Facebook Live with Christine Short April 13, 2020
Today we’re going to preview Q1 earnings which is set to kick off this week with airlines, big banks and a handful of other large cap names.
I’ve been covering corporate earnings for over 10 years and feel like this is going to be the most important season to watch.
According to FactSet, sell-side analysts are expecting companies in the S&P 500 to post a 10% decrease in YoY profits, with revenues predicted to grow 1%. Just to give some perspective, at the beginning of the year both measures were estimated to grow over 4%. The double digit decline in profits, if reached, will be the deepest in over 10 years (since Q3 2009).
Now for those of you that maybe aren’t familiar with the nuances of earnings estimates, I think there are a few important things to understand before we proceed. Sell-side analysts tend to issue very conservative estimates for the companies they cover right ahead of reporting season.
Many times they are just following the guidance of the companies themselves, and corporations typically issue low guidance. They do so in order to manufacture an earnings surprise, which usually gives their stock a pop after they report. This loop of under-promising and over-delivering goes on every quarter. On average S&P 500 earnings growth ends up being 5 percentage points higher than the expectation at the beginning of the season. So in this case, we are starting the reporting season with a decline of 10%, the expectation would be to end somewhere around 5%.
However, this is all during a normal earnings season, and this earnings season is anything but normal.
All we know right now is that Q1 earnings season is going to be bad, but we don’t even have a clear view on how bad it will be at the moment. One reason for the lack of visibility is that many companies themselves haven’t told us what to expect given the coronavirus crisis. Many blue chips have withdrawn guidance issued at the beginning of the year as it no longer holds, and have indicated they are revising downward, but they actually don’t even know what is a reasonable number to revise down to at this point, so all bets are off for Q1. Many have said they will announce their revisions for 2020 on their Q1 calls, so we’re all sort of in wait and see mode. There is a list of over 150 publicly traded companies that have warned investors about the threat of COVID-19 to their profits in Q1.
On a sector level, 6 of 11 sectors are anticipating negative profit growth for Q1, and we’re going to get to some of the leaders and laggards within each industry.
Let’s start with the laggards:
It’s probably no surprise that Energy takes the top spot here, with the Russia-Saudi Arabia oil price war and the impact of coronavirus slow downs across the globe leading to lower oil prices. In fact, the sector is expected to see profits decline over 50% in the first quarter. The largest players in the sector that are currently taking the biggest hit, are Exxon and Chevron.
As you can see, Exxon currently has a smart score of 6, and that’s come down in the last couple of months as analysts have downgraded ratings, with Goldman Sachs, Scotiabank and DZ Bank all downgrading to a sell. As a reminder, the Smart Score is based on 8 market factors that have historically been a precursor of future outperformance including analyst ratings, insider and hedge fund activity, news sentiment, individual investor activity, financial blogger sentiment, as well as technicals and fundamentals
Consumer Discretionary is the sector seeing the second largest drop of -33%. We’ve already gotten a handful of same store sales (SSS) results over the last couple of weeks, and while the picture for chain restaurants such as McDonald’s, Starbucks and Wendy’s wasn’t pretty, stores such as Costco, Kroger, Dollar Tree and Target are all benefiting from panic buying.
As for earnings expectations, automobile makers such as Ford and GM currently have the deepest declines of -84% and -55% YoY, respectively, followed by names in the apparel space such as Under Armour which is anticipated to decline -37% YoY. Lastly, names in the travel and leisure space such as Darden Restaurants (-191%), Wynn (-170%) and Carnival (-155%) are all bracing for the worst.
Now you can see we still have a smart score of 7 for Carnival, and although the best analysts on the platform are calling this a moderate sell, many other factors are still strong including hedge fund and insider activity. And a big reason for that could be because cruise bookings for 2021 are actually up 40% from 2019 according to the website CruiseCompete.com, and from a UBS research note that said 76% of people that had to cancel a cruise in 2020 have chosen to accept credit towards a cruise in 2021, vs. 24% that asked for a refund.
Lastly on our list of laggards are the Industrials, led by Boeing which was already having some trouble before coronavirus hit due to the grounding of their 737 Max planes after two recent crashes. You can see here they currently have a smart score of 3.
Airlines themselves have also been in the thick of it. I usually like to look at the airlines in two groups: large international carriers and discount/domestic airlines. And while both are going to see a big down tick in growth, international carriers took the hit earlier on with travel to China & Europe being banned. Domestic low-fare carriers were allowed to proceed as normal, but with stay at home orders emerging in many states starting in mid-March, they too had to limit flights.
I pulled up a few screens on the airlines and found that JetBlue is currently faring the worst with a smart score of 3, followed by United Airlines and American Airlines with a score of 4.
Now let’s turn to the expected Leaders for Q1, and they are all in the defensive industries: communications, utilities, health care and consumer staples.
Communications is expected to report the highest growth rate of 8%, but keep in mind only two of the 5 sub-sectors are anticipated to grow, interactive media & services and media, lead by Facebook which is the largest company in the sector and really holding it up right now, without it growth falls flat. And Facebook still considered a Strong Buy by the best analysts on TipRanks.
Health Care is interesting this quarter, on the front line of the coronavirus crisis, currently there are 16 biotech/pharma companies of varying sizes working on vaccines. One of the most prominent names at the forefront of that effort is Regeneron, and they are the large cap name expecting the highest YoY earnings growth of 44% and currently hold a smart score of 10, with the only negative being insider selling.
Of course this list of leaders also contains Utilities, always pretty steady as individuals need water, electricity and gas, and a good safe haven in a bear market.
Consumer goods are expected to be up 1% YoY, with revenues expanding by 4%.
Now getting to some of the earnings reports this week – we’ll see all 6 of the big banks report, starting with JP Morgan and Wells Fargo tomorrow, and Bank of America, Citigroup, Goldman Sachs and Morgan Stanley on Wednesday. Financials as a whole are expected to be down nearly 20% YoY. Wells Fargo and Goldman are the two biggest contributors to that decline. With interest rates dropping to historically low levels, that has taken other lending rates such as mortgage rates along with it, impacting the profits banks can make lending to consumers and businesses. And that was happening before coronavirus even hit, the global pandemic will no doubt result in higher default rates among their borrowers, so all eyes will be on loan-loss provisions – the money banks set aside to cover loans gone bad.
That’s it for today, thanks for joining me for this Q1 earnings preview. Please ask any questions in the comments section below. And join us next Monday as we enter peak earnings season, with over 300 companies set to report.
Thanks and take care.
