8% the week ending May 1st, and then to 1.7% the next week where it held for a month.
At this same time we observed an equity market-influenced probability of default from our PD Market Signals model indicating that credit risk was rising within the sector. Specifically, we see large elevations the weeks ending May 15th and 22nd. A large driver of these movements is the PD levels of Frontier Communications Corporation (NasdaqGS:FTR) which saw its PD rise to more than 20% at the end of May after staying below 1.2% in April. As this PD was rising we see their earnings growth estimates falling off significantly along with a noticeable decrease in revenue growth forecasts.
Similarly we see PD levels rise for CenturyLink, Inc. (NYSE:CTL) starting the week of 5/15 to 1.83% from 1.16% as revenue growth forecasts fell to -0.73% from -0.38% while EPS growth numbers fell slightly to -2.31% from -2.24%.
What can we glean from these trends? The credit risk of these firms is increasing the credit risk for the sector overall. A driver of this may be the revenue forecasts as credit risk is influenced more by top line revenue and a slowdown in business forecasts than an EPS number which can be managed by reporting and doesn’t speak as much to the cash flow available to pay back creditors.