Bull and bear sculptures in front of the Deutsche Börse in Frankfurt am Main.
Kai Pfaffenbac | Reuters
Europe’s corporate earnings season started in earnest last week, with analysts’ consensus forecasting earnings per share up 140% year over year for the second quarter.
Earnings per share is a key metric used by traders to measure the value of a stock or broader index, and it rose 87% across the pan-European Stoxx 600 index in the first quarter.
Over the past six months, sell-side analysts have raised their EPS growth forecasts for the second quarter by more than 50 basis points, according to factset data aggregated by Bank of America’s European equity quant strategy team.
Meanwhile, consensus expectations for EPS growth overall for 2021 have risen from 35% in March to a new high of 48%.
With the second quarter being its peak, analysts expect earnings per share to decline for the remainder of 2021, with year-over-year growth of 32% in the third quarter and 21% in the fourth quarter.
Given the sharp decline in the second quarter of 2020 in the wake of the Covid-19 pandemic, European blue chip index second quarter earnings are expected to remain 2% below their pre-pandemic high this year.
“Our macro projections imply a further upside potential of 9% for the 12-month EPS by the end of 2021 and 11% by mid-2022,” said analysts at Bank of America in a statement on Friday.
“This would bring the overall increase from last year’s low to 50%, which is broadly in line with the EPS rebound after the global financial crisis.”
In terms of sectors, analyst consensus shows Cars, Retail and Commodities to be the strongest in earnings growth in the second quarter. Consumer staples, energy and financials together add 29 percentage points to the 48% earnings growth forecast for the Stoxx 600 this year, BofA analysts said.
“The 12-month EPS for commodities has been revised up nearly 60% over the past six months, the strongest earnings momentum on record, with Energy’s EPS earnings momentum near a 25-year high at 45% “, they said .
“Despite the strong profit increases, the price ratios of the commodity sectors have faded, with the energy sector lagging behind the market by 15% since March and mining by 12% since May.”
The latter trend has driven the price / earnings ratio of the energy sector to an all-time low, emphasized the BofA, while mining is at its lowest level since 2008.
Provision of cash reserves
Based on a systematic analysis of corporate post-earnings communications in the last quarter, BNP Paribas expects further announcements of investments, share buybacks and mergers and acquisitions in the second quarter.
Buybacks occur when companies buy their own stocks that are traded on the stock exchange, reducing the proportion of stocks in the hands of investors. They provide a way to return cash to shareholders – along with dividends – and usually coincide with a surge in a company’s stock as stocks become scarcer.
Earlier in the reporting season, Viktor Hjort, global head of the credit strategy and analyst team at BNP Paribas, said that companies appear to serve both bond and stockholders.
Leverage continues to decline and liquidity metrics – the ability of a company to pay off ongoing debts without raising additional capital – remain near record levels, Hjort pointed out in a Friday release.
Meanwhile, management teams across the board signaled increased risk appetite in their first quarter earnings releases in the form of capital expenditures, share buybacks and M&A plans.
“The last quarter was the second quarter in a row with declining cash reserves. Companies have shifted capital out of the defensive stance of the pandemic to the offensive, and this is ultimately leading to falling liquidity ratios, “Hjort said.
Investment banks: what to watch out for
During the pandemic, major lenders increased their investment banking revenues significantly in the face of increased volatility and soaring trading volume. However, investment banking activity is expected to cool down in the coming reporting period.
In the US, Goldman Sachs was unique in propping up past earnings expectations with strong investment banking contributions from a robust IPO market. While others like JPMorgan and Citigroup also exceeded expectations, their godsend came in the form of reduced provisions for bad loans.
UBS began reporting for European banks for the second quarter on Tuesday, beating expectations of net income attributable to shareholders of $ 2 billion, 63% more than the same period last year.
Barclays co-head of European Equity Research Amit Goel said ahead of the earnings report that the Swiss lender could benefit from domestic competitor Credit Suisse’s efforts to mitigate risk.
Goel said Credit Suisse will suffer a “double blow” as it normalizes its trading income in fixed income, currencies and commodities, with pandemic volatility easing and efforts to mitigate risk after a series of high-profile governance failures.
So far this year, the bank has faced the collapse of supply chain finance firm Greensill Capital and the collapse of U.S. family hedge fund Archegos Capital, which has led to an overhaul of its leadership position in wealth management.
“As such, Q221 earnings are likely to shrink significantly from underlying Q121 levels and we are below recent consensus,” said Goel.
“Still, we think investors are devaluing these issues and the real fundamental questions are how the group is going to be reorganized going forward; we are looking into potential IB [investment bank] Deleveraging scenarios. “
The retail division is also in focus for Deutsche Bank, and Goel expects the German lender to have “significantly better” retail sales than its competitors compared to the previous year.
“It will be important to see how the market share develops and whether the (year-round) guidance can be maintained,” he said.
“We will also look at the development of costs, where we see the risk of a deviation from the group targets.”