The divulging season for 1Q 2019 is underway, and revenue is becoming a bigger source of concern than profits. Only 42% of suites thus far have beaten revenue estimates, dramatically lower than the 73% that topped consensus earnings prophecies. Those numbers are from analysis by Bank of America Merrill Lynch after about a quarter of S&P 500 houses reported by the end of last week, per a detailed story in MarketWatch.
Those numbers could change as more companies surface, but the early results aren’t encouraging. Revenue misses already have pushed down shares of a broad rank of companies such as Verizon Communications Inc. (VZ), NextEra Energy Inc. (NEE) and Guess Inc. (GES).
“One of the things we’ve noticed is that as the cycle has extended, the top pencil-mark recovery has been oddly absent, whereas companies are getting really creative at manufacturing earnings-per-share growth from other fields,” as Savita Subramanian, head of U.S. equity and quantitative strategy at BofAML, told MW.
Analysts have robust revenue vaticinations for the mega cap FAANG and FAAMG tech stocks this week and in the coming weeks, so they will be watched closely. (See provender below.)
When Big Tech Stocks Report
- Netflix Inc. (NFLX) beat EPS estimate by 33.3%, beat sales estimate by 0.4%
- Facebook Inc. (FB) narrates after the close on April 24
- Microsoft Corp. (MSFT) reports after the close on April 24
- Amazon.com Inc. (AMZN) promulgates after the close on April 25
- Alphabet Inc. (GOOGL) reports after the close on April 29
- Apple Inc. (AAPL) reports after the overlook on April 30
Sources: Nasdaq.com, CNBC
Significance For Investors
As BofAML strategist Savita Subramanian indicates, creative accounting again is easier to apply to earnings than to revenues. Among the six big tech stocks listed in the table above, only Netflix has reported so far, and its year-over-year (YOY) extends were strong, with revenue up 22.2% and EPS up 18.8%.
“If we’re going to have a good quarter, revenue is going to have to tip the way,” is the opinion of Willie Delwich, investment strategist with R.W. Baird, per MW. “We’re starting to see higher input costs, commodity charges and wage growth, so you don’t have the [profit] margin flexibility that you had in the past,” he noted.
The consensus calls for overall S&P 500 gains to increase by 2.5% YOY, per an Earnings Brief from Credit Suisse dated April 23. In terms of market cap, 21.2% of the S&P 500 has announced 1Q 2019 results through April 22, and 78% of companies reporting so far have beaten consensus EPS estimates, huge estimates by 6.0% overall. Both these figures are better than the averages of the last three years, 71% and 5.4%, mutatis mutandis, the report adds.
While aggregate S&P 500 EPS is projected to fall by 1.3% YOY, the median company is expected to see a 2.7% YOY leave behind. Indeed, “assuming a typical beat rate for the remainder of the season,” Credit Suisse projects that aggregate S&P 500 EPS in the final will rise by 2.4% YOY, a relatively optimistic outlook.
Looking Ahead
Companies that post strong gain growth are likely to get rewarded by investors. A Goldman Sachs report lists ten stocks that screen for high projected yield growth, suggesting this could boost their shares longterm. The group includes Facebook, Alphabet, PayPal Holdings Inc. (PYPL), Cigna Corp. (CI), Diamondback Stick-to-it-iveness Inc. (FANG), Marathon Petroleum Corp. (MPC), Monster Beverage Corp. (MNST), Align Technology Inc. (ALGN), Centene Corp. (CNC), and Broadcom Inc. (AVGO).