Article / 12 October 2015 at 11:30 GMT

Earnings Watch: So far, so good

Head of Equity Strategy / Saxo Bank
Denmark
  • 45 S&P 1200 firms to report earnings this week
  • A little over half of reporting firms have surpassed expectations at present
  • Energy and materials firms will likely drag down overall Q3 picture
  • Adobe, Lennar and Red Hat are the US earnings leaders so far
  • H&M post revenue growth but profits remain flat

Bank of America
Bank of America's 2009 tower looms over Bryant Park, Manhattan: 
Our main focus this earnings season will be the big US banks. Photo: iStock

By Peter Garnry

The third-quarter earnings season is well under way and this week, 45 companies in the S&P 1200 Global Index will report earnings. As we wrote in our preview last Friday, the main focus will be on US financials with most important ones being Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Goldman Sachs.

Thirty-four companies in the S&P 1200 Global Index have already reported Q3 earnings. Some will likely think that it sounds odd when Alcoa and PepsiCo are some of the first in the US to have reported earnings last week, but the reason for this is that not all companies follow the calendar year. 

Companies with their reporting end dates on August 31 (Japanese and South Korean companies, for example) have two months of financial data in the Q3 calendar quarter and as such, the majority of data lie in the third quarter and thus they are included in our Q3 earnings analysis.

Revenue and earnings robust despite slowdown

Despite all of the media headlines concerning the global economic slowdown, the 34 companies with earnings data for Q3 show that revenue and profit have proven resilient against expectations. They also show healthy growth rates against figures from a year ago. 

Obviously, however, earnings data are lagging against the real economy due to timing issues and thus management outlooks often dominate the post-earnings announcement reactions in the stock price.

As we also have only very limited data, we will only present headline conclusions (and skip the charts) for the moment, but as we progress through the Q3 earnings season we will of course put much more colour on our view of the earnings landscape.

The median revenue and EPS surprises are 0.3% and 0.5% respectively, so a little more than half of the companies have beat expectations. The median revenue, net income and EPS growth rates (year-over-year) are 2.2%,  7.4% and 10.8% respectively (all figures are in the reporting currency). 

Factoring in global inflation, this sample of earnings results barely show real revenue growth with only 2.2% expansion (y/y), but given the challenging global economic environment it is an acceptable showing. 

The difference in between net income and EPS growth shows the impact from share buybacks that are being carried out in large amounts by almost every company in the world. This reflects the lag of confidence in real investments and thus companies are sending more back to shareholders through buybacks.

Preliminary figures exclude impact from commodity rout

Most of the 34 companies that have reported Q3 earnings are consumer companies that have outperformed the overall equity markets (as consumer consumption has stayed robust despite the economic weakness on the backdrop of lower energy prices). 

It is therefore very likely that the Q3 earnings figures will deteriorate when earnings from energy and materials companies are reported.

Winners and losers

Within the numbers, we see a few big surprises relative to expectations. The three companies that have disappointed the most on revenue against expectations are Blackberry, ConAgra and Monsanto, missing revenue estimates by 18.9%, 24% and 15.5% respectively.

Blackberry also missed earnings estimates by 44.4% with the initial reaction sending the stock price down with the following sessions extending the declines to $6 per share. The stock has since recovered some ground, but the overall conclusion is that Blackberry still faces severe bleeding in its core business and we have yet to see any stabilisation.

In terms of actual revenue growth rate the winners are the three Japanese companies Lawson, Aeon and Nitori growing revenue at 19.5%, 19.6% and 10% (y/y) respectively while high growth in the US is found among Adobe, Lennar and Red Hat growing 21.1%, 23.7% and 13.1% (y/y) respectively. 

We have very few companies from Europe with Carnival and H&M being the only ones so far. H&M delivered 18.6% revenue growth (y/y) but profit growth was flat. H&M delivered in line results on the top and bottom line against expectations compared to its rival Fast Retailing (most famous for its Uniqlo brand) that disappointed massively against expectations but also outlook.

Uniqlo
H&M delivered strong revenue growth, but flat profits show that rival Uniqlo (and parent Fast Retailing) remains the company to beat in this sector. Photo: iStock

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank

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