Europe’s largest companies are expected to post blowout earnings this quarter.
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A raft of large European companies are due to report quarterly results over the next few weeks, with year-over-year comparisons set against one of the worst periods of the Covid-19 pandemic—Q2 2020.
Growth is expected to be big: Consensus expectations are that earnings per share will rise by more than 100%, according to Swiss bank
UBS.
In such an unprecedented context, and with earnings a key catalyst for stock-price movements, what level of growth is good enough?
The stakes are high, analysts led by Nick Nelson outlined in a report on Friday, and earnings in the first quarter of 2021 provide a taste of what is to come.
There were record earnings beats in the first quarter of the year, but, even so, outperformances in terms of stock price moves were modest, Nelson and his team said. But when earnings missed expectations last quarter, the result for stocks was punishing—with some sectors seeing the worst one-day relative performance for 10 quarters, according to UBS.
“We suspect for stocks to outperform from here they may well need to beat and impress on guidance,” the analysts said, looking ahead to this wave of earnings. Nearly 100 Stoxx Europe 600 companies will report this week, with nearly 200 to come next week.
Price inflation could complicate matters, especially when it comes to margins. Input price inflation—felt by producers—should have peaked in the second quarter in year-over-year terms, Nelson’s team said, but there are already signs that some commodity prices are falling.
“In aggregate, we believe that European corporates can manage the higher input costs and grow margins—corporate sentiment around pricing is at a decade high,” the analysts had said in a note earlier in July. “But clearly there are large differences across sectors and even intra-sector.”
The sectors that appear to have the strongest pricing power—i.e. should see stable demand even as prices rise—are tobacco, spirits, software, contract caterers, luxury goods, food retail, and some capital foods groups, UBS said. Airlines, non-premium automobile makers, and some chemical groups are in a weaker position.
Plus:Ericsson Has a Big Problem in China and the Stock Is Falling. Here’s What to Know.
Going into earnings season, the analysts at the Swiss bank put together a list of high-conviction stocks for which earnings will be a major catalyst.
According to Nelson’s team, payments specialist
‘s stock has legs to climb 17% higher, while shares in
could soar 27% following earnings.
Luxury-goods group
stock has a UBS target price implying a 34% upside, while shares in
—the owner of
and other airlines—could lift off 76%, and electricity-and-gas distributor
may see stock gains of 32%.
Shares in
should rise nearly 32%, and house builder
’ stock may be headed for 28% upside, the analysts said.
The picture is less rosy for miner
The UBS target price on the stock suggests that earnings could begin a 16% slide in the shares.
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