It's Earnings Showtime!

It's Earnings Showtime!

about 4 years ago • 3 mins

Mentioned in story

With companies in the midst of revealing fourth-quarter results and 2020 predictions, investors are in the midst of reviewing their earnings estimates and stock portfolios.

🕰️ Recap

  • Last week, major US banks reported record profits that were also higher than expected
  • Netflix raised the curtain on tech earnings with a better-than-expected fourth quarter on Tuesday
  • American Airlines’ and Southwest Airlines’ fourth-quarter profits went in opposite directions when they reported updates on Thursday
  • In total, analysts expect US companies’ fourth-quarter profits to be 2% lower than a year ago

đź”— Connecting The Dots

Every quarter in the US – and less frequently in places like France and the UK – public companies pull back the curtain on how they’ve performed in the last three months. A company’s management might take the opportunity to talk up the firm’s achievements: product launches, new store openings, and the like. But investors are far more interested in revenue and profit, and to find out if their previous forecasts (and decisions to buy) have been vindicated.

As companies report their fourth quarters, analysts are predicting their profits will, on average, be 2% lower than the same time last year. That average will be dragged down significantly by the energy sector, whose profit is expected to fall by 40%. The oil price has, after all, been depressed lately due to a global economic slowdown, while energy firms’ costs have been on the rise. You only need to look at Baker Hughes’ earnings this week to see that…

That shouldn’t stop companies reporting better-than-expected earnings, mind you. Companies prefer to underpromise and overdeliver, which means even falling profits can send share prices up if the decline’s smaller than investors were braced for. But more important than backward-looking earnings is a company’s forward-looking outlook. Since a company’s valuation depends on its ability to generate cash in the future, its forecast is a major influence on how much investors are willing to pay for its shares.

🥡 Takeaways

Given US tech companies’ importance to the global stock market, its little wonder investors spend a lot of time analyzing them. Prior to Netflix’s earnings update on Tuesday, its stock had already risen more than 20% in the last three months, and analysts’ earnings estimates climbed too. That did, however, mean Netflix’s stock didn’t rise much after Tuesday’s update, as investors had already anticipated positive news. Titans Amazon, Facebook, Apple, and Microsoft will provide similar updates next week – and if investors have already figured out what they’ll say, their stocks may not move by much either.

The economic malaise that’s keeping the oil price subdued is the same that’s weighing on “consumer discretionary” firms, which are expected to report 14% lower fourth-quarter profits than in 2018. Less-than-stellar retailer updates about their sales over the holiday season have also played a part in more cautious forecasts from analysts. And the rise of a deadly virus in China – which has now spread to Europe and the US – could dampen consumer demand this year too.

🎯 Also On Our Radar

On Friday, the planned merger between online food delivery companies and Just Eat was put on ice. UK regulators want to look into whether the massive deal would be bad for customers, who might suffer from reduced choice and worse service as a result. While investors are hoping the sheer number of big-name rivals – including Uber Eats and Deliveroo – will mean the merger’s approved in short order, it’s a reminder how seemingly innocuous deals can be laid to rest at a moment’s notice.

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