US earnings season has started here s what to look out for

Have US dollar gains eaten into US earnings?

The US market may to be preoccupied with the significant falls of last week, but investors there are also well aware that a convoy of third-quarter earnings is backing up in their rear view mirror.

In fact, the risk that US corporate earnings may have already peaked is one of a host of worries troubling global investors of late.

That and a probable slowdown in Europe’s ‘growth engine’, Germany; Ebola, ISIL, and not forgetting the US dollar, after a record 12-consecutive week advance.

The Dollar Index (or ‘DXY’ to use market slang) gained roughly 8% between the end of June and early October, posing a triple-risk for American company profits.

That brings us back to the earnings season that just got under way.

A soaring greenback could:

• drive up the costs of doing business overseas
• suppress the value of sales in other currencies
• imply weak international demand

So for though, for the big-name companies that have already reported third-quarter earnings, the strong dollar does not appear to have been a top concern.

YUM! Brands Inc.

The KFC and Pizza Hut owner, with an increasing focus on China, served up results last Tuesday (7th October) which showed more ill effects from a food scare over alleged tainted meat in China, than dollar translation effects. Its 3Q EPS, excluding one-off factors, came in at 87 cents a share, fractionally under Wall Street estimates of between 88c-89c a share.

Alcoa Inc.

The firm, whose primary business is to make aluminium, benefited, as expected, from a rebound in prices of the metal over the last several months. Lower costs and improved productivity also helped, enabling the third-largest producer of aluminium in the world to post last Wednesday a profit of $149 million, or 12 cents a share, up from $24 million, or two cents a share, a year earlier.

Excluding restructuring and acquisition-related charges and other items, earnings rose to 31 cents from 11 cents. Analysts were expecting EPS of 23 cents and revenue of $5.85 billion.

PepsiCo Inc.

The food and beverage behemoth (market cap: $141bn) reported last Thursday net income of $2 billion, or $1.32 a share, up from $1.9bn, or $1.23 a share, a year earlier. Earnings per share, excluding charges related to acquisitions and other items, were $1.36. Analysts were expecting $1.29 a share.

Revenue, excluding the impact of currency translation and changes to PepsiCo’s business, grew 3.1%. Overall revenue, which includes currency impacts, was $17.2bn, up 2% from a year earlier.

The company, which makes Frito-Lay snacks and beverage brands like Mountain Dew and Tropicana, said its quarterly performance underscored how its beverage and snacks businesses worked well together, even as it noted challenges remained, with consumer demand in developed markets “sluggish” and both emerging and developing markets showing economic and political volatility.

Despite that caution, PepsiCo still raised its full-year earnings forecasts.

Wall Street slashes forecasts

So far then, for big-name US corporate earners, even those with sizeable exposure to potential translational effects from the US dollar’s breath-taking advance, the risk has been offset by strong productivity gains, commodity price bounces (Alcoa), subsumed by PR disasters (Yum!), or eclipsed by successful refinements in product mixes (PepsiCo).

But with a gain by the US dollar of about 4% in September alone, we think the dollar’s rise in the quarter will have been too rapid for most companies to have hedged-out and therefore expect some US firms to start attributing earnings forecast misses to the greenback fairly soon. In the current risk-off equity market environment, such EPS misses are likely to stoke volatility and feed market bears further.

The chart below, using Thomson Reuters’ I/B/E/S (Institutional Brokers’ Estimate System) shows the deceleration in forecasts made for S&P 500 third-quarter company earnings towards the end of the third quarter, compared to those made earlier in the quarter.

The table shows forecasters turned more pessimistic during the quarter.

Higher forecasts were made at the beginning of the quarter (green), compared to forecast earnings for the same companies a few days ago (orange).

Financial sector forecasts cut in half

Looking at the sectoral breakdowns, we can see the biggest forecast earnings rises are expected in Materials, with Financials, Industrials and Healthcare companies also expected to post reasonable earnings.

But the chart also lays bare the extent of the downgrade of expectations later in the quarter relative to the beginning, with Financials bearing the brunt of the increased pessimism.

A relatively moderate downgrade in Consumer Discretionary (populated largely by ‘luxury’ goods makers) is enough to turn expected earnings into expected losses.

From a very basic perspective these expectations are in line with the likelihood of rebounds in industrial segments that have experienced cyclical declines.

For materials we know prices for certain raw materials have bottomed and begun to increase following years of falls. Aluminium is a good example.

However, the trajectory of resource comebacks hasn’t been steady. In keeping with the recent dollar rally, prices of several metal resources, transactions of which are largely denominated in dollars, have wilted for several weeks.

Consensus forecasts for the complete fiscal year compiled by Bloomberg can be interpreted as reassuring in some ways.

Companies are broadly expected to maintain their performances from the current quarter on an annualised basis.

Forecast FY adj. S&P 500 EPS growth (Source: Bloomberg)

US Earnings–The Big Ones

During the next few weeks, City Index market analysts will be scrutinising third-quarter earnings from the largest, highest-profile US corporations, monitoring the impact of the strong dollar and other economic factors on their performance and reading across any significant indications from US earnings to the bigger global corporate and economic picture.

The US companies that we think will be the most important focus points in the earnings season are listed below, together with consensus forecasts of their earnings.

All times are in GMT.

For entries without timings, no scheduled release time was provided.

Estimates are the mean of forecasts compiled by I/B/E/S in dollars and cents.

Abbreviations

AMC – ‘After US Market Close’

BMO – ‘Before US Market Open’