Earnings Roundup: High Energy Beats in Autumn While Retailing Falls Short

A storm of earnings reports from 174 S&P 500 companies touched down in the peak weak of the Q3 2016 earnings season. Overall, 69% of companies reported earnings above expectations the week of Oct. 24, 2016. In aggregate, earnings came in $5.1 billion (5.5%) above estimates, which improved Q3 2016 Y/Y earnings expectations by 1.9 percentage points to 3.0%. The Retailing industry group stood out as one of the few areas to see the majority of companies miss earnings expectations (80%), while the Energy sector surprised analysts with earnings 26.7% above estimates.

Exhibit 1:  S&P 500 Companies that Reported Q3 2016 Earnings, Week of Oct. 24, 2016

Source: I/B/E/S data

Retailing falls short

The Retailing industry group stood out with Q3 2016 earnings 10.3% below estimates. Amazon.com Inc. (AMZN.OQ) reported revenue of $32.71 billion, slightly above the $32.79 billion estimate and 29% higher than the prior year. The Media segment grew revenue by 8.4% Y/Y to $5.7 billion, Electronics & Other General Merchandise grew 31.8% Y/Y to $23.4 billion, and Amazon Web Services (AWS) grew 55.0% to $3.2 billion. The $7.4 billion increase in sales translated into earnings of $0.52 per share, which were up 205.9% Y/Y, but well below the expected $0.78 per share.

Increased investments contributed to a Y/Y increase in Q3 operating expenses of 29% to $32.1 billion., Amazon.com CFO Brian Olsavsky spoke to the investment strategy stating, “What you are seeing, essentially, in the second half of this year is a step-up [in] investment, primarily around digital content and also the fulfillment center investment, but also things like Echo and Alexa, which we’re adding a lot of resources to, India and AWS (Amazon Web Services) as we add people there to support additional service, rapid growth in that business.”

High Energy beats

The 12 Energy sector companies that reported during the week represent 87% of the sector’s $4.0 billion expected earnings for Q3 2016. These companies beat earnings estimates by $737.1 million (26.7%). While earnings came in significantly higher than expected, the beat only added 0.3 percentage points to the index’s 3.0% Y/Y earnings growth rates, which demonstrates the magnitude of the sector’s drag on earnings for the index. Without the energy sector, Y/Y earnings for the index for Q3 increase to 6.7%.

News of big moves

While the 66% earnings surprise from Baker Hughes Inc. (BHI.N) was impressive, it wasn’t the reason the company was among the top stories for the week. The $23 billion market cap Oil & Gas Equipment & Services provider made headlines late in the week when the WSJ broke news of talks with Industrials sector conglomerate General Electric Co. (GE.N). The week prior, GE reported earnings of $0.32 per share, beat estimates by 7.7%, and sighted weakness in Oil & Gas, which made the news an even greater surprise. In the conference call, GE Chairman and CEO Jeff Immelt said, “We continue to see a drag in oil and gas, with revenues down 15% to 20% for the year. The rest of GE will grow at a healthy pace”

Baker Hughes saw Y/Y revenue decline 38% to $2.35 billion, 2.5% below expectations. However, execution on cost savings initiatives helped produce the largest Q3 2016 earnings surprise of the Energy sector during the week with a loss of $0.15 per share vs. the -$0.44 per share estimate, a decline from the Q3 2015 earnings loss of $0.05 per share. During the conference call, Baker Hughes Chairman and CEO Martin Craighead saw opportunity for penetration into new markets, but remained cautious on North America, stating, “We continue to believe that oil prices in the mid to upper $50s are required for a sustainable recovery in North America.”

Craighead later provided his overall outlook stating, “Now as we look ahead, it’s also worth reiterating the obvious. That the oil and gas ecosystem remains fragile and susceptible to shocks from headlines, [physical] policy changes, currency fluctuation and geo-political dynamics. As I’ve said previously, the difference in this cycle is the more prominent role of the North American shale producer, who can achieve production growth and get it into the pipe far faster than conventional producers. As such, the elasticity of the unconventional segment could act as an effective ceiling on the commodity price. So while we remain optimistic about recovery’s prospects, we are positioning the company to prosper in a lower for longer market environment. In simple terms, that means delivering solutions to our customers that result in more efficient wells, optimized production, and improved recovery.”

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