Bull and bear sculptures in entrance of the German inventory trade in Frankfurt, Germany.
Kai Pfaffenbac | Reuters
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 progress projections by greater than 50 foundation factors, in accordance with Factset knowledge aggregated by Financial institution of America’s European fairness quant technique workforce.
In the meantime, consensus EPS progress expectations for 2021 as an entire 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 progress 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 yr are nonetheless set to stay 2% under 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 be aware Friday.
“This could carry the entire improve from final yr’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 exhibiting the strongest earnings progress within the second quarter. Shopper discretionary, vitality and financials are collectively seen contributing 29 share factors to the 48% earnings progress projected for the Stoxx 600 this yr, BofA analysts mentioned.
“The 12-month ahead EPS for sources has been revised up by nearly 60% over the previous six months, the strongest earnings momentum on report, with vitality’s relative EPS momentum near a 25-year excessive, at 45%,” they mentioned.
“Regardless of the sturdy earnings upgrades, the useful resource sectors’ worth kin have light, with vitality underperforming the market by 15% since March and mining by 12% since Might.”
The latter pattern 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 firms’ post-earnings communications final quarter, BNP Paribas expects the second quarter to carry extra capital expenditure bulletins, share buybacks and M&A.
Buybacks occur when companies purchase their very own shares buying and selling on the inventory trade, lowering the portion of shares within the arms of traders. They provide a option to return money to shareholders — together with dividends — and often coincide with an organization’s inventory pushing larger as shares get scarcer.
Coming into reporting season, Viktor Hjort, international head of BNP Paribas’ credit score technique and analyst workforce, mentioned corporates seem like taking care of each bond and fairness holders.
Leverage continues to say no and liquidity ratios — an organization’s skill to repay present debt obligations with out elevating additional capital — stay close to report ranges, Hjort identified in a be aware 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 look at
In the course of the pandemic, main lenders acquired vital boosts to their funding banking revenues amid heightened volatility and vastly elevated buying and selling volumes. Nevertheless, 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 sturdy funding banking contributions as a result of a sturdy IPO market. Whereas others reminiscent of JPMorgan and Citigroup have additionally exceeded expectations, their windfalls have come within the type of decreased provisions for dangerous loans.
UBS kickstarted second-quarter reporting for European banks on Tuesday, beating expectations to report a web revenue attributable to shareholder of $2 billion, up 63% from the identical interval final yr.
Barclays Co-Head of European Fairness Analysis Amit Goel mentioned previous to the earnings report that the Swiss lender might profit from threat discount efforts from home rival Credit score Suisse.
Goel mentioned Credit score Suisse will undergo from a “double whammy” from the normalization of its mounted earnings, 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 thus far this yr 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 prone to contract considerably from underlying Q121 ranges and we’re under the most recent consensus,” Goel mentioned.
“However, we expect traders are discounting these points, and the actual elementary questions are on how the group shall be restructured sooner or later; we take a look at potential IB [investment bank] deleveraging eventualities.”
The buying and selling division can be in focus for Deutsche Financial institution, and Goel expects the German lender to indicate “materially higher” year-on-year buying and selling income traits than its friends.
“It will likely be vital to see how market share evolves and if the (full-year) steering could be maintained,” he mentioned.
“We may even be price traits, the place we see a threat of slippage versus the group targets.”