What to watch out for at the start of the earnings season in Europe
LONDON – The earnings season for European companies started in earnest last week, with analyst consensus forecasting a 140% year-on-year increase in earnings per share for the second quarter.
Earnings per share is an important metric used by traders to gauge the value of a stock or a larger index, and it rose 87% per year in the pan-European Stoxx 600 index in the first quarter.
In the past six months, sell-side analysts have raised their projections for second-quarter EPS growth by more than 50 basis points, according to Factset data aggregated by Bank of America’s European equities quantitative strategy team .
Meanwhile, consensus EPS growth expectations for 2021 as a whole have risen from 35% in March to a new high of 48%.
With the second quarter at the peak, analysts expect EPS to decline for the remainder of 2021, growing 32% year-over-year in the third quarter and 21% in the fourth.
Given the sharp drop in Q2 2020 as the Covid-19 pandemic set in, the second quarter earnings of the European blue chip index this year are still expected to remain 2% below their peak before the pandemic.
“Our macroeconomic projections imply a further upside potential of 9% for 12-month EPS by the end of 2021 and 11% by mid-2022,” Bank of America analysts said in a report on Friday. note.
“This would bring the total increase from last year’s low to 50%, broadly in line with the rebound in EPS after the global financial crisis.”
In terms of sectors, analyst consensus indicates that autos, retail and resources posted the strongest second quarter earnings growth. Consumer discretionary, energy and financials jointly contribute 29 percentage points to the 48% earnings growth forecast for the Stoxx 600 this year, analysts at BofA said.
“12-month EPS for resources has been revised up nearly 60% in the past six months, the strongest earnings momentum on record, with relative dynamics of Energy EPS close to a 25-year peak, at 45%, ”they said.
“Despite strong earnings gains, resource sector price reports have waned, with energy underperforming the market by 15% since March and mining by 12% since May.”
The latter trend has driven the energy sector’s price-to-earnings ratio to an all-time low, BofA pointed out, while mining is at its lowest since 2008.
Based on a systematic analysis of post-earnings communications from companies in the last quarter, BNP Paribas expects the second quarter to be marked by more announcements of investments, share buybacks and mergers and acquisitions. Buybacks occur when companies buy their own publicly traded stocks, thereby reducing the share of stocks held by investors. They offer a way to get money back to shareholders – as well as dividends – and typically coincide with the rise in a company’s shares as stocks become scarcer.
As reporting season approaches, Viktor Hjort, global head of credit strategy and analyst team at BNP Paribas, said the companies appeared to be dealing with both bondholders and actions.
Leverage continues to decline and liquidity ratios – a company’s ability to repay current debt without raising additional capital – remain near record levels, Hjort said in a note Friday.
Meanwhile, management teams at all levels have reported greater risk-taking in their communications about first quarter results, in the form of capital spending, share buybacks and merger plans and acquisitions.
“The last quarter marked the second consecutive quarter of declining cash reserves. Companies have shifted focus on deploying capital from the defensive position of the pandemic to the offensive and this ultimately translates into lower ratios of liquidity, ”Hjort said.
During the pandemic, major lenders significantly increased their investment banking income amid heightened volatility and significantly increased transaction volumes. However, investment banking activity is expected to slow in the next reporting cycle.
In the United States, Goldman Sachs has been unique in fueling past earnings expectations thanks to strong contributions from investment banking due to a robust IPO market. While others like JPMorgan and Citigroup also exceeded expectations, their windfall gains translated into reduced bad debt provisions.
UBS is launching second quarter reports for European banks on Tuesday, and Barclays’ co-head of European equity research Amit Goel said the Swiss lender could benefit from the risk reduction efforts of national rival Credit Swiss.
“We’re slightly ahead of the consensus compiled by the company, although we still expect revenue to decline sequentially,” Goel said in a note Friday.
“We will be looking at capital, as the buyout was slower than expected in Q221 and focused on the broader cost and income trends.”
Barclays is “underweight” in UBS stock based on its relative valuation and the bank’s below consensus estimates for 2022/23. Goel said his team also saw “negative jaws” in “normalizing” revenues and growing costs.
Goel said Credit Suisse would suffer a “double whammy” from the normalization of its fixed income, currency and commodity trading income, with the pandemic-induced volatility drop, as well as risk reduction efforts following a series of large-scale governance failures.
The bank has so far been exposed this year to the collapse of supply chain finance firm Greensill Capital and the collapse of U.S. family-owned hedge fund Archegos Capital, leading to an overhaul of its leadership in wealth management.
As such, Q221 earnings are expected to contract significantly from underlying T121 levels and we are below the latest consensus, ”Goel said.
“Nonetheless, we believe investors are ignoring these issues, and the real fundamental questions are how the group will be restructured in the future; we are looking at a potential IB [investment bank] debt scenarios. ”