Article / 28 April 2017 at 15:00 GMT

Earnings Watch: A transatlantic show of strength — #SaxoStrats

Head of Equity Strategy / Saxo Bank
  • Both European and US companies posting strong earnings
  • Wage inflation about to hit US, testing returns from major firms
  • Despite iPhone strength Apple faces headwinds from aging iPad, Mac

Apple's iPhone remains a strong seller, but the company may be dragged down by an already high valuation as well as aging iPad and Mac offerings. Photo: Shutterstock

By Peter Garnry

We are now over halfway through the earnings season and we have confirmation that this is one of the best seasons in many years on both sides of the Atlantic. 

Next week, however, continues at full speed with 421 companies reporting earnings out of our global universe of 2,000 firms. In this week's Earnings Watch we focus on the earnings season so far, as well as next week's releases from Apple, Facebook, and Novo Nordisk.

Europe's best earnings season since 2011

While European Central Bank president Mario Draghi played it safe yesterday and downplayed the recent upturn in Europe, the data speak for themselves. We are seeing historically high confidence among consumers and businesses, inflation is ticking up, and unemployment is coming down fast. 

Coincident indicators are suggesting euro area GDP growth is around 3% annualised.

STOXX 600 earnings
Earnings season is finally also showing that this surge in both soft and hard indicators is filtering into performance. EBITDA growth (year-over-year) is close to 10% and the highest since Q3 2011. 

Yes, it comes on the backdrop of weak earnings growth from energy, materials, and financials, but in our view data support that this is a more of a prolonged growth period for European companies, and less a temporary rebound.

Among S&P 500 companies the positive trend in underlying EBITDA has been evident since Q4 2015. EBITDA growth is around 7.5% so far and US companies are no longer experiencing headwinds from the USD and commodities. Soon, however, wage inflation will hit and then we get the big test of whether they can pass on the operating costs to consumers.

US earnings growth  
Replacement cycle

Apple reports FY18 Q2 earnings on Tuesday (after-market) with analysts expecting earnings-per-share of $2.02 (up 7% y/y) and revenues of $53 billion (up 5% y/y). The key driver for Apple is still the iPhone, generating 63% of revenue on the surface and probably a lot more when factoring in content and services sold within the iPhone/Apple ecosystem. 

The iPhone is currently experiencing a replacement cycle which will likely continue for some time as the next iOS update will not support iPhone 5 and thus will force customers on older iPhones to consider buying a new phone. 

Despite this current tailwind from the iPhone, which has sent the share price to all-time highs and up 24% year-to-date, the consensus on Wall Street is cautious as there are no near-term new products or events that can meaningfully move the needle.

Apple weekly share price
Apple share price
Source: Saxo Bank 

In addition the iPad is falling behind Microsoft's Surface in consumer surveys and the Mac is under pressure as well. So the outlook may be a bit clouded despite current strong iPhone sales.

Our quant model is neutral on Apple as the valuation is above the industry and the stock is underperforming its segment. On the positive side, the company is still generating high return on invested capital compared to peers and the stock price is more stable, luring in low volatility investors.

The slowdown phase or not?

Facebook reports Q1 earnings on Wednesday (after-market) with analysts expecting EPS $1.12 (up 45% y/y) and revenue at $7.8bn (up 45% y/y) driven by strong growth from ads on mobile. But everyone expects a slowdown in the core Facebook business as the Newsfeed is reaching what the company calls "maximum ad capacity".

Facebook weekly share price
Facebook share price
Source: Saxo Bank 

With the share price at all-time-highs investors are still discounting high growth and expecting video ads, Instagram, Messenger and WhatsApp to take over as key drivers. Our quant model is neutral on Facebook with its quality (high ROIC and ROE) being the factor that is most positive.

Comeback kid? 

Novo Nordisk, the world's largest insulin maker, reports Q1 earnings on Wednesday (pre-market) with analysts expecting EPS at DKK 3.62bn (down 2% y/y) and revenue at DKK 27.9bn (up 3% y/y). 

Formerly the most successful and admired pharmaceutical company in Europe the past year has been tough with rapidly falling share price as pricing pressure has increased dramatically in its key North America market. In addition, the company has had to abandon the dream of insulin in a pill.

As we have said before, we believe North American pricing pressure will persist for some time creating an uncertain environment for the share price. But through all the noise about North America, the Chinese market will continue to grow strongly. In fact, we believe the story for Novo Nordisk will change over the years to high growth in China on the strength of Chinese demand for diabetes medications.

Novo Nordisk weekly share price
Novo Nordisk share price
Source: Saxo Bank 

The table below shows all the most important earnings releases next week. You can get the full list from your sales trader or account manager.

Most important earnings releases
Source: Bloomberg and Saxo Bank

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank


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