Europe’s corporate earnings season began in earnest last week, with analyst consensus projecting a 140% year-on-year increase in earnings per share for the second quarter.
Earnings per share is an important metric used by traders to gauge the value of a stock or a wider index, and it grew by an annual 87% across the pan-European Stoxx 600 index in the first quarter.
Over the past six months, sell-side analysts have raised their second-quarter EPS growth projections by more than 50 basis points, according to Factset data aggregated by Bank of America’s European equity quant strategy team.
Meanwhile, consensus EPS growth expectations for 2021 as a whole have risen from 35% in March to a new high of 48%.
With the second quarter representing the peak, analysts expect EPS to tail off for the remainder of 2021, with 32% year-on-year growth in the third quarter and 21% in the fourth.
Given the sharp decline in the second quarter of 2020 as the Covid-19 pandemic took hold, second-quarter earnings across the European blue chip index this year are still set to remain 2% below their pre-pandemic peak.
“Our macro projections imply 9% potential further upside for the 12-month forward EPS by end-2021 and 11% by mid-2022,” Bank of America analysts said in a note Friday.
“This would bring the total increase from last year’s trough to 50%, broadly in line with the EPS rebound after the global financial crisis.”
In terms of sectors, analyst consensus has autos, retail and resources showing the strongest earnings growth in the second quarter. Consumer discretionary, energy and financials are jointly seen contributing 29 percentage points to the 48% earnings growth projected for the Stoxx 600 this year, BofA analysts said.
“The 12-month forward EPS for resources has been revised up by almost 60% over the past six months, the strongest earnings momentum on record, with energy’s relative EPS momentum close to a 25-year high, at 45%,” they said.
“Despite the strong earnings upgrades, the resource sectors’ price relatives have faded, with energy underperforming the market by 15% since March and mining by 12% since May.”
The latter trend has driven the energy sector’s price-to-earnings ratio to an all-time low, BofA highlighted, while mining is at its lowest since 2008.
Deployment of cash reserves
Based on a systematic analysis of companies’ post-earnings communications last quarter, BNP Paribas expects the second quarter to bring more capital expenditure announcements, share buybacks and M&A. Buybacks happen when firms buy their own shares trading on the stock exchange, reducing the portion of shares in the hands of investors. They offer a way to return cash to shareholders — along with dividends — and usually coincide with a company’s stock pushing higher as shares get scarcer.
Coming into reporting season, Viktor Hjort, global head of BNP Paribas’ credit strategy and analyst team, said corporates appear to be looking after both bond and equity holders.
Leverage continues to decline and liquidity ratios — a company’s ability to pay off current debt obligations without raising further capital — remain near record levels, Hjort pointed out in a note Friday.
Meanwhile, management teams across the board signaled more risk-taking in their first-quarter earnings communications, in the form of capex spending, share buybacks and M&A plans.
“Last quarter marked the second consecutive quarter of declining cash reserves. Corporates have shifted gears on capital deployment from the pandemic’s defensive stance to the offensive and this ultimately translates to declining liquidity ratios,” Hjort said.
Investment banks: What to watch
During the pandemic, major lenders received significant boosts to their investment banking revenues amid heightened volatility and vastly increased trading volumes. However, investment banking activity is expected to cool in the upcoming reporting round.
Stateside, Goldman Sachs has been unique in powering past earnings expectations on the back of strong investment banking contributions due to a robust IPO market. While others such as JPMorgan and Citigroup have also exceeded expectations, their windfalls have come in the form of reduced provisions for bad loans.
UBS kickstarts second-quarter reporting for European banks on Tuesday, and Barclays Co-Head of European Equity Research Amit Goel said the Swiss lender may benefit from risk reduction efforts from domestic rival Credit Suisse.
“We are slightly ahead of the company-compiled consensus, although we still expect a pullback in revenues sequentially,” Goel said in a note Friday.
“We will be looking at capital, as the buyback has been slower than we expected in Q221, and focused on the broader cost and revenue trends.”
Barclays is “underweight” on UBS’ stock based on its relative valuation and the bank’s lower-than-consensus estimates for 2022/23. Goel said his team also sees “negative jaws” from revenue “normalization” and growing costs.
Goel said Credit Suisse will suffer from a “double whammy” from the normalization of its fixed income, currencies and commodities trading revenues, with pandemic-induced volatility subsiding, along with risk reduction efforts following a string of high profile governance failures.
The bank has so far this year been exposed to the collapse of supply chain finance firm Greensill Capital and the meltdown of U.S. family hedge fund Archegos Capital, resulting in an overhaul of its wealth management leadership.
“As such, Q221 earnings are likely to contract significantly from underlying Q121 levels and we are below the latest consensus,” Goel said.
“Nevertheless, we think investors are discounting these issues, and the real fundamental questions are on how the group will be restructured in the future; we look at potential IB [investment bank] deleveraging scenarios.”
By Elliot Smith
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