LONDON — Europe’s company earnings season started in earnest final week, with analyst consensus projecting a 140% year-on-year improve in earnings per share for the second quarter.
Earnings per share is a vital metric utilized by merchants to gauge the worth of a inventory or a wider index, and it grew by an annual 87% throughout the pan-European Stoxx 600 index within the first quarter.
Over the previous six months, sell-side analysts have raised their second-quarter EPS development projections by greater than 50 foundation factors, in response to Factset knowledge aggregated by Financial institution of America’s European fairness quant technique crew.
In the meantime, consensus EPS development expectations for 2021 as a complete have risen from 35% in March to a brand new excessive of 48%.
With the second quarter representing the height, analysts anticipate EPS to tail off for the rest of 2021, with 32% year-on-year development within the third quarter and 21% within the fourth.
Given the sharp decline within the second quarter of 2020 because the Covid-19 pandemic took maintain, second-quarter earnings throughout the European blue chip index this 12 months are nonetheless set to stay 2% beneath their pre-pandemic peak.
“Our macro projections indicate 9% potential additional upside for the 12-month ahead EPS by end-2021 and 11% by mid-2022,” Financial institution of America analysts mentioned in a word Friday.
“This could deliver the whole improve from final 12 months’s trough to 50%, broadly in step with the EPS rebound after the worldwide monetary disaster.”
By way of sectors, analyst consensus has autos, retail and sources displaying the strongest earnings development within the second quarter. Client discretionary, vitality and financials are collectively seen contributing 29 share factors to the 48% earnings development projected for the Stoxx 600 this 12 months, BofA analysts mentioned.
“The 12-month ahead EPS for sources has been revised up by virtually 60% over the previous six months, the strongest earnings momentum on file, with vitality’s relative EPS momentum near a 25-year excessive, at 45%,” they mentioned.
“Regardless of the robust earnings upgrades, the useful resource sectors’ worth kin have pale, with vitality underperforming the market by 15% since March and mining by 12% since Could.”
The latter development has pushed the vitality sector’s price-to-earnings ratio to an all-time low, BofA highlighted, whereas mining is at its lowest since 2008.
Deployment of money reserves
Primarily based on a scientific evaluation of corporations’ post-earnings communications final quarter, BNP Paribas expects the second quarter to deliver extra capital expenditure bulletins, share buybacks and M&A. Buybacks occur when corporations purchase their very own shares buying and selling on the inventory alternate, decreasing the portion of shares within the fingers of traders. They provide a strategy to return money to shareholders — together with dividends — and normally coincide with an organization’s inventory pushing increased as shares get scarcer.
Coming into reporting season, Viktor Hjort, international head of BNP Paribas’ credit score technique and analyst crew, mentioned corporates seem like taking care of each bond and fairness holders.
Leverage continues to say no and liquidity ratios — an organization’s means to repay present debt obligations with out elevating additional capital — stay close to file ranges, Hjort identified in a word Friday.
In the meantime, administration groups throughout the board signaled extra risk-taking of their first-quarter earnings communications, within the type of capex spending, share buybacks and M&A plans.
“Final quarter marked the second consecutive quarter of declining money reserves. Corporates have shifted gears on capital deployment from the pandemic’s defensive stance to the offensive and this in the end interprets to declining liquidity ratios,” Hjort mentioned.
Funding banks: What to observe
Through the pandemic, main lenders acquired important boosts to their funding banking revenues amid heightened volatility and vastly elevated buying and selling volumes. Nonetheless, funding banking exercise is anticipated to chill within the upcoming reporting spherical.
Stateside, Goldman Sachs has been distinctive in powering previous earnings expectations on the again of robust funding banking contributions because of a sturdy IPO market. Whereas others equivalent to JPMorgan and Citigroup have additionally exceeded expectations, their windfalls have come within the type of lowered provisions for unhealthy loans.
UBS kickstarts second-quarter reporting for European banks on Tuesday, and Barclays Co-Head of European Fairness Analysis Amit Goel mentioned the Swiss lender could profit from threat discount efforts from home rival Credit score Suisse.
“We’re barely forward of the company-compiled consensus, though we nonetheless anticipate a pullback in revenues sequentially,” Goel mentioned in a word Friday.
“We will likely be taking a look at capital, because the buyback has been slower than we anticipated in Q221, and centered on the broader price and income developments.”
Barclays is “underweight” on UBS’ inventory primarily based on its relative valuation and the financial institution’s lower-than-consensus estimates for 2022/23. Goel mentioned his crew additionally sees “adverse jaws” from income “normalization” and rising prices.
Goel mentioned Credit score Suisse will endure from a “double whammy” from the normalization of its mounted revenue, currencies and commodities buying and selling revenues, with pandemic-induced volatility subsiding, together with threat discount efforts following a string of excessive profile governance failures.
The financial institution has to date this 12 months been uncovered to the collapse of provide chain finance agency Greensill Capital and the meltdown of U.S. household hedge fund Archegos Capital, leading to an overhaul of its wealth administration management.
“As such, Q221 earnings are more likely to contract considerably from underlying Q121 ranges and we’re beneath the newest consensus,” Goel mentioned.
“Nonetheless, we predict traders are discounting these points, and the actual basic questions are on how the group will likely be restructured sooner or later; we have a look at potential IB [investment bank] deleveraging eventualities.”