With week 3 of US earnings now complete US earnings season for Q2 is largely done with 76% of the S&P 500 reported
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- As of Friday, 314 companies have reported. S&P 500 bottom-up EPS climbed to $29.31 from $29.20 the prior week. Consensus earnings growth is -4% YoY (+1% ex energy).
- Last week was characterised be very strong earnings from the Tech sector, led by FaceBook, Google and Amazon.
- At the sector level Internet/Software, Banks and software have been the biggest drivers of the beats.
SOME KEY TAKEOUTS:
Earnings are running 2% ahead of analyst expectations coming in.
- Better than expected tech results Were the main driver last week
So far, 62% of companies have beaten on EPS, 52% have beaten on sales and 40% have beaten on both
- Historically, on average for a full quarter, 53% typically beat on EPS, 57% beat on sales and 35% beat on both
Health Care and more beats from multinationals: has seen the most top-and bottom-line beats.
The strong USD effect from last year is waning…but sales growth is slowing.
- The negative currency impact to YoY sales growth continued to lessen in 2Q16 to 1ppt, from 2ppt in 1Q (and a peak of 5ppt in 3Q15)
- But constant currency sales growth for the S&P (excluding Financials and Energy) has continued to slow, with 2Q16 constant currency sales growth at a three-year low (see below)
No sign of Brexit in guidance (yet..)
And with that, most people sign off in the USA, as really only utilities as a sector are left now to report. Australia on the other hand can work themselves into their twice yearly frenzy of reporting season. Try doing it four times a year!
STOCKS THAT ARE IN OUR PORTFOLIO:
Week 3 was a busy week for our portfolio, with 1/3 of our stocks reporting. Alas, our portfolio didn’t enjoy the same tailwinds as the overall US reporting season, with a few stocks missing either on earnings or forecasts. I’ve nominated 2 below for a summary:
ServiceCorp International (SCI)
Good – results were basically in line with expectations reflecting good cost control in face of the continuation of a particularly quiet flu season in the US and therefore a lower than usual seasonal increase in activity during the colder months.
Bad – expectations were only met on an adjusted basis and the top end of the range of net income guidance for the full year was reduced by 4% but we note that half of the adjustment related to the early repayment of debt which will lower interest payments over the longer term.
Ugly – including the various “one-off’s” the results are clearly worse than expected which is fine whilst investors focus on adjusted results and ignore the bad news, however, if the negative impacts are not eventually offset by positive surprises in equal measure then the current investor forgiveness should not be relied upon over the long term.
- SCI is the USA’s largest funeral home provider.
- Provided Management keep on top of cost control, particularly through weaker periods such as that just reported, then SCI should continue to be supported by the demographic trend of an aging US population, growing steadily by deploying its cash flow to acquire small bolt-on additions to its portfolio of businesses as well as steadily returning capital to shareholders via share repurchases.
Electricity De France (EDF)
Good – In the face of weak energy prices which resulted in revenues for the first half being down 5% on a comparative basis, EDF delivered a strong set of results that considerably exceeded expectations at both the operating and net income level and which should result in earnings upgrades for the full year, reflecting the announcement last week which re-iterated the guidance for the full year.
Bad – the UK government has postponed the final decision on the new Hinkley Point nuclear power station which EDF is planning to build with support from Chinese investors and whilst this is perceived as being positive by many investors given the size and risks of the investment relative to the company’s already stretched balance sheet, considerable sunk costs (circa EUR 2bn) could be lost if this investment does not go ahead.
Ugly – EDF is a large and complex company and whilst various other strategic announcements today were also positive, further weakness in end power markets will continue to stress the balance sheet.
Management have done a good job in delivering cost and capex savings along with a number of positive developments which should result in analyst forecasts increasing and a lower perception of balance sheet risk:
- Life extension of one reactor model (50 to 60 years) leads to lower depreciation charges going forward;
- The agreement for the sale of French transmission assets at a value some 60% greater than book value (or circa 15% of EDF’s current market cap.).
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