Article / 09 January 2015 at 14:17 GMT

Prepare for the shock factor in Q4 earnings

Head of Equity Strategy / Saxo Bank
Denmark
  • Strengthening dollar will limit Q4 earnings expectations 
  • S&P 500 EPS down 2.5% from October 2014 peak
  • Weaker EUR should boost earnings for European firms

By Peter Garnry 

The Q4 earnings season starts next week. It's going to be important because the last quarter of the year always contains potential impairment charges or other one-off items that can shock investors. 

It is in the Q4 earnings release that management puts forth their view for 2015. Adding to the flavour this year, is the strengthening USD, which is going to curb earnings expectations as overseas profits are translated into fewer US dollars. 

This is also something evident in the 12-month forward expectations for earnings per share in the S&P 500, which are down 2.5% from the peak in early October 2014. The lower expectations in combination with higher prices have catapulted the S&P 500 to its highest valuations since April 2004 (see chart below). 

Is it a cause for worry? Yes, higher valuations are always a cause for worry as they are proportional to lower future returns, but in this low-interest rate environment this will likely not be the case in the short term.

S&P 500 12-month forward valuations




















The flip-side of the stronger USD is a much weaker EUR which should give a boost to earnings among European companies and lower the valuations which could cause investors to bid up prices on European equities.

Below is a snapshot of next week's most important earnings releases and our views:

  • Alcoa enters challenging period but could surprise to the upside... as lower energy prices increase the aluminum producer's profitability. Offsetting the lower energy prices are  lower aluminum prices in Q4 – down 10% – and continuing high prices for bauxite and alumina due to Indonesia's export ban. Analysts expect $0.27 up 568% year-on-year, with EPS expectations up 17% quarter-on-quarter. Alcoa reports Q4 on Monday after the close.

  • No big surprises at Wells Fargo and JPMorgan Chase... with especially Wells Fargo being the steady ship in US commercial banking. Analysts expect the bank to deliver Q4 EPS $1.02, up 2% y/y, with no major changes in the revenue mix. JPMorgan Chase (JPM) could surprise a bit to the upside versus EPS expectations of $1.33, down 5% y/y, as Q4 has been a good trading quarter to volatile markets. We expect focus on IT security in JPM's conference call and questions about how much the bank expects to invest in this area long term. Focus for both banks will also be the ongoing pressure on the net-interest margin. WFC and JPM report Q4 earnings on Wednesday at 13:00 and 12:00 GMT respectively. 

  • Citigroup and Bank of America could be pandora's box... with Citigroup's results fragile to the recent weakness in emerging markets. Longer term, we are worried about the new direction that Citigroup has taken focusing more on capital markets and less on consumer banking with announcement it is selling its consumer business in up 19 countries. Citigroup has historically not been very savvy in capital markets and the long term regulatory requirement in this segment is tougher. Analysts expect Citigroup to deliver EPS of $0.73, down 12% y/y, and they have revised down expectations by 35% in three months. The bank reports earnings on Thursday at 13:00 GMT. Bank of America could very well surprise to the upside excluding one-off items and litigation costs. With the US economy continuing to strengthen we expect strong results across its commercial banking unit. The bank reports earnings on Thursday at 12:00 GMT.

  • Intel's mojo is back... as revenue growth has rebounded to around 6.5% expected in Q4 and EPS expected to be up 25% y/y driven by data-centers and cloud business, while thePC segment is stabilising. With 12-month EV/EBITDA at 6.8x the stock trades at 21% discount to its peer compared to the 2-year average discount of 34%. So the stock is narrowing the spread to the industry valuation. We expect this trend to continue and believe Intel could surprise to the upside. Intel reports Q4 earnings on Thursday after the close.

  • Goldman Sachs to shine on volatile markets... extending six straight quarters of positive earnings surprises in Q4 as volatile markets have increased market activity significantly. In addition, global M&A deal values were their third strongest in the past seven years. With GS leading the tables on deals it should have a positive impact on results. GS reports earnings on Friday at 12:30 GMT.

b
Banks' margins will be affected as more invest 
in IT security. Photo: Patrick Lux \ Thinkstock.com

Read the attached PDF for all earnings releases next week.
 
Download document

Earnings releases Jan 12 - Jan 18, 2015

4y
dominom dominom
:) Thank you very much, for the past few hours I was trying to find some information on earnings season to prepare for the season and could not find any relevant articles and suddenly here it comes from you. Thanks once again for good timing :)

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail