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Markets face a fifth consecutive quarter of double-digit earnings growth

As the fourth quarter earnings season wraps up, it marks the fifth consecutive quarter of double-digit earnings growth for Standard & Poor's companies.

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As the fourth quarter earnings season wraps up, it marks the fifth consecutive quarter of double-digit earnings growth for Standard & Poor’s (S&P 500) companies. When finally tallied, 2018 earnings are expected to grow over 20%. The after-tax profits for the S&P 500 in 2018 were boosted by the corporate tax cut.

With the S&P 500 up 11% for the year, some investors are wondering how much steam the market has left.

Companies are cautious, and there is a chorus of equity analysts suggesting that earnings growth could easily tip into recession this year.

The analysts of FactSet expect first-quarter earnings to be down 2.5% from levels a year ago. They also expect a sluggish second quarter, but see an improving second half, resulting in a 4.5% earnings increase for the full year. This is not disastrous, but it is still fairly tame.

However, figures for Q4 2018 are below the historical average. According to FactSet, 69% of companies, which already reported their financial statements for Q4, beat EPS estimates. This is below the one-year (77%) and five-year average (71%). Moreover, the EPS reports are 3.5% above expectations, on average, which is below the one-year (6.0%) and the five-year average (4.8%).

There were several important earnings reports during the week, with Home Depot and Lowe posting weaker-than-expected fourth-quarter earnings.

HP sales revenue is growing, but below expectations

The sales revenues of HP Inc did not meet Wall Street’s expectations for the last quarter. The results were affected by the weaker than the estimated sales of printer components for commercial users. Part of the problem, according to company representatives, is overestimating demand after the company relies on “delayed or incomplete market share studies”.

In addition, more customers have bought products online – a change that Chief Executive Officer, Dion Weisler, says will require the printer and PC giant to expand and enhance its digital presence. The printer segment has brought most of HP’s profit.

Revenue from the printer segment dropped to 5.06 billion USD from 5.08 billion USD a year earlier.

Meanwhile, those of the PC unit grew by 2.3% YoY to 9.66 billion USD, also below analysts’ expectations. The total number of devices sold dropped by 3% year-on-year after laptop sales shrank by 1% and desktop PCs by 8%, according to HP.

HP reported 803 million USD profit, or 0.51 USD per share, which was below 0.59 USD a year earlier when the results were encouraged by the US tax changes. Excluding restructuring costs and other items, the profit managed to meet analysts’ expectations of 0.52 USD per share compared to 0.48 USD per share a year earlier.

The revenues rose by 1.3% year-over-year to 14.71 billion USD.

For the current quarter, HP expects a profit of 45 to 48 cents per share or 50-53 cents per share on a revised basis. Analysts expect 51 cents per share or 53 cents per share on a corrected basis.

Decreasing home sales in the United States have worsened Home Depot’s financial results

Home Depot predicts lower earnings in 2019, as rising US housing prices are rejecting many Americans from buying a new home.

The sales of homes in the US have reached their lowest level last month since more than three years. This means that the housing market is still losing momentum, which leads to shrinking stocks and more expensive homes.

For 2019, Home Depot expects earnings per share to reach 10.03 USD, which is 23 cents below analysts’ forecasts.

Sales at company sites, which have been open for at least 52 weeks, rose by 3.7% in the fourth quarter to February 3rd and also did not respond to analysts’ forecast for growth of 4.5%.

Home Depot’s net profit for the fourth quarter of 2018 rose to 2.34 billion USD from 1.78 billion USD a year earlier, while the net sales revenue increased 11% to 26.49 billion USD, but they barely meet expectations of 26.57 billion USD.

The company also announced a share buyback of 15 billion USD, as well as a 32% increase in its quarterly dividend to 1.36 USD per share.