Zero in on Q2 2018 earnings

Posted By Darren Winters on Jul 21, 2018


Zero in on Q2 2018 earnings

It would be timely to zero in on Q2 2018 earnings as the peak weeks of the latest earnings season come into focus. I have joined some dots, bearing in mind that already 109 S&P 500 companies have issued their results, an interesting vision is emerging.

So let’s zero in on Q2 2018 earnings by first getting an earnings insight with FactSet (setting the facts straight).

Q2 2018 is a mixed back with some upbeat news to report. For Q2 2018 89% of S&P 500 companies have reported a positive Earnings Per Share(EPS) surprise and 85% have reported a positive sales surprise. Indeed, The number of S&P 500 companies issuing positive EPS guidance is 47 which is well above the 5-year average (30). Meanwhile, the number of S&P 500 companies have issued negative EPS guidance is 62.

Zero in on Q2 2018 earnings

But zero in on Q2 2018 earnings we discover stocks are still pricey, despite the sell-off that occurred early in the year, February. The price/earnings ratio (often shortened to the P/E ratio or the PER) is the ratio of a company’s stock price to the company’s earnings per share. The ratio is used in valuing companies. So the forward 12-month P/E ratio for the S&P 500 is 16.6 which is still above the 5-year average (16.2) and above the 10-year average (14.4).

So which companies are doing well?

When we zero in on Q2 2018 earnings it is those companies engaged in the 4th revolution that have performed the best. Moreover, IT companies and those catering to an aging population, healthcare, that are also in an upward trend.

For those who zero in on Q2 2018 earnings will notice that technology and Health Care sectors have the highest number of companies issuing positive EPS guidance for the quarter.

Indeed, it is the Information Technology sector, that has issued the most positive EPS guidance with 20 companies which have issued positive EPS guidance for the second quarter. The number is above the 5-year average for the sector (12).

I believe the technology sector will continue to outperform as companies look towards deploying the latest technologies to reduce costs and undercut their competitors in an ever increasingly competitive market. The dynamics of companies turning to true technologies (not gimmicks) to reduce costs is underway and is likely to strengthen going forward.

In the Health Care sector, 11 companies have issued positive EPS guidance for the second quarter. This number is above the 5-year average for the sector (5). Again, this will probably come as no surprise to readers of this blog as one of my top stock tips for 2018 was companies operating in the healthcare sector.

So zero in on Q2 2018 earnings, join the dots and a vision of a true black thoroughbred stock emerges, a technology stock with a focus on healthcare.

All the stars are aligned, an aging population will increase demand for healthcare. Moreover, cash-strapped governments will increasingly be looking at ways of doing more with less resources. Technology to the rescue in healthcare? Autonomous ambulances Robot doctors, surgeons, nurses…?

But keeping with the theme if we zero in on Q2 2018 earnings the top winners are companies in the info technologies sector and healthcare companies.

The worse performing sector also tells us another story.

The worse performing sector thus far is real estate with 9 companies reporting negative EPS announcements and zero positive.
zero in on Q2 2018 earnings we also notice that consumer discretionary was the next worse performing sector with 17 companies reporting negative EPS announcements and only 6 positives.

We could be seeing the early fallout from the central bank’s Quantitative easing (QE) unwind, also known as quantitative tightening (QT).
If QE pumped up the “paper wealth effect” then QT is going to deflate it.

So highly leveraged assets which require a large amount of borrowing, in other words, real estate in a QT environment could go through a deflationary period. Moreover, an update on the Fed’s QE unwind shows little or no signs that the hawkish Fed is going to halt QT.

If so then banks, real estate companies are all likely to under-perform going forward.

Could other headwinds be in play when we zero in on Q2 2018 earnings?

Currency volatility, inflation and a US-inspired trade war could all provide headwind. But if we zero in on Q2 2018 earnings we can see that More S&P 500 Companies believe that FX will have a more negative impact than Tariffs in Earnings Calls for Q2.

So S&P 500 Companies aren’t that concerned about a trade war yet.

Zero in on Q2 2018 earnings and we notice that it is foreign exchange which has been cited by the most companies (12) in the index as having a negative impact on earnings in Q2 and in the future.

“Importantly, in regard to Q1 guidance, exchange rates have moved from a 3% revenue tailwind to now being a 1% headwind from the last time I gave guidance. That is a 4% negative move, which impacts revenue in Q1 by about $300 million. It also impacts EPS negatively by $0.03” – Oracle (Jun. 19)

The next headwind is rising input costs (raw material, transport, labor, and oil/gas).
“Full-year segment operating profit was down 22% in constant currency driven by significant raw material inflation and
currency-driven inflation on products imported into the UK.” – General Mills (Jun. 27)

“Food and sundries side, it was up in the 2% to 3% range. And probably two-thirds of X was more related to the freight-related costs.”
-Costco (May 31). Read about the negative impact on earnings.

But a zero in on Q2 2018 earnings won’t give an accurate assessment of damage from a trade war, bearing in mind that the first shots of a trade war were only fired last week. So stay tuned.

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