Things to watch out for when the European earnings season begins

London — The European corporate earnings season began in earnest last week, and analyst consensus predicts second-quarter earnings per share to increase 140% year-over-year.

Earnings per share is an important indicator used by traders to measure the value of stocks or broader indices, with an annual increase of 87% across the STOXX 600 Index across Europe in the first quarter.

Over the past six months, sell-side analysts have raised their second-quarter EPS growth forecast by more than 50 basis points, according to FactSet data compiled by Bank of America’s European Equity Quants Strategy Team.

Meanwhile, the overall consensus EPS growth forecast for 2021 rose from 35% in March to a new high of 48%.

Analysts expect EPS to peak in the second quarter and decline for the rest of 2021, with growth of 32% year-on-year in the third quarter and 21% in the fourth quarter.

Due to the Covid-19 pandemic, there was a sharp decline in the second quarter of 2020, so overall second-quarter earnings for this year’s European Equity Index remained 2% below its pre-pandemic peak. Become.

Bank of America analysts said in a Friday note, “Our macro forecast shows that 12-month futures EPS will rise another 9% by the end of 2021 and could rise 11% by mid-2022. It suggests. ”

“This brings an overall increase of 50% from last year’s valley, almost in line with the recovery of EPS after the global financial crisis.”

On the sector, analyst consensus shows that automotive, retail, and resources showed the strongest revenue growth in the second quarter. Consumer discretion, energy and finance have jointly contributed 29 percent to the 48 percent revenue growth of the STOXX 600 this year, according to BofA analysts.

“The 12-month futures EPS for resources has been revised upwards by almost 60% in the last 6 months. This is the highest earnings momentum ever and the relative EPS momentum for energy is the highest in 25 years. It’s close to 45%, “they said. ..

“Despite strong earnings improvements, relative prices in the resource sector have declined, energy has fallen below the market by 15% since March, and mining has fallen by 12% since May.”

The latter trend has led to the lowest price-earnings ratio in the energy sector in history, emphasized by BofA, but the mining industry is the lowest since 2008.

Deployment of cash reserves

Based on a systematic analysis of corporate post-earning communications in the previous quarter, BNP Paribas expects to bring more capital investment announcements, share buybacks and M & As in the second quarter. Buybacks occur when a company buys its own shares on the stock exchange, reducing the proportion of shares in the hands of investors. They provide a way to return cash to shareholders, along with dividends, which is usually consistent with a company’s stock being pushed up as it runs out of stock.

Viktor Hjort, Global Head of Credit Strategy and Analyst Team at BNP Paribas, said companies appear to be taking care of both bondholders and stockholders as the reporting season begins.

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Leverage continues to decline and the liquidity ratio (the ability of a company to repay its current debt without raising additional capital) remains close to record levels, Hjort said in a Friday note. did.

Meanwhile, full-scale management has shown more risk-taking in earnings communications in the first quarter in the form of fixed investments, share buybacks and M & A plans.

“Last quarter, cash reserves fell for the second straight quarter. Companies shifted their capital expansion gear from a pandemic defensive stance to an offensive stance, which ultimately led to a decline in the liquidity ratio. “Mr. Hyort said.

Investment Banking: Notable Points

During the pandemic, major lenders have significantly boosted investment bank profits amid rising volatility and significant increases in trading volume. However, investment banking is expected to cool in the next report round.

Stateside Goldman Sachs has focused on historical earnings forecasts against the backdrop of strong investment banking contributions from the strong IPO market. Other companies, such as JP Morgan and Citigroup, have also exceeded expectations, but the plunge is manifested in a reduction in non-performing loan reserves.

UBS launched its second-quarter report on European banks on Tuesday, and Barclays Co-Head of European Equity Research Amit Goel said Swiss lenders benefit from risk-reduction efforts by domestic rival Credit Suisse. Said that there is a possibility of getting.

“We’re slightly above the consensus that the company has put together, but we still expect revenue to decline gradually,” Goel said in a note on Friday.

“We will consider capital because repurchases are slower than expected in the 221 quarter and focus on a broader cost and revenue trend.”

Barclays has “underweighted” UBS shares based on relative valuations and estimates lower than the bank’s consensus in 2022/23. Goel said his team also sees “negative Joe” because of “normalization” of revenue and increased costs.

Credit Suisse has “double pain” from normalizing fixed income, currency and commodity trading returns as the volatility caused by the pandemic subsides, in addition to risk mitigation efforts following a series of high-profile governance failures. “It will suffer, Mr Goel said.

Banks have been exposed to the collapse of supply chain finance company Greensill Capital and the collapse of US family hedge fund Arquegos Capital so far this year, resulting in a review of wealth management leadership.

“Therefore, Q221’s revenue is likely to shrink significantly from the underlying level of Q121, which is below the latest consensus,” Goel said.

“Still, I think investors are downplaying these issues. The real fundamental question is how the group will be restructured in the future. We consider potential IBs. To do. [investment bank] Leverage elimination scenario. ”

Things to watch out for when the European earnings season begins

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