US earnings: Beating the street.
Profit reporting season for the first quarter in the US is off to a flying start.
Over 25% of the S&P 500 has reported earnings to date.
Broadly, companies have reported earnings that have been higher than expected, beating expectations for both revenue and net profit margins.
These results, and the commentary that has surrounded them, provide some valuable insight into the recovery and impact on prices.
Beating the street
The growth rate for S&P500 earnings in the March quarter is expected to land at 33.8% (Source: FactSet).
Of course, this dramatic headline number is partly reflective of companies cycling depressed earnings during COVID-19.
However, as at last week, 84% of companies had produced earnings which were ahead of estimates.
In aggregate, companies have reported earnings that are 23.6% above estimates, with positive earnings surprises led by Financials, Health Care, Information Technology and Communication Services.
Net profit margins are also set to reach the highest levels seen in years at 11.6%.
A significant portion of this is attributed to the Financials sector – which was bolstered by stronger than expected trading and investment banking results.
Looking at profit margins relative to their five-year averages, margins continue to be depressed in some sectors. This may be due to rising input costs and the impact they are having (Industrials and Consumer Discretionary stocks) but are providing benefits to other such Materials.
Overall, the results help the US market grow into its current valuation: growing the E in the P/E ratio of the market, which remains elevated relative to historical averages.
Inflation: the word of the season
The increasing availability of alternative data has provided investors with some unique and often real time insights into companies and markets.
Advances in natural language processing has allowed the mining of earnings calls to provide data relating to sentiment, areas of focus and other insights. Here's an interesting example of Netflix using such data to expand in India.
An analysis by Bank of America (BofA) has shown a “robust rebound” in mentions of inflation during earnings calls this year – which have more than tripled year-over-year (albeit off a low base). In fact, 47 companies had mentioned inflation in their earnings calls.
Strategists highlighted that raw materials, transport and labour were cited as major drivers of inflation during calls, with companies looking to raise prices to offset higher costs.
For example, Mondelez International (maker of biscuits, chocolates and all things delicious) has seen agricultural prices rise (wheat, cocoa) as well as inflation in transportation and packaging.
We also saw this domestically this week, with cost inflation from rising zinc and copper pricing being an area of focus in Reliance Worldwide’s trading update. The company will be looking to raise its prices between 8%-15% across product lines to offset these costs.
Overall, this provides evidence that cost pressures are becoming a pressing issue for companies. The extent to which these rising input costs are passed will factor into overall levels of inflation.
Mentions of “inflation” have tripled so far this year
Source: BoFA, Bloomberg
Supply disruptions continue
A dearth of semi-conductors continues to wreak havoc. Ford announced on Thursday that one of is large manufacturing plants in Chicago will remain idle until at least mid-next month due to shortages.
The company now expects to lose about 50% of its second quarter production and take a AU$3.2 billion hit to earnings.
The impact this is already having could be seen in this week’s CPI figures in Australia, with the price of motor vehicles rising 5.7% over the last year. Rising vehicle prices were also a key contributor to the rise in headline CPI for the quarter.
This sentiment was also echoed by Apple. The company posted stellar results, with sales growing by 54% year-on-year and double digits across categories. However, it too flagged that semi-conductor shortages will knock billions off its revenue line in the coming quarters.
Overall, earnings season in the US is off to a flying start, which will help quell some fears that the market has run ahead of itself.
With it has come some interesting commentary with respect to rising input costs and supply shortages, which we will be watching closely in gauging the outlook for inflation and bond rates.