US EARNINGS SCORECARD Q1 2016

Transcription

1 US EARNINGS SCORECARD Q June 2016 For investment professional use only and not for general public distribution

2 Contents 1. Q earnings scorecard 2. Sector analysis 3. Key themes of the quarter 4. Investment team views

3 US earnings scorecard Q Most S&P 500 companies beat earnings estimates in Q1 Of the 99% of S&P 500 companies that have reported earnings for Q1 to-date, 72% have beaten average earnings estimates* this is above the 5-yr average of 67%. 53% of companies have reported sales above average estimates this is below the 5-yr average of 56%. Aggregate blended earnings ** in Q1 declined by 6.7% year-on-year, with the biggest negative contribution coming from energy sector earnings. Perhaps explaining the lack of adverse market reaction, the earnings decline in Q1 was less than expected.* In terms of Q guidance, 81 companies issued negative EPS guidance, significantly more than the 31 companies that issued positive EPS guidance. S&P 500 Q earnings by sector % of companies above/in-line/below estimates above in-line below Consumer Staples Healthcare Materials Consumer Disc. Industrials Info tech. S&P 500 Telecoms Financials Utilities Energy Source: Factset Earnings Insight, 3 June 2016; * reference point for estimates is 31 March 2016, so beaten means relative to the earnings expectation on this date; ** blended earnings combines actual results for companies that have reported and estimated results for companies yet to report. 2 US Quarterly Earnings Scorecard Q1 2016

4 US earnings scorecard Q Significant sector level variation in performance The earnings surprise percentage for Q as at 3 June (the amount by which reported earnings for all index constituents exceeded estimates) of +4.2% was exactly equal to the 5-yr average. However, as shown below, there was significant performance variation across sectors consumer discretionary was the best performing sector in Q1 with +19.8% earnings growth, followed by the telecoms sector with +16.6% earnings growth (left chart). Energy was again by far the worst performing sector with a 107.2% contraction in earnings in Q1. This was also significantly worse-than-expected as evidenced by the sector seeing the biggest negative earnings surprise among all sectors in Q1 (right chart). S&P 500 Q1 earnings growth by sector (% y/y) S&P 500 Q1 earnings surprise by sector (%) Energy Materials Financials S&P 500 Info tech Industrials Utilities Consumer staples Healthcare Telecoms Consumer disc Consumer disc Materials Industrials Consumer staples Healthcare S&P 500 Telecoms Info tech Utilities Financials Energy Source: Factset Earnings Insight, 3 June US Quarterly Earnings Scorecard Q1 2016

5 US earnings scorecard Q Key themes of the quarter Lower energy prices While the oil price in Q1 increased a little compared to the year-end level, it was still more than 30% lower than in the same period of 2015, with varying effects depending on the sector. Example: Regarding its oil and gas division, GE said it was operating in an incredibly tough environment with US onshore rig count down 27% compared to year-end and 72% compared to the 2014 peak. Buybacks still a popular use of cash Returning cash to shareholder, especially via buybacks, remained a key theme in Q1. Example: Starbucks said its buybacks in the last quarter were nearly equal to those in the whole of Strong dollar concerns persisting The strong dollar continued to weigh on companies that derive large portions of their earnings from non-us markets. Example: Merck said total company revenues of $9.3bn in Q1, were down 1% y/y. However, excluding the impact of the strong dollar, revenues increased 3%. Political risks are growing in some international markets A number of companies noted intensifying political risks such as the possibility of Brexit, Brazil s crisis and the upcoming US election. Although the impact so far has been low. Example: PepsiCo management noted, Brazil is a tough, tough market. It s also fundamentally a good market but in the last months, there have been a lot of self-induced problems. Source: S&P 500 Beige Book, Goldman Sachs, 12 May 2016; Factset Earnings Insight, 3 June US Quarterly Earnings Scorecard Q1 2016

6 Investment team comments While the current US macro picture looks relatively rosy, as investors we are always more interested in the future, and in this respect, I do see some areas of potential concern. In particular, US corporate earnings in aggregate can be viewed from two perspectives, a non-gaap-view and a GAAP-view; in very broad terms, the former is what companies increasingly prefer to focus on in their investor communications but the latter is typically more realistic. My concern here is that the more accurate GAAP-based measure of aggregate US earnings has been turning lower of late and this is typically what we observe towards the latter stages of economic cycles. The sustainability of earnings growth is also something of a concern given that profit margins are close to 40-year highs in most sectors. Moreover, while low unemployment is generally a good thing, it also tends to reduce labour market slack, creating upward pressure on wages. Again some incipient signs of this are emerging and this is not helpful for corporate profit margins. Angel Agudo, Portfolio Manager, US equities 5 US Quarterly Earnings Scorecard Q1 2016

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