Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 13 October 2017 at 13:14 GMT

Earnings Watch: Will US companies set a new EBITDA record?

Head of Equity Strategy / Saxo Bank
  • Q3 earnings season kicks into higher gear after a slow opening week
  • Among next week's heavy-hitters are Netflix, ICBC and Daimler
  • Q3 2017 may set a new record on EBITDA for the first time in a decade

 Netflix is expanding rapidly and attracting increased investor interest. Pic: sitthiphong/

By Peter Garnry

Next week 130 companies will report Q3 earnings out of the 2,000 companies that we track for earnings seasons. The first weeks are always dominated by US companies and the opening week this quarter again featured US companies and, as mentioned in our regular morning calls and in our monthly equity update webinar, there's been a heavy tilt towards financials. This week's Earnings Watch will look at US earnings from a top down view and focus on three interesting earnings releases next week.

US companies to set new record?

It's still early days so the current Q3 revenue number is currently below Q2, but we expect revenue to grow q/q and thus making a new high again in Q3, thereby supporting the latest rally in US equities. The drivers will likely be the technology, energy and industrial sectors as the global economic expansion propels operating income higher in cyclical sectors.

S&P 500 revenue
Source: Saxo Bank

But not all is rosy. Valuation is beginning to be a concern although as we have stated before, valuations are rarely the cause of bear markets but simply an amplifier. The 12-month trailing EV/EBITDA is now at 13.2 which is on par with levels observed in early 2003, early 2002 and late 2000. We are now in the upper 8% of the valuation metric distribution – in plain English, it's getting expensive. The bulls are not late to pull out the forward-looking indicators such as 12-month forward EV/EBITDA standing at 11, a level below the highs prior to the Great Financial Crisis, reflecting the high expectations for EBITDA growth over the coming 12 months. But is this even realistic? 

In the past 52 weeks, sell-side analysts providing the forward estimates on EBITDA have been wrong, predicting EBITDA on average to be 11.6% higher than what it actually turned out to be 12 months later. If we correct the forward indicator by the prediction-error (pink line) then the ratio gets closer to the 12-month trailing ratio. In other words, given the current prediction-error investors should not pay too much attention to the 12-month forward EV/EBITDA.

S&P 500 valuation
But one thing is for sure. The key ingredient for a sustained rally in US equities is good growth in EBITDA, also called operating profit, which has indeed rebounded over the past six quarters. The highest ever recorded EBITDA was in Q2 2007 but given the current momentum in US earnings there is a good chance that Q3 2017 could be the quarter when US companies reach a new peak for operating income.


Source: Saxo Bank

World dominance in video streaming

Netflix is the world's largest video content streaming service and is expanding rapidly and attracting the admiration of investors. Here are the key facts ahead of next week's earnings:

  • Reports Q3 earnings on Monday at 20:00 GMT (after the close)
  • Est. EPS $0.37 up 106% y/y and est. revenue $2.97bn up 30% y/y
  • Investors will focus on international subscriber growth which is the segment the equity market is basing its high valuation on.
  • Easy y/y comparables may help Netflix show high growth across the board
  • Margins are expected to expand due to price increases in many international markets
  • Investors will focus on the upcoming US price hike and any guidance from the company on the impact from this price hike
  • The stock price is at an all-time-high so there are elevated expectations
  • The stock has a negative score in our quant model with only the momentum factor being positive

Netflix weekly share price
Netflix share price
Source: Saxo Bank 

To get a sense of how high the valuation is for Netflix look at the chart below. The two dots are Netflix and Amazon. The market is putting a huge premium on those two stocks compared to a meaningful peers' group. The spread cannot be explained by the profit spread (ROIC/WACC) alone so it is obviously Netflix's high growth and future potential that explains this premium. Total invested capital (a measure of organic growth) is around 50% y/y in the past 3-4 years.

Netflix valuation

Source: Saxo Bank

China growth continues

The largest bank in China by market value is ICBC valued at $325bn (only surpassed by JPMorgan Chase) is the best barometer on the Chinese economy and financial system.

  • ICBC reports Q3 earnings on Tuesday (no time provided)
  • Est. EPS CNY 0.20 flat y/y and est. revenue CNY 174.6bn
  • We have an outstanding buy recommendation out on ICBC with a price target of HKD 7.25 compared to the current price of HKD 6.37
  • Focus on non-performing loans and loan provisions. Current trajectory is for non-performing loan ratios to decline as the Chinese economy has improved over the past year
  • The bank is valued at 0.99x price-to-book on around 15% return on equity
  • The stock is rated positively in our quant model (was in its top 40 list during the release of our buy recommendation) driven by strong fundamentals (cheap and higher quality relative to global banking peers).

ICBC weekly share price
ICBC share price
Source: Saxo Bank 

 Still a beauty but the EV revolution is gathering pace. Photo: chrisdorney/

No appetite for old cars?

The newsflow in the car industry is rich and increasingly about electric vehicles with several governments having adopted EV cars as a national goal, for example China. This has caused investor concerns and lack of willingness to increase exposure to car stocks and bid up valuations. In addition the global car sales has slowed or even declined in the case of the US.

  • Daimler reports Q3 earnings on Friday at 05:30 GMT
  • Est. EPS is €2.08 down 15% y/y and est. revenue is €40.2bn up 4%
  • Focus will be on operating margin expected to be under pressure. Any upside surprise here could be good news for the stock price
  • Car loan rates are going up curbing demand in many markets. In the US car loan rates are up 1%-point since early 2013 to 3.4% on average
  • EV adoption is a major headache for car companies as the transition requires large capital expenditures and lower short-term profits on top of uncertain payoff
  • Recent oil price gains may also have negative short-term impact
  • Investor focus on Daimler's CASE strategy evolving clear goals for electrification which they mentioned on the capital markets day with analysts.
  • The stock is rated neutral in our quant model with its attractive valuation being offset by weak relative momentum against other peers

Daimler weekly share price
Daimler share price
Source: Saxo Bank 

Below are the top 30 most closely watched earnings releases next week including their estimates and reporting time.

Earnings watch list
 – Edited by Clare MacCarthy


Peter Garnry is head of equity strategy at Saxo Bank


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