Earnings Watch: Off to a good start

The earnings season has its first real important milestone today with Wells Fargo, JPMorgan Chase and Citigroup reporting Q2 earnings. Next week things are gearing up with 162 companies reporting earnings, among the around 2,000 global companies we track during earnings season. Let's take a look at the most important releases next week.

Early signs of strong Q2 earnings 

Three companies have so far delivered Q2 earnings with the full Q2 calendar quarter as the Q2 fiscal quarter. Those companies are Delta Air Lines, Fastenal and PepsiCo, and they all have reported better than expected revenue and profit numbers. The average EPS surprise is ~5% and the average revenue surprise is 0.5%. The average revenue growth y/y for those three companies is ~8% y/y which if materialised through all of S&P 500 companies is a rather good number.

Besides the three companies mentioned, 18 companies have reported Q2 earnings releases where more than 1.5 months of the fiscal quarter overlaps with the Q2 calendar quarter. These 21 companies have reported revenue growth of 12.5% y/y and EPS growth of 26% y/y. These aggregate numbers are likely to come down as more companies report but the small sample does indicate that we have a very good Q2 earnings in front of us. As we wrote last week in our previous Earnings Watch update the big question is whether the Q2 earnings season can become the necessary catalyst for climbing higher towards the highs from January. Our view is still that earnings will be overshadowed by the trade war escalation and headline risk. We are also expecting management outlooks to become more cautious in the Q2 releases which could drag stock performances.

Will Netflix knock it out of the ballpark again?

Netflix is part of the FANGs and is thus a highly anticipated earnings release. The company reports on Monday after the market close with the sell-side consensus looking for EPS $0.89 up 262% y/y and revenue $3.94bn up 41% y/y. In the past six months analysts have revised up Q2 EPS by 25% so expectations are set very high for Netflix. The stock is up by 161% in the past year over the past five years (see chart) it has been one of the best performing stocks in the US equity market. Netflix’s superior strategy execution on original content should drive another great quarter with around 5m net new international subscribers, which is 21% y/y growth.

Overall, Netflix expects 6.2m net new subscribers in Q2 up from 5.2m net additions last year. The intense focus on original content is obviously a big strain on its finances with free cash flow expected to decline further in 2018 to around minus $3.1bn from minus $2bn in 2017. However, with a sound balance sheet the market is not particularly worried about Netflix big capex as it’s the main engine behind its growth. Despite being a super interesting company that looks like it’s going to dominate video streaming in the developed world, the stock has a negative rating in our Equity Radar model of -0.14, dragged down by a very negative value score of -2.03 – the lowest value score of all companies in the Internet & Direct Marketing Retail industry, which means that Netflix is the most expensive stock in that industry. Other well-known companies in that industry are Amazon, Ocado Group, Zalando, TripAdvisor, JD.com and Expedia.