Earnings Watch, signs from Delivery Hero, Philips, and PetroChina

Equities 10 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Consensus is expecting earnings in S&P 500 to decline in Q4 compared to Q3 and thus showing broad-based margin compression. This combined with rising interest rates are the key two dynamics pressuring equities and will act as headwinds in 2022. Higher revenue growth from inflation and lower investment levels have the potential to offset most of the pressures on equity values. In other words, it is going to be an interesting earnings season that will have far reaching consequences for equity positioning over the coming quarters. We also go through recent statements from Delivery Hero, Philips, and PetroChina which offer insights into the underlying dynamics in the global economy and equity markets.


Margin pressure will show up in Q4

The margin pressure was evident among European companies and US technology stocks while the broader US equity market (S&P 500) had unchanged profit margins in Q3. However, consensus estimate is looking at 21.7% earnings growth for the S&P 500 which will equal Q4 EPS of $46.32 down from $50.68 or -8.6% from Q3. As we expect revenue to continue higher margin pressure will be broad-based and the question is how stocks will respond. Rising interest rates are currently pressuring equity valuation through the discount rate and if operating margins come under pressure then you have two powerful effects fighting equities. Companies can then defend valuations by increasing their revenue growth or lowering their capital expenditures. While revenue growth will likely surprise due to underlying inflation helping equities, companies will most likely also cut down on investments which we are already seeing signs of.

For growth companies in software the main input costs are people and the latest hourly earnings are close to 5% y/y in the US and we suspect that labour costs for programmers are rising faster. This can make it more difficult for technology companies to increase their margins. Making things a bit more troublesome many technology companies have seen their share prices go down and thus share-based compensation has gone down dramatically for many R&D workers in those companies. They could easily ask for more cash compensation to offset the decline which companies, given the tight labour  market in the US, probably would have to accept.

Delivery Hero wants to avoid a ‘DocuSign moment’

The fast-growing European food delivery company Delivery Hero with its biggest business activity in Asia and the Middle East announced yesterday that it expects to reach break-even in Q4 this year. However, we have heard this song from many other growth companies over the years such as Uber without never materializing or at least much slower than communicated. We believe the same will for Delivery Hero as cash flows from operations actually deteriorated in the first half of 2021 and competition is fierce on food delivery. If Delivery Hero breaks even it will likely be on some version of an adjusted EBITDA which it not really the key metric that matters for valuation. The key metric is the net operating profit after taxes (NOPAT) and the incremental investments needed to drive revenue growth.

We believe Delivery Hero is signaling a path to break-even by end of this year because the heat is going up for unprofitable growth companies. DocuSign showed in December that it means when you miss against Wall Street’s expectations for higher operating margins. DocuSign was punished massively by investors and many growth companies now that with rising interest rates profitability must be prioritized.

Philips shows the headache in 2022

The Dutch industrial company Philips has unpleasant news for investors today reporting preliminary Q4 revenue of €4.9bn vs est. €5.2bn due to semiconductor shortage and various product recalls. The company also said that port congestions are not making it easier to projects and products. Philips’ woes are a peek into 2022 for many companies in which global supply constraints will act as a drag on revenue growth while potentially impacting operating margins. If these forces are then combined with higher interest rates then these companies could really see their equity value drop hard. Philips shares are down 14% today and down 42% since the recent peak in April 2021.

Source: Saxo Group

PetroChina shows why ESG consciousness could be a drag on returns

China’s largest integrated oil & gas company PetroChina announced this morning that preliminary FY21 net income will be somewhere around CNY 126bn compared to consensus at CNY 94.5bn. This suggests that the market is still severely underestimating the earnings power of energy companies. With an unfolding energy crisis due to seven years of underinvestment in oil and gas, ESG mandates constraining financing in this sector, and the green transformation (higher carbon emission prices), energy companies will deliver strong results and returns for shareholders. We estimate the long-term expected return for global energy companies to be around 9-10% and be a source of alpha over the next 10 years. Even if an investor is ESG conscious can energy stocks really be ignored in the age of inflation and higher energy prices?

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.