Article / 21 July 2017 at 14:17 GMT

Earnings Watch: Good start for Q2 results, big week ahead —#SaxoStrats

Head of Equity Strategy / Saxo Bank
Denmark
  • Second-quarter earnings season has got off to a good start
  • European companies are posting fastest EBITDA growth since Q4 2010
  • The coming week brings results from 610 of the 2,000 companies we track
  • This Earnings Watch previews tech majors Alphabet, Facebook and Amazon

Google headquarters
 Google and its parent Alphabet's Googleplex corporate headquarters in 
Mountain View, California. Photo: www.google.com

By Peter Garnry

The second-quarter earnings season has been under way for two weeks, and already now it looks to be a great Q2. Next week is the biggest week, with results due from 610 of the 2,000 companies we track during earnings season. Reports from major US technology companies will be the highlights of the week, so this Earnings Watch takes a look at Alphabet, Facebook and Amazon.

Europe is leading the Q2 earnings season

With almost 100 companies in the STOXX 600 having reported earnings, the sample size is large enough for us to make a qualified prediction for the second-quarter earnings season. This is going to be the best earnings season in Europe since the fourth quarter of 2010 when earnings growth was driven by a strong rebound in emerging-markets countries, commodities and global trade. Earnings before interest, tax, depreciation and amortization is up 17.6% year-on-year (see chart).

EBITDA growth



















Revenue growth is not stellar at 4.3% y/y, but is still the best since Q2 2015 before headwinds from energy prices began hurting earnings. Compared with S&P 500 firms, European companies are growing a bit faster and with bigger expansion in operating profit mirroring the hard economic data over the past year that have shown Europe is pulling ahead. Recent euro strength could become headwind going forward. (A new video with Garnry's comments on the earnings season is also available here on TradingFloor.)

Revenue growth



















Google is firing on all cylinders

Expectations are close to all-time high when Alphabet (Google) reports Q2 earnings on Monday after the market close. Analysts expect earnings per share of $10.39, up 23% y/y, as mobile ad sales at Google and YouTube are driving top-line growth. Investors will also pay close attention to the cloud business where Google is number three after Amazon and Microsoft. 

Any positive outlook on hardware sales from the Pixel phone and Google Home segment could fuel investor sentiment. The stock has a positive rating in our quant model, driven by attractive valuation, higher-than-average yield and recent relative weakness relative to peers.

Alphabet (Google) weekly share price
Google share price
Source: Saxo Bank 

Instagram is next growth engine

Facebook shares hit a new record this week and are up 43% year-to-date. Expectations are high for Q2 earnings to be published on Wednesday after the market closes. Analysts expecting EPS of $1.38, up 42% y/y, and revenue of $9.2 billion, up 43% y/y, driven by higher ad prices and explosive growth in monetisation of Instagram and video ads. 

Facebook's stock has a slightly negative score in our quant model due to its above-average valuation and recently weaker momentum relative to the industry. We expect strong earnings. Facebook's EPS has surprised positively in all but two quarters since the company's IPO, creating one the best and most sure runs on Wall Street.

Facebook weekly share price
Facebook share price
Source: Saxo Bank 

Amazon packaging
Seattle-based Amazon is the world leader in e-commerce. Photo: Shutterstock

The everything store powers on

Amazon shares also hit new all-time high this week ahead of Q2 earnings. Expectations are also high, and investors will especially seek an update on the Whole Foods acquisition and what the exact plans are. Earnings are slated to be published on Thursday after the market close. Analysts expect EPS of $3.04, up 8% y/y, and revenue $37.2 billion, up 22%, as the Prime business continues to grow. Some estimates put Prime subscriber growth at around 35% y/y in Q2.

Amazon Web Services, the world's largest cloud infrastructure business, continues to grow fast and is currently the biggest driver of EBITDA margin expansion and growth in profits. Amazon's stock has a positive rating in our quant model due to low volatility and recent underperformance relative to industry.

Amazon weekly share price
Amazon share price
Source: Saxo Bank 
 

Below are the most important earnings releases next week.

Most important earnings releases
 Source: companies and Saxo Bank


 — Edited by John Acher

Peter Garnry is head of equity strategy at Saxo Bank

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