Idea of the Week: Analysts Trimming Profit Estimates for Developed Europe

The economic slowdown in Europe is beginning to show up in aggregate analyst forecasts for the fourth quarter of this year and the first quarter of 2013, as well as the forward 12-month period, according to StarMine, with companies in Italy and Spain likely to feel the greatest impact over the coming 12 months.

Released: November 20 2012
Length: 3 Minutes

For most of 2012, optimists have insisted that the eurozone somehow would manage to avoid tipping into another recession. But the latest disappointing factory data, in the shape of Eurostat’s September industrial production figures, may well force those bulls to reconsider their “glass half full” thinking. While a Reuters poll of economists had forecast a decline of 1.9% in industrial production, the actual data showed a slump of 2.5%. We thought this would be an opportune time to look at how the economic woes are showing up in the way that analysts view the outlook for stocks in Developed Europe, as reflected in the StarMine data.

On a broad level, StarMine SmartEstimate data show that analysts are clinging to the view that companies across the region will manage to post growth in both revenues and earnings over at least the next 24 months. StarMine data showed us that analysts have chopped their forecasts by about 6% and by about 4% for the first quarter of 2013.

British stocks account for about 30% of the stocks that we follow in StarMine’s Developed Europe universe; this group is experiencing an 11% decline in earnings estimates for the coming quarter. France, where companies tracked by StarMine represent 15% of StarMine’s Developed Europe database, is seeing large declines for the current quarter. The Netherlands, at a 6% weight in this universe, also sees earnings forecasts down 11% for the next quarter. When it comes to Spain, also a 6% weighting, the drop is far larger, with analysts predicting a 26% drop in earnings for this quarter and 8% for the first quarter of 2013.

Of course, investment managers know that all sectors in each country aren’t experiencing the same conditions, so we used StarMine data to scan the same universe of stocks, this time by sector. We ranked each sector according to the change in the SmartEstimates for the fourth quarter over the last 30 days, from highest to lowest. Despite all the gloom and doom in the media, analysts actually raised their outlook for the consumer discretionary sector by nearly 7%, while the outlook for utilities improved by more than 2%. The problem in the eurozone lies elsewhere, however: at the bottom of these rankings, where financial and information technology companies have been hit with double-digit declines in analysts’ earnings estimates.

The eurozone’s struggle with its fiscal problems is also a banking issue, so it’s not surprising that analysts have cut their estimates for earnings at banks throughout the Eurozone, including Germany, the U.K., France and Spain. Spanish energy companies also have been hit by big cuts in earnings estimates by analysts, the data show. Italy’s energy sector is struggling and so, more surprisingly, are its consumer products companies, which have been pockets of strength in other parts of the eurozone.

Looking ahead to the first quarter of the new year, analysts are cutting back their earnings growth projections in most countries and sectors. France’s information technology sector continues to experience cuts in earnings forecasts, as are Germany’s consumer discretionary companies and materials and industrials stocks. Spanish healthcare and financial companies are in the eye of the storm, while British energy companies also will face a bumpy path, according to StarMine estimates.

So where can a wary investors find a good place to ride out the tumult? Well, looking forward over the next 12 months, StarMine data show that analysts have trimmed earnings estimates the least at companies that one might logically expect to fare better – at least on a relative basis – during a lackluster economic climate: health care, consumer staples and utilities. The countries sporting the largest analyst estimate reductions include Spain (-3.0%), Italy (-3.9%) and Iceland (-7.1%), but also, more surprisingly, the Netherlands (-5.6%).

Obviously, industry analysts don’t get together to mull over these questions in a big weekly gabfest, but if they did, the results might end up looking something like StarMine’s aggregation of group-think. Certainly, history has shown that whenever analysts as a group start cutting their earnings and revenue estimates for a company or a group, odds are that the declines will show up when scheduled and that it will take a lot of good news for earnings to reverse course and defy those predictions.