Earnings Season 4Q14 – Preview

4Q14 setting up for earnings surprises

Earnings Season 4Q14 – Preview

ANALYST CONSENSUS VS. COMPANY EXPECTATIONS

The companies have become fond of the “expect little and they’ll be happy with anything” game for a while now. This quarter is no exception: Using guidance numbers provided by S&P 500 company, 87 analysts issued negative guidance while only 21 issued positive guidance. So, we’re well set up for positive earnings “surprises” in some industries.

ENERGY RISK & THE IMPACT ON CORPORATE EARNINGS

Energy and oil service company earnings are expected to come under pressure for obvious reasons.  Expect the independent oil exploration and production companies will be hardest hit, but remember to take the companies’ energy hedging policies into account.  You can read more about that in my late December blog on this topic here.

BusinessInsider.com published a useful chart regarding earnings at energy companies. “The direct negative effect of lower oil prices on energy company profits is clear,” said Goldman Sachs’ David Kostin. “Reduced energy capex will also hurt profits in other industries.”

Kostin also highlighted that energy companies make up 11% of earnings, which have a strong relationship with oil prices. “Given this historical relationship and oil futures prices, energy earnings are likely to drop by more than 50% year-over-year in 2015. This fall would result in an S&P 500 earnings drag of roughly $65 billion, or more than $7 of EPS vs. 2014.” You can read the full article on Business Insider here.

FOREIGN EXCHANGE RISK & THE IMPACT OF CORPORATE EARNINGS

In light of the strength in the US Dollar, earnings of US importers and exporters will be impacted. Of course, US companies doing business abroad and repatriating those earnings will be hardest hit. In either case, it’s very important to look at their Currency Hedges.

Multi-National Corporations (MNCs) with subsidiaries around the world convert their overseas assets back to USD in order to prepare their consolidated financial statements. Their non-dollar assets are converted solely for accounting purposes.

Then we have US companies who do business overseas but repatriate their earnings. Examples would be McDonald’s or Pepsi Inc.

While both of these types of companies will be impacted by the stronger dollar, the MNC’s impact is an accounting impact. The company repatriating their earnings will have an economic impact, thus benefitting most from a strong hedging policy.

A survey conducted by Chatham Financial and published by CFO Magazine sampled 1,075 US companies with revenues from $500 million to $20 billion. They estimated 52% of the sample DO hedge their foreign exchange risk.

Companies like McDonald’s and Pepsi are likely to be negatively impacted. Historically, MCD reported a 9% hit to earnings due to currency fluctuations. For the 52% of the companies that hedge this risk, the impact will be smaller.

SEPARATING THE WHEAT FROM THE CHAFF

You can analyze a company’s Foreign Exchange hedging by using www.sec.gov website. Type in the name of the company you want to research, and look for their latest 10-Q (quarterly numbers) or 10-K (annual numbers). Scroll forward to Section 7a, Quantitative and Qualitative Risk. This section should give you a good idea as to how much of their FX risk is hedged. Alternatively, check the notes in the back of the filings.

You can read more about non-financial companies and their hedging practices in this article from CFO magazine, or click MH Derivative Solutions, LLC’s On Tap Knowledge on the right-hand banner for further information.

 

READING LIST FOR EARNINGS STATISTICS

The list below includes most of the sites I prefer for earnings information. Each provides a little different bent on the same asset class (equities). More so, they present their data in an easy to read format.   

N.B.:  I’m only pointing out the FREE portions of these sites.

CAVEAT EMPTOR:  Most of these sites look to generate revenue from this information. They offer a limited portion of the site to engage their audience and convert them to paid services.

Bespoke Investments: Focuses on which stocks are good to trade during earnings season, so I like them a lot. They provide a list of the 50 most volatile stocks during earnings season and the 50 least volatile stocks during earnings season.

Business Insider: Although not an earnings focused site, this is another great site to watch for information on the current news.

FACTSET: Primarily a data provider, but in the past, they’ve provided good, concise statistics similar to what Yardeni provides.

Marketrealist: Fast becoming one of my go-to sites and I recommend it especially for those readers who want to learn the guts of earnings and corporate finance.

Stocksearning: Please note the spelling of the URL! This site provides the average move for each stock during earnings season. Again, if you’re trading the earnings season, take a look at stocksearning.com. They have some good services.

Yardeni: In addition to reporting earnings and revenue surprises on stocks in the S&P 500 – and the extent to which they beat/disappointed – Yardeni also breaks the S&P 500 down into sectors. By way of example, it was very easy to see that healthcare was a leader in the “positive surprise” sectors.

Earningswhisper: They do an excellent job of providing the analysts’ estimates and the date the earnings will be released.

It promises to be an interesting earnings season. I’ll update this area mid-season and follow up with a review at the end. Happy trading, everyone!

 

 

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