The Good, The Bad, And The Earnings

The Good, The Bad, And The Earnings

over 3 years ago3 mins

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Companies have started revealing how they’ve done in the third quarter, and the winners and losers might surprise you.

🕰 Recap

  • Heading into “earnings season”, investors expected US company profits to be 21% lower than the same time last year on average, and European profits to be down 29
  • Earlier this month, big US banks reported third-quarter results that were generally better than expected
  • On Tuesday, tech giant Netflix reported a weaker-than-expected earnings update
  • But consumer staples companies like Nestlé and Procter & Gamble comprehensively beat third-quarter expectations

✍️ Connecting The Dots

Over the last three months – and for the first time in more than two years – analysts have been increasing their forecasts of how much companies will earn in a coming quarter. But they still figured America’s biggest firms would report profits that were more than 20% lower, on average, than the same time last year, and that Europe’s would report those almost 30% lower. As for what’s hot and what’s not: those analysts were most optimistic about healthcare, consumer staples, and seemingly pandemic-proof tech firms, while they expected energy companies to report losses for the second quarter in a row.

The curtain on Big Tech’s earnings was raised, as usual, by Netflix, which failed to meet box office expectations. The streaming giant fell victim to its own early success: the pandemic, it said, “pulled forward” customer demand, meaning there were fewer new potential subscribers left to sign up. And when live sports returned and lockdowns began to loosen, it saw a lot of cancelations too. Tech investors are no doubt hoping the boosts to Amazon and Microsoft weren’t similar flashes in the pan. Facebook’s investors, for their part, have less reason to worry: social media rival Snapchat’s strong earnings earlier this week suggest there’s strong user momentum and sales growth to come…

Consumer staples, as normal in times of crisis, have certainly been coming to investors’ rescue: last week’s positive updates from Procter & Gamble, Unilever, Coca-Cola, and the world’s largest food company, Nestlé, might’ve reminded investors why the companies’ “defensive” characteristics stand them in such good stead. That is, they make and sell food, drinks, and household products that people continue to buy whatever the economic weather. That means their earnings tend to hold up pretty well – even when other companies are suffering record losses.

🥡 Takeaways

Some analysts have been anticipating a “rotation” away from the high-growth and consumer staples stocks that’ve been driving the market higher this year, in favor of unloved and cheap-looking “value” stocks, like energy and banks. But even though banks’ earnings beat expectations earlier this month, that hasn’t happened yet – and given that tech earnings are likely to impress next week, other investors may be wondering if it’ll happen at all.

Around 75% of companies beat analysts’ earnings projections every quarter, but that number already sits at above 80% for last quarter’s updates. While these so-called “beats” don’t actually count for much (companies are generally expected to outperform official predictions), earnings updates do serve a purpose for long-term investors. A company’s shares are, theoretically, as valuable as the value investors attribute to its future cash flows – and an earnings update gives them an opportunity to test their assumptions, increase or decrease their forecasts, and buy or sell shares accordingly.

🎯 Also On Our Radar

It’s no secret that oil companies are struggling, and they’ve been trying to save cash by cutting their dividends and spending on big projects. And given traders think oil demand could take another 18 months to get back to pre-pandemic levels, even once-loved shale oil companies are teaming up to cut costs and make it through in one piece. That much was clear from two deals struck last week: a $10 billion tie-up between ConocoPhillips and Concho Resources, and a $5 billion deal between Pioneer Natural Resources and Parsley Energy.

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