While it is very early in the European results season, with just 82 companies tracked to date, below are four initial conclusions from results so far:
1) Earnings season has started in reasonable shape, very similar to 1Q.
It is far too early to draw definitive conclusions about the shape of European 2Q results, but what we have seen from one week of results has been more comforting than the recent deterioration in earnings momentum may have initially suggested. We have tracked 82 companies, or 5% of market cap. 35% of companies have beaten earnings estimates, while 29% have missed, giving a net beat of 6% of companies. On these figures, 2Q results are tracking at very similar levels to last quarter (which saw a 6% net beat). Although earnings have come in 18% below expectations on a weighted basis (given a large miss from Investor AB), given the very small sample size at present this figure is largely irrelevant. In contrast, the median stock has beaten estimates by 0.9%, which is far less susceptible to distortion from the low sample size. Weighted earnings are on track to grow 4%, with the median stock growing at 11%.
2) Revenue beats have slowed from recent quarters.
While earnings beats have largely matched 1Q, there has been a slowdown in top-line beats. The last three reporting seasons have seen, on average, 19% more companies beating revenue estimates than missing. 2Q sales results to date have on balance come in ahead of expectations, with 42% beating while 34% missed sales estimates. While still positive, the 8% net beat would mark a significant slowdown against recent quarters. We suspect this slowdown in revenue beats has been largely driven by the stabilisation in the euro given that revenue results tend to be more volatile than earnings around FX moves (due to the offsetting impact of offshore costs). After three successive quarters of euro declines (8% in 3Q14, 4% in 4Q14 and 11% in 1Q15), the stabilisation in the euro in 2Q (up 3%) has seemingly already started to be reflected in sales results.
3) Earnings estimates have been downgraded sharply ahead of results, but results and guidance provide more cause for optimism. As we discussed in European Equity Strategy: 2Q Earnings Preview - Downgrade Risks May Be Rising (13 Jul 2015), Europe saw a renewed period of consensus earnings downgrades in the run-up to earnings season, after a two-month period of net upgrades. Currently Energy and Utilities are the only two sectors seeing net upgrades, and when compared to the equivalent week during the quarter, the earnings revisions ratio
is now currently tracking at the worst pace in a year (see page 5). This has occurred despite 1Q earnings coming in ahead of expectations and guidance revisions having been largely positive during the last results season. The combination of the positive breadth of earnings results and a number of guidance upgrades (see page 6), on balance, do make us more hopeful of seeing earnings momentum improve from the current lackluster trajectory.
4) Stock reaction to results has been largely positive.
On page 9, we illustrate some initial data looking at how stocks have performed around results. Clearly we need to be cognisant of the fact that we are still very early on in results season, but in general there has been a positive skew in how stocks have reacted to results. Across every metric we track, stocks beating estimates have outperformed on the day of results by more than those that missed underperformed. The most extreme
example is for net income, where stocks missing on net income have actually, on average, outperformed the market on the day of results.