Article / 10 February 2017 at 14:44 GMT

Earnings Watch: Strong Q4 season enters final phase — #SaxoStrats

Head of Equity Strategy / Saxo Bank
  • 262 of the 1,200 companies that we track globally report results next week
  • So far 70% of S&P 500 companies have reported quarterly results
  • Q4 2016 US earnings season is best in six years on a quarterly basis y/y
  • Growth is back as base effects of the strong USD and low oil price are vanishing
  • Today's Earnings Watch spotlights Nestle, PepsiCo and Cisco's upcoming reports
Nestle headquarters
 Nestle headquarters, Vevey, Switzerland. Photo:

By Peter Garnry

Next week 262 of the 1,200 companies that we track globally during earnings season will report quarterly results. So far 70% of companies in the S&P 500 have reported Q4 results, while Europe is still a bit behind. This week's Earnings Watch update focuses on Nestle, PepsiCo and Cisco System in addition to a quick status on the US earnings season in terms of aggregate numbers.

Could Nestle surprise as EM bounces back?

Food giant Nestle reports Q4 earnings on Thursday, with analysts expecting revenue growth of 2% year-on-year to CHF 24.4 billion and adjusted EPS of CHF 1.763 for the second half, down 3% y/y reflecting an ongoing slowdown of growth over the years. With 43% of revenue coming from emerging markets, the slowdown in EM has impacted Nestle negatively.

Nestle got a new chief executive, Mark Schneider, on January 1 with an agenda to take the company forward for the next 10 years. Investors are expecting an intense focus on the nutrition and pharmaceutical business. 

Nestle weekly share price
Nestle share price
Source: Saxo Bank 

The rebound in economic growth in EM countries may lead to a positive surprise in the Q4 earnings release, but also going forward. Compared with industry peers, Nestle shares look interesting on the reversal and shareholder yield factors. So Nestle shares have underperformed over the past four weeks and therefor scores above average on reversal. The above-average shareholder yield is due to a combination of a high dividend yield and lower share capital due to share buybacks.

Productivity plan to show its worth at PepsiCo?

PepsiCo reports fourth-quarter earnings on Wednesday at 1130 GMT, with analysts expecting EPS of $1.16, up 9% y/y, and revenue of $19.5 billion, up 5% y/y, indicating margin expansion coming from the company's productivity plan. The beverage company is impacted in the short term by the stronger US dollar and recent slowdown in international markets.

PepsiCo weekly share price
PepsiCo share price
Source: Saxo Bank 

Longer term PepsiCo is challenged by changing consumer behaviour, as consumers demand healthier foods and beverages. There are also rumours that by mid-2018 new US regulations will require new labels on packaged foods and beverages warning about the negative effects of added sugars. PepsiCo shares score above average on our equity factor model across all factors (value, momentum, reversal, shareholder yield and quality).

Can Cisco diversify out of its core business?

Networking group Cisco Systems reports Q2 results on Wednesday at 2130 GMT (after market), with analysts expecting EPS of $0.56, down 2% y/y, and revenue of $11.5 billion, down 3% y/y, as the company struggles to offset weakness in its core switch and router business. The new strategy is to build out its business into newer high-growth segments such as datacentre equipment and the Internet of Things. We remain skeptical that Cisco can successfully deliver this change.

Cisco weekly share price
Cisco share price
Source: Saxo Bank 

Cisco scores below average on equity factors such as shareholder yield and quality, while momentum and reversal are above average.

Below are the 30 companies with the highest market values in USD reporting earnings next week.

Top earnings releases

S&P 500 returns to growth

The fourth-quarter 2016 US earnings season is the best in six years on a quarterly basis y/y as the base effects from the strong USD and low oil price are disappearing. The 12-month trailing revenue growth y/y is finally positive again after six quarters of negative growth. We expect this measure to increase throughout 2017, returning to around 3% growth on par with 2014.
S&P 500 revenue growth

The rebound has been even more pronounced in EBITDA, which bounced back from -10% growth y/y in Q3 of 2015 to 3% y/y five quarters later.

S&P 500 EBITDA growth
— Edited by John Acher

Peter Garnry is head of equity strategy at Saxo Bank


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