The earnings season started surprisingly strong after 15% of the companies in the S&P 500 reported their actual results for the first quarter. To date, 78% of the enterprises that had posted their reports have a positive EPS surprise and 53% have reported a positive revenue surprise. On average, the companies are reporting earnings that are 5.7% above the estimates, which is also above the 5-year average. In terms of sales, the percentage of companies reporting actual sales above estimates is below the 5-year average. In aggregate, companies are reporting sales that are 0.4% above estimates, which is also below the 5-year average.
For Q1 2019, the blended earnings decline for the S&P 500 companies is -3.9%. If -3.9% is the actual decline for the quarter, it will mark the first year-over-year decline in earnings for the index since Q2 2016 (-3.2%). However, the result will be better initially expected. Moreover, forecasts show earnings should be flat in the second quarter, up less than 2% in the third, and then grow almost 9% in the fourth. The stocks almost back at all-time highs, all based on the Fed pause.
The analysts’ expectation is for a pretty significant decline in margins, which possibly might affect the long-term view of the companies assessment.
Banking earnings reports
The earnings season had a fly start with markets focusing on the financial statements of the largest banking institutions. JPMorgan Chase and Wells Fargo already published their earnings last Friday, but the new week was also pretty busy with reports of Citigroup, Goldman Sachs Group, Bank of America Corporation, Morgan Stanley, BlackRock, and American Express Co.
Citigroup reported on Monday that its first-quarter profit rose by 2% YoY, boosted by the US consumer credit growth and a steady performance in terms of trade compared to its competitors. The bank reported a quarterly profit of 4.7 billion USD or 1.87 USD per share. The creditor’s earnings for the quarter reached 18.6 billion USD, down by 2% from the same period in 2018 when earnings were 18.9 billion USD. Revenue from the securities trading unit in January-March fell by 5% to 4.3 billion USD. Citigroup, as well as other banks, warned that customer activity since the beginning of the year has not yet recovered since the end of 2018.
Bank of America outpaced profit analysts’ forecasts due to lower spending with more than expected and positive growth of 25% in the Retail Banking Division. The second-largest US asset lender said its profit for the first three months of the year rose by 6% to 7.3 billion USD or 0.70 USD per share. For comparison, analysts’ estimates were for a gain of 0.66 USD per share. The revenues remain relatively unchanged from a year earlier to 23 billion USD, matching market expectations. Under the leadership of Chief Executive Officer, Brian Moynihan, the bank has made a record quarterly profit for the second time with systematic cost savings.
Morgan Stanley reported a 2% decrease in the first-quarter profit due to the decline in commerce at the beginning of the year. The bank announced a profit of 2.4 billion USD, or 1.39 USD per share, and revenue of 10.3 billion USD. Both profits and earnings are lower than in the same period last year when the company earned 2.7 billion USD or 1.45 USD per share. Still, the bank surpassed the expectations of analysts, who predicted a profit of 1.99 billion USD, or 1.17 USD per share, and revenue of 9.93 billion USD. Revenue from the company’s investment banking has shrunk by 24%, suffering mainly from declines in its business with risk assessment and risk-taking. In the asset management division, the smallest Morgan Stanley business that the company is trying to expand, revenues have risen 12 percent to 804 million USD. The return on equity was 13.1%, slightly above the medium-term target of 13%.
The net profit of the world’s largest asset manager, BlackRock, declined by 3% in the first quarter to 1.05 billion USD, or 6.61 USD per share. A year earlier, the profits amounted to 1.09 billion USD or 6.68 USD per share. The investors have been more interested in cheaper funds, which reduces fee revenues, the company said. However, analysts surveyed by FactSet expected earnings of 6.04 USD per share. Revenues dropped by 6.6% to 3.35 billion USD, which is around the expected levels, although investors have added more money to their asset management products. The total assets rose to more than 6 trillion USD after the fall in 2018.
Netflix posted better-than-expected earnings but disappointing guidance
Netflix posted disappointing guidance that worried investors at a time when Walt Disney and other players are preparing to boost competition in the video streaming market. Despite the poor forecast, the company reported results that exceeded Wall Street expectations.
The video streaming platform predicts that 5 million new subscribers will be attracted from April to June. This was below the expected 5.48 million USD, as is the consensus forecast of analysts interviewed by FactSet.
Netflix attracted a record number of paying subscribers in the first quarter, bringing total users to 148.86 million.
In a letter to the shareholders, Netflix claims to monitor “a mild short-term retreat effect” or dropping out of service users in response to rising prices.
North American customers have boosted PepsiCo’s results
PepsiCo’s financial results for the first quarter of the year were better than expected by analysts, backed by greater demand for snacks, carbonated water, and low-sugar beverages. Packaged foods and beverages companies are under pressure because of changes in consumer tastes that seek healthier nutrition, with PepsiCo’s response to the implementation of new recipes and the use of improved ingredients.
The manufacturer reported a 2.15% increase in sales in its North American beverage unit and 5.5% in the Frito-Lay snacks.
Organic sales – a key benchmark for Pepsi’s performance, which excludes the effects of currency movements and acquisitions of the company, rose by 5.2%. This is the largest quarterly growth of more than three years.