High Bar for European Profit Rebound Leaves No Room for Setbacks
Europe is kicking off the year’s first earnings season with expectations running high after a strong equity rally, setting the stage for disappointment if companies signal further pandemic pain.
With luxury brandBurberry Group Plc, chip equipment makerASML Holding NV and minerRio Tinto Group among some 30 companies in the Stoxx Europe 600 Index posting earnings or sales updates in the next week, investors are seeking reassurance about a recovery beyond the lockdowns currently weighing on sentiment. Analysts predict a strong profit rebound this year, following last year’s sharp slump triggered by the impact of Covid-19.
While equities have surged about 20% since the end of October on optimism about vaccine rollouts and further stimulus measures, profit forecasts have been slow to catch up, making European shares near the most expensiveon record. That may leave investors in a less forgiving mood, as seen by Just Eat Takeaway.com NV’s slump after its results.
“We’re positive on the year ahead,” Grace Peters, EMEA head of investment strategy at JPMorgan Private Bank, said. “There’s lots of things that we’re looking for this earnings season,” she added, citing forward-looking earnings guidance and commentary on capital expenditure and dividends.
Earnings are expected to grow 40% this year, following a 36% slump in 2020, according to Bloomberg Intelligence. The hitch, at least in the short term, is the new wave of lockdowns across Europe threatening such a recovery.
Some companies may say there’s still too much uncertainty to give detailed outlooks, according to Philipp Lisibach, head of global equity strategy at Credit Suisse Group AG. “Once we have the reporting of first-quarter numbers, companies will be more comfortable guiding,” Lisibach said.
Here’s some of the sectors to keep an eye on:
Food delivery, e-commerce and home entertainment were among the biggest beneficiaries of lockdowns, but given their high valuations now, any sequential declines in growth rates from here may be taken badly, according to James Rutherford, head of European equities at the international business of Federated Hermes. Just Eat Takeaway shares have tumbled more than 13% since the company’s fourth-quarterupdate on Wednesday, with JPMorgan analysts saying its margin guidance was “clearly disappointing.”
Reports from Dialog Semiconductor Plc and and STMicroelectronics NV already suggest anuptick in demand for chips. Semiconductors is an area that’s likely to benefit from both a cyclical recovery and the longer-term digitalization of the economy, according to JPMorgan Private Bank’s Peters. The shift toward electric vehicles, smart automation, artificial intelligence and big data all depend on the sector, she said.
European construction firms with exposure to the residential sector, particularly in the U.S., are currently benefiting from housing market strength, according to Peters. Shares of France’s Cie. de Saint-Gobain SA jumped earlier this month on better-than-expectedsales numbers.
Prospects look bullish for miners. Earnings estimates for 2021 for basic-resources companies have seen upgrades of 24% over the past three months, driven by rising iron ore and copper prices stemming from a recovery in the Chinese economy and fiscal stimulus programs in Europe and the U.S., Laurent Douillet of Bloomberg Intelligencesaid in a note.
Energy and Utilities
Expectations for energy firms are still “very negative” despite a rebound in oil prices, Joost van Leenders, senior investment strategist at Kempen Capital Management, said. That’s partly due to the shift toward clean energy gaining even more momentum. UBS Group AG analyst Sam Arie expects banks to scale back finance for fossil projects and scale up support for renewables. Three stocks to play that trend are Enel SpA, RWE AG and Engie SA, Arie said.
However, after a huge rally for renewables in recent months, Bank of America Corp. warns that share prices might be showingsigns of a bubble.
Despite the headwinds of ultra-low interest rates, Giles Rothbarth, manager of the BlackRock European Dynamic Fund, said solid capital ratios and low loan losses leave potential for a resumption of dividends once regulators relax restrictions. Meanwhile, for asset managers, UBS analyst Michael Werner said recent rate cuts should result in lower equity market volatility, boosting inflows. European equities attracted $2.2 billion of inflows in the week through Jan. 13, the most since June, Bank of America strategists said in a note citing EPFR Global data.
Travel and Leisure
Vaccines are unlikely to have a meaningful impact on the sector’s earnings until at least the second quarter. For now, the focus will remain on balance sheets and cash flows, Rutherford of Federated Hermes said. Hospitality is likely to see a more immediate boost than travel when the latest lockdowns are lifted, according to Credit Suisse’s Lisibach, who said high savings rates suggest pent up demand for eating and drinking outside of the home.
Mid-term earnings estimates already account for a healthy recovery for luxury goods, so the potential for upgrades appears relatively limited, according to RBC Capital Markets analyst Piral Dadhania. Sector valuations are stretched and RBC is relatively cautious for 2021, Dadhania wrote in a note. The industry is also somewhat dependent on footfall at airports.
Deutsche Bank AG notes better-than-expected revenue trends for staffers as the demand for temporary labor improves. As expected at this point in the cycle, temp labor is picking up before permanent, given uncertainty around lockdowns is keeping companies cautious, UBS analyst Dominic Edridge wrote in a note. Hays Plc on Thursday reported second-quarter net fee growth and cash that were “well ahead” of expectations, Jefferies Group LLC analyst Kean Marden wrote in a note.
— With assistance by Sam Unsted, Ksenia Galouchko, Lisa Pham, Michael Msika, and Kit Rees
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