July 13, 2018

STOXX 600 18Q2 Earnings Preview – Where is the Growth coming from?

by Tajinder Dhillon.

Surprised to learn that 5 companies are responsible for driving 67% of the overall 18Q2 STOXX 600 EPS growth rate?  Read on…

As we head into Q2 earnings season, let’s take a closer look at growth expectations for the STOXX 600.  We are seeing exceptional EPS and Revenue growth rates of 8.1% and 5.9% respectively, both of which exceed the prior 20-quarter average.  As a reminder, Q1 ended off with EPS and Revenue growth rates of 4.3% and -1.0%.

So where has all the growth come from this quarter? If we take a look at which sectors are contributing to the Q2 growth rate, we can see one sector which is far and away responsible for such a rosy outlook.

The Energy sector is expecting to grow 72.2% YoY as seen in Exhibit 1.  Looking at this from a different perspective, it is contributing 5.4 points to the overall index growth rate.  This means that the Energy sector is driving 67% (=5.4/8.1) of the STOXX 600 EPS growth rate this quarter.  Excluding the Energy sector, the EPS growth rate for this quarter is coming in at 2.9%, which would actually be less than Q1.

Exhibit 1: Q2 2018 Earnings Growth Rates

It is certainly worrisome when a cyclical sector like Energy is the backbone for Q2 earnings.  So which companies should we be paying attention to?  Looking into this further, remarkably, there are 5 companies which account for 99% of the Energy sector level growth rate (5.35 points of 5.4).  Exhibit 2 highlights the importance of seeing strong earnings growth from BP (BP.L), Royal Dutch Shell (RDSa.AS), Total SA (TOTF.PA), Eni SpA (ENI.MI), and Repsol SA (REP.MC).

Exhibit 2: Top 5 Contributors to Energy Growth Rate

Now that we know which 5 companies are responsible for 99% of the Energy sector growth, which is responsible of 67% of the overall STOXX 600 EPS growth rate, let’s see how these companies are scoring from a StarMine perspective.

Good news for those who were worried about having all of the eggs in one basket.   When looking at our StarMine Combined Alpha Model in Exhibit 3, the majority of these companies are scoring a staggering 100, the highest score possible.   The Combined Alpha Model provides a single score which is derived from the ‘optimal’ combination of available quantitative models across value, momentum, ownership, and quality.

Exhibit 3: StarMine Combined Alpha Model for Energy Companies

Source: Thomson Reuters Eikon

Having analysts bullish on these companies as seen by the Analyst Revision Model (ARM) score is re-assuring as we head into earnings season.  This indicates that analysts have been busy revising their estimates upwards.   Whether this bullish sentiment will be realized will certainly be interesting to see in the coming weeks which will provide a solid ground into how 18Q2 earnings will play out.

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