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How the Coronavirus Has Impacted Earnings

Sheraz Mian

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • There is a big question mark over consensus earnings estimates for the current and coming quarters that primarily reflects the difficulty of quantifying the full impact of this pandemic. That said, while estimates for 2020 Q1 and Q2 have come down sharply over the last few weeks, with Q1 now in negative territory and Q2 barely positive, analysts have largely left estimates for the second half of the year intact, at least for now.

 

  • Total Q1 earnings or aggregate net income for the S&P 500 index are currently expected to be down -1.4% from the same period last year. This is down from close to +4% growth expected in early January. This magnitude of decline to 2020 Q1 estimates is only modestly bigger than what we witnessed in the comparable periods over the last few quarters.

 

  • A big contributing factor to this seemingly ‘average’ decline in earnings estimates is the uncertainty of the pandemic’s full impact that has prompted many companies to simply withdraw their previously issued guidance, instead of lowering it.

 

  • We suspect an unusually high proportion of companies coming out with negative pre-announcements following March 31st once they officially close their books on the calendar period. 

 

  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be up +5.3%, with all of the growth coming in the back half of the year. This is down from +7.6% on February 19th and close to +8% at the start of the year.

 

  • Please note that the 2019 Q4 earnings season has yet to officially end, as 7 S&P 500 members have still to report their results. For the 493 index that have reported already, total Q4 earnings were up +1.5% from the same period last year on +4.2% higher revenues, with 71.6% beating EPS estimates and 64.5% beating revenue estimates.

 

  • As we have pointed out all along for the Q4 earnings season, while the proportion of companies beating EPS estimates tracked below what we had seen from this same group of 493 index members, the revenue beats percentage was notably above historical periods.

 

  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 17.2X and index close, as of March 11h, is $159.21, modestly down from $161.54 in 2018. Using the same methodology, the index ‘EPS’ works out to $167.68 for 2020 (P/E of 16.3X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

 

We are almost four weeks away from the big banks really kicking off the 2020 Q1 reporting cycle, but a number of bellwether companies with fiscal quarters in February that get counted as part of the 2020 Q1 tally will start reporting in the next few days. Many of these early reporters like Adobe (ADBE), Oracle (ORCL), FedEx (FDX) and others will likely give us an early read on how the Q1 earnings season will unfold.

Estimates for 2020 Q1 have come down, as the chart below clearly shows.

 

 

 

 

As negative as this revisions trend looks, it is actually only modestly bigger than what we witnessed in the comparable periods over the preceding four quarters. In other words, the magnitude of negative revisions to Q1 estimates is hardly unusual when seen in a historical context, even if we go beyond the last few quarters.

Such a relatively ‘average’ decline in Q1 estimates runs counter to the actual and perceived disruptions to normal business activities by the global pandemic.

The explanation for this seeming disconnect is that many companies simply withdrew their earlier issued guidance as it was practically impossible for them to quantify the full extent of the pandemic’s impact. Guidance is important, as it serves as a reference point for sell-side analysts in coming up with their EPS estimates. This suggests that we will likely see an unusually busy pre-announcement season as companies close their books on the quarter on March 31st.

Estimates for 2020 Q2 have been coming down lately as well, but the same for the last two quarters of the year haven’t moved that much, as the chart below shows.

 

 

 

 

Earnings growth was expected to resume this year and accelerate next year. But that growth trajectory is now in doubt as a result of the global pandemic, as the revisions trend below shows.

 

 

 

 

The chart below puts earnings and revenue growth expectations for full-year 2020 in the context of where growth has been in recent years and what is expected next year.

 

 

 

 

The ongoing market sell-off shows there isn’t a lot of confidence in these consensus expectations. That will likely change only once visibility on containment of the pandemic improves, which will enable companies to get a handle on the full extent of their exposure and the pandemic’s macroeconomic impact.

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Oracle Corporation (ORCL) : Free Stock Analysis Report
 
FedEx Corporation (FDX) : Free Stock Analysis Report
 
Adobe Systems Incorporated (ADBE) : Free Stock Analysis Report
 
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