Key points in this equity note:
- Q3 earnings season starts next week with our focus on earnings from PepsiCo, Delta Air Lines, and JPMorgan Chase.
- PepsiCo reports on Tuesday and is expected to show solid revenue and operating income growth. Delta Air Lines is expected to show a further slowdown in revenue growth but still expanding operating income. JPMorgan is expected to show another quarter of strong top and bottom line growth driven by expanding net interest margin.
- Expectations for earnings have rising a lot over the past three months as better than expected economic data points since June are pointing towards more growth in the economy.
Key earnings next week: PepsiCo, Delta Air Lines, and JPMorgan Chase
The Q3 earnings season starts next week and with rising earnings expectations all year and the recent decline in equities due to rapidly rising bond yields a lot is at stake. The list below shows next week’s key earnings releases (reporting time in GMT).
- Tuesday: PepsiCo (1030)
- Thursday: Chr Hansen (bef-mkt), Fastenal (1100), Walgreens Boots Alliance (1100), Delta Airlines (bef-mkt)
- Friday: PNC Financial Services (1030), JPMorgan Chase (1045), Well Fargo (1100), BlackRock (bef-mkt), UnitedHealth (bef-mkt), Citigroup (1200)
PepsiCo has been robust during the inflationary period that started after the pandemic with an ability to pass on input costs to consumers. The diverse portfolio with snacks and beverages has strong brand loyalty and consumers have not meaningfully reduced spending despite higher prices. Revenue growth has been above 10% y/y over the past three quarters and FY23 Q3 revenue growth is expected to decline a bit to 6% y/y. FY23 Q3 EBITDA is expected at $4.58bn vs $4.25bn a year ago. The current consensus target price is 23% above yesterday's close.
Why is important to watch earnings from Delta Air Lines? Because the airline industry is connected to business activity but also leisure activity which is a good proxy for excess consumer discretionary spending, which is typically the first thing to go in an emerging downturn. Revenue growth is expected at 5% y/y down from 13% in Q2 and EBITDA at $2.52bn up from $2bn a year ago. However, going forward the expectation is that the operating margin could come under pressure from higher jet fuel costs and pilot wages (likely going to rise 19%).
JPMorgan Chase is the largest US bank in terms of balance sheet and has enjoyed a sharp acceleration in net revenue growth as interest rates have moved higher. With deposit rates still being low the net interest margin has expanded increasing JPMorgan’s operating income to $18bn in Q2 up from 11.2bn a year earlier. In Q3, analysts expect net revenue growth to hit 22% y/y and EPS of $3.90 up 24% y/y reflecting the ongoing margin expansion and that loan provisions are still benign as the labour market for now remains robust.
As the Q3 earnings season approaches it is worth reflecting on 12-month forward earnings estimates and how they have developed throughout 2023. The first three months reflected a lot of uncertainty about whether the US economy would enter a recession. But slowly improving macro indicators and stronger than expected outlook from companies in the US and Europe in April changed forward estimates. Then in May came the blowout guidance from Nvidia and suddenly everything had changed with growth expectations rising as the market was scrambling to discount some future with generative AI technology. Earnings estimates have continued to rise reflecting solid expectations going into the Q3 earnings and based on nowcasting indicators on the US and European economy we believe companies will indeed deliver strong results for Q3. If we are right then equities could get back some tailwind lost as bond yields rose.