US Earnings

Given the strong market rebound in the first quarter, this earnings season was an important one in determining the direction of markets for the rest of 2019. June 6th saw the last day of Q1 earnings releases for S&P 500 companies. The following aggregate data omits the final four reports: Salesforce,

Tiffany & Co, Campbell Soup and Brown-Forman, as they were not available at the time of writing.

Halfway through the season, the number of earnings beats were above the five-year average and the blended year-on-year earnings decline for the first quarter had reduced significantly, helping to buoy markets following a Q1 rebound.

According to Factset, 59% of companies reported a positive revenue surprise and 76% reported a positive earnings surprise. Aggregate reported sales were 0.4% above estimates, while earnings were 5.3% above estimates. This means companies reporting in the second half have performed very much in line with those who reported in the first, with a slight improvement in sales figures, up 0.1% from 0.3% halfway through.

Big Beats

Ford shares rose by 10% after their results, reporting profits of 44 cents per share, well above the 27 cents average estimate and signalling that the company’s strategic bets may be paying off. Revenue was propped up by utility vehicle sales, but efforts to trim costs in Europe and a broad product rollout are beginning to attract investors.

Amazon and Microsoft had continuing cloud business strength with earnings surprises of 17% and 14%, respectively. Facebook revenue grew 26% and had more active users than expected. While earnings impressed, they also made a $3 billion provision for expected fines relating to data breaches.

American International Group trounced estimates following a shock last quarter, as its general insurance business posted its first underwriting profit since the financial crisis. After taking the helm in May 2017, Brian Duperreault has been overhauling AIG’s underwriting culture of chasing revenue growth without appropriately weighing risks.

General Electric topped earnings expectations and reaffirmed its full year forecast, burning less cash over the period than feared. The company is currently in the middle of a turnaround describing 2019 as its “reset year”.

Lockheed Martin, the world’s largest defence contractor, beat earnings estimates by 38% with sales rising in all divisions but cited trade policies and sanctions as an ongoing risk.

Big Misses

Exxon disappointed, missing earnings estimates by 23% as refining margins came under pressure during a period that suffered from numerous maintenance projects. Capital and exploration expenses increased by $2 billion.

3M, the diversified industrial company best known for its yellow post-it notes, suffered its worst one-day drop in a decade after reporting softening automotive and electronics sales in China. Management plans to lay off 2,000 workers and spend on corporate restructuring.

Eyes on Boeing

Results from Boeing were not too disappointing despite two crashes that have seen 737 Max sales halted. The top and bottom line were as expected and a 15% decline in cash flow was not a surprise. The question remains, however, as to when sales of the Max will resume; they represent a third of revenue over the next five years.

Sectors

Communication services reported the highest year-on-year revenue growth of all sectors. Information Technology reported a year-on-year contraction in revenue but to a lesser extent than expected, with Information Technology (InfoTech) and Real Estate having the highest proportion of companies outperforming revenue estimates.

Health care reported the highest year-on-year earnings growth, with Biotechnology and Health care Providers & Services boasting double-digit earnings growth. The Energy sector reported the largest year-on-year decline at -27%, driven by lower oil prices over the last twelve months.

The consumer discretionary sector provided the largest aggregate surprise in earnings, while InfoTech reported the highest proportion of companies outperforming earnings estimates. InfoTech, however, also reported the second highest year-on-year earnings contraction, with Technology; hardware and storage; and Semiconductor Equipment reporting double-digit declines.

Guidance

The blended year-on-year earnings decline for the first quarter was -0.4%, the first decline in this figure since Q2 2016, but faring much better than the earnings decline of -4.0% estimated as of the 31st March 2019. Revenues grew by 5.3%.

Looking forward, analysts expect a slight decline in earnings in the second quarter, followed by growth in the following two quarters, culminating in calendar year earnings growth of 3.2%. This growth is heavily weighted to the final quarter.

Despite a modest earnings season, Q2 is now expected to be a disappointing quarter for earnings, with estimates having fallen by 2.1% during the first two months of the quarter. Interestingly, this is a below average reduction, with the five year average decline over the first two months of a quarter standing at 2.5%.

Forward earnings guidance has been underwhelming thus far; the number of companies issuing negative EPS guidance is 76%, above the five-year average but improving on the outlook mid-season. Trade negotiations have been cited as a reason for concern and the recent re-ignition in hostilities between the US and China may suppress beats in the next quarter.

Posted: 27.06.2019

Source: FactSet & Bloomberg

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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