July 21, 2020

STOXX 600 Q2 2020 Earnings Preview

by Tajinder Dhillon.

Q2 2020 marks the sixth consecutive quarter of negative year-over-year (YoY) earnings growth for the STOXX 600.  Earnings growth is expected to be -53.9%, which is the worst quarter since inception of this report.  Additionally, Q2 revenue growth of -17.2% marks the beginning of a ‘revenue recession’ for the STOXX 600 as defined by two consecutive quarters of negative YoY growth.

Looking at Exhibit 1, we observe that analysts started to make aggressive downward revisions to STOXX 600 20Q2 earnings growth expectations in mid-March and continued to do so until early May.

Exhibit 1: STOXX 600 Q2 Earnings Growth Rate

Negative YoY earnings growth is expected across most of the index this quarter.  Of the 309 constituents included in the Q2 earnings growth calculation, 221 are expected to post negative earnings growth which represents 72% of constituents.

Cyclical sectors are most affected this quarter from both earnings and revenue perspectives.  Consumer Cyclicals, Energy, Industrials, and Basic Material sectors are expected to post Q2 earnings results of -129.0%, -126.5%, -93.4% and -66.4% respectively.  Similarly, Q2 revenue results are expected to be -32.0%, -38.9%, -26.2% and -21.5% respectively.

Within Consumer Cyclicals, German and Italian automobile manufacturers including Volkswagen (VOWG_p.DE), Fiat Chrysler Automobiles (FCHA.MI), and Bayerische Motoren Werke (BMWG.DE) are expected to post 20Q2 earnings results of -141.6%, -354.0%, and -75.4% respectively.  Earnings and revenue figures also remain negative for all three companies in Q3.

Within Energy, integrated oil & gas majors including Royal Dutch Shell (RDSa.AS), BP (BP.L), and Total SA (TOTF.PA) are expected to post Q2 earnings results of -165.6%, -156.0%, and -113.0% respectively.  According to Reuters, Royal Dutch Shell is expected to take a post-tax impairment charge of $15-22 billion this quarter after lowering its long-term outlook on oil and gas prices. While Brent oil prices have stabilized between $38-42 a barrel since June, earnings and revenue growth remain negative for these companies in both 20Q3 and 20Q4.

Analyst revisions

As noted above, analysts began to aggressively downgrade STOXX 600 Q2 growth expectations in mid-March.  However, it is interesting to note that the severe pessimism amongst analysts has turned around over the last few months when looking at aggregate analyst revisions.

Exhibit 2 highlights the STOXX 600 revisions ratio, which is calculated weekly and aggregates the total number of earnings estimate revisions for the Fiscal Year 1 period for all companies in the index over the previous seven days. During the height of COVID-19, the down % ratio peaked at 90% on the week ending March 31, which is the highest level since this data has been tracked.

However, it appears that analyst pessimism bottomed out around this time and gradually began to revise estimates upwards since then. At the latest reading, the aggregate up/down ratio is at 40% and 60% respectively which is close to the prior 1-year average ratios of 37% and 63% respectively.

Exhibit 2: STOXX 600 Earnings Revision Ratio

Note: Up revisions represent the total number of estimates for Fiscal Year 1 submitted in the past seven days that are higher than the previous estimates for Fiscal Year 1. Down revisions represent the total number of estimates for Fiscal Year 1 submitted in the past seven days of that are lower than the previous estimates for Fiscal Year 1.

Aggregate analyst sentiment by industry

Using Refinitiv Eikon, we can use the Aggregates app to aggregate analyst sentiment by looking at StarMine analytics and models.  Exhibit 3 highlights the aggregate Analyst Revisions Model (ARM) and SmartHoldings Model (SH) for the STOXX 600, broken down by TRBC Business Sector.

Exhibit 3: ARM and SH Model scores for STOXX 600 by TRBC Business Sector

Source: Refinitiv Eikon

The ARM model is a stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, and revenue over multiple time periods. Mineral Resources has an ARM score of 79, since it has benefitted from strong price performance in gold, iron ore, and copper year-to-date. Rio Tinto, BHP Group, and Anglo American all have bullish model scores above 80.

Pharmaceuticals & Medical Research also has a strong ARM score of 74, given the critical role this sector is playing in providing a long-term solution to COVID-19. The STOXX 600 Q2 Health Care earnings growth rate is expected to be 2.0%, which is the only sector in positive territory.

Other industries including Food & Drug Retailing, Telecommunications also have benefited from COVID-19 as consumers stockpiled groceries and relied on the internet while working from home.

We observe a strong correlation amongst both ARM (sell-side) and SmartHoldings (buy-side).  The SmartHoldings Model (SH) predicts forward changes in institutional buying and selling by determining which factors are currently favored by institutional investors and which stocks are becoming more or less desirable in the current environment. Twenty-five fixed factors across volume, price momentum, profitability, value, growth, analyst revisions and leverage are utilized and ranked from most popular to least.

A company with a high SH score indicates that it is well-aligned with current market preferences and likely to pass investor ‘idea generation screens’.

Exhibit 4 highlights the top single-name companies within the STOXX 600 who currently have the highest ARM score.

Exhibit 4: STOXX 600 Constituents ranked by ARM Score

Source: Refinitiv Eikon

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