Article / 27 July 2016 at 9:01 GMT

Earnings Watch: Revenue growth at zero, EPS negative

Head of Equity Strategy / Saxo Bank
  • US earnings show flat revenue growth, EPS decline
  • Profit margins still contracting, signalling weak macro data
  • eBay 'improving on all numbers', Netflix profitability timeline in doubt

By Peter Garnry

The Q2 earnings season is well under way in the US with 176 companies having reported earnings. Some of our initial conclusions are that, despite the vanishing of the strong USD base effect, revenue growth is zero and EPS growth is still negative year-over-year. 

The energy and health care sectors have been the biggest surprise on revenue growth. Energy companies are still seeing their revenue down almost 25% y/y driven by lower oil prices, but if the oil price can stay at current levels, the base effect is gone in Q3.

S&P 500 versus MSCI World

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Source: Saxo Bank 

Another interesting observation is that profit margins are still contracting (y/y) confirming the weak macro data. Unless revenue growth comes back, this trend will make it hard for companies to show profit growth. 

Engineered EPS growth, however, can always be done.
Among the 176 companies in our earnings season analysis, the three biggest winners so far are eBay (EBAY:xnas) , United Rentals (URI:xnys) and Biogen (BIIB:xnas).

eBay hourly price chart around earnings release:
Source: Saxo Bank
The biggest driver behind eBay’s 13% excess return over the earnings release was its FT revenue guidance at $8.85-8.95 billion up from $8.6-8.8bn. The firm is improving on all numbers and sporting a 8% free cash flow yield. We are positive on eBay shares.
The three worst performing stocks so far are Netflix (NFLX:xnas), Southwest Airlines (LUV:xnys), and CarMax (KMX:xnys). Netflix shares were dragged down by disappointing subscriber growth in its US and international segments. 

The company is still just operating around break-even level and the increasing competition from among other Amazon makes it difficult to see that Netflix will ever get to profitability within a couple of years so as to justify the current valuation.

Netflix hourly share price around the earnings release:
Source: Saxo Bank

In terms of median revenue surprise in percentage points across sectors, the energy and healthcare sectors have been the most positive surprise. Given the 26% decline in average oil price in Q2 2016 from a year ago, energy companies have also come out ahead on EPS at around 11%, showing that they have been extraordinary in cutting costs and capex to protect operating profit.

S&P 500
Source: Saxo Bank
The numbers so far also show that the biggest growth sector is still healthcare with revenue up around 9% y/y.

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank

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