EQUITIES 5 minutes to read

Earnings Watch: Q4 numbers look good, outlook less certain

Peter Garnry

Head of Equity Strategy

Summary:  This earnings season has seen some solid releases from major US names, but earnings beats cannot fully obscure the signs of a coming slowdown.


In our first earnings season preview, we highlighted the fact that the bar is set high for US earnings as Q3 earnings and especially revenue figures were the best since the financial crisis. So far, the numbers out of S&P 500 companies suggest that the bar is high. Revenue per share y/y in % is down from the high growth in Q3, but these are still only preliminary numbers (around 10% of the index has reported earnings).

Most S&P 500 companies have so far beaten expectations on both revenue and earnings, adding further tailwind to the momentum in global equities.

In our previous Earnings Watch, we highlighted JPMorgan Chase, Netflix and TSMC earnings as the most important to watch. JPMorgan Chase delivered fine numbers and management were quite upbeat on outlook, going against the trend. Netflix Q4 results were in line with estimates but the outlook was below analyst estimates and a tad to the negative side.

Our view on Netflix is cautious given the outlook and the fact that liabilities continue to grow faster than revenue which is problematic as the life span of video streaming content is much shorter than music.

At TSMC, one of Apple’s largest suppliers, projections for Q1 revenue were sharply lower than estimated; in general, the previous double-digit growth rates may slip into negative territory in 2019 unless China and US strike a trade deal in combination with Chinese stimulus.
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If we zoom in on EBITDA per share, it seems growth slowed down again in Q4 reflecting what is already known – global growth deteriorated substantially in Q4. But more importantly, the effects of Q4 are already showing up in management outlooks focusing on lower growth and trade uncertainty.

The world is waking up to the reality that our global economy is supported by extremely tight (just in time) and complex supply chains (thousands of cross-border suppliers).
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This week the most important earnings releases are: ASML, Nidec and Ford Motor.

ASML

The company reports Q4 earnings on Wednesday before markets open. Analysts are expecting EPS at €1.80, up 20% y/y, and revenue at €2.99bn, up 17% y/y. ASML is an interesting company because it is in the front end of the business cycle and thus adds value to macro analysis. Q4 numbers are likely to be good given strong demand for chip lithography equipment driven by TSMC, but as we already know, TSMC is slowing down so ASML’s outlook is likely to have changed to a cautious stance.

Nidec

Reports FY'19 Q3 numbers on Wednesday at 06:15 GMT. Analysts expect EPS at JPY 114.34, up 23% y/y, and revenue of JPY 411bn, up 5% y/y. The CEO of Nidec, the world’s largest comprehensive motor application producer with revenue of $14bn per year, became the focus of financial markets last week when the company issued a profit warning amid US-China trade war concerns. In addition, the CEO said “I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us”, which is not exactly comforting news for global investors. In essence, anecdotal evidence of an economic slowdown is piling up everywhere.

Ford Motor

The company reports Q4 earnings on Wednesday at 21:15 GMT (after the close) with analysts expecting EPS at $0.31, down 20% y/y, and revenue of $37.9bn, down 2% y/y. We do not expect strong numbers from Ford Motor and analysts are likely to increase negative questions over the company’s European operations and the operating losses increasing in its Mobility division. Like so many other carmakers, Ford Motor is challenged by a massive transition to electric vehicles which as of today have a lower profit margin due to higher input costs per unit produced. Also, and again like many other carmakers, Ford Motor is spending billions in R&D on self-driving technology. The latter may prove to be wasted capital as the technology is arguably more difficult than previously thought.

The table below shows the most important earnings next week across our global universe of 2,000 stocks during the earnings season.
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Source: Saxo Bank

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