by Tajinder Dhillon.
18Q3 earnings season is underway with 54 companies reporting last week ending November 2, 2018. Exhibit 1 provides a summary of reporting results.
Exhibit 1: Earnings Season Results
Of the companies that reported last week, 57% beat EPS expectations and 41% missed EPS expectations. In addition, 54% beat Revenue expectations and 50% missed Revenue expectations.
The company who beat EPS expectations by the largest amount was Orsted A/S (ORSTED.CO) with a positive 358.3% surprise. The company who missed EPS expectations by the largest amount was Telefonica Deutschland Holding AG (O2Dn.DE) with a negative -300% surprise.
The company who beat Revenue expectations by the largest amount was Fiat Chrysler Automobiles NV (FCHA.MI) with a positive 6.5% surprise. The company who missed Revenue expectations by the largest amount was Swiss Re AG (SRENH.S) with a negative -100% surprise.
As mentioned in last week’s Earnings Roundup, banks noted a drop in client activity due to volatile market conditions. Credit Suisse added to this theme in Q3, as CEO Cheick Thiam discussed how trade tensions weighed on client behaviour. “In the third quarter, we have seen more challenging conditions and lower levels of client activity, particularly in July and in August … markets were impacted by increasing trade tensions, rising U.S. rates, increased emerging market currency volatility and the notable rise in geopolitical uncertainty. In that context, clients have taken a more cautious approach.”
As a result, Thiam also discussed how Asian markets have been impacted by trade war and ongoing trade war discussions. “Asian markets have endured a significant correction … in particular, in China, the U.S.-China trade rhetoric has been turning into reality and exerting pressures on client risk appetite, on asset prices and on activity volumes.” We can see the correction Thiam mentions in Exhibit 2, which looks at the Shanghai SE A share Index.
Exhibit 2: Shanghai SE A Share Index
Volkswagen AG (VOWG_p.DE) also commented on the impact of tariffs which have caused a decline in the global car market – “the global car market decreased in the third quarter, which was impacted by the growing market decline in China due to the trade conflict with the U.S. and the shrinking North American market.”
With oil prices peaking at $85 a barrel in October 2018, we have seen strong earnings results from major Energy players including BP PLC (BP.L) and Tenaris SA (TENR.MI).
BP PLC provided an engaging outlook on macro conditions and their bullish outlook towards future oil prices. CFO Brian Gilvary stated, “with the oil market in a more balanced position, OECD commercial stocks have declined to below the 5-year rolling average. U.S. crude and product stocks, which account for around 40% of total OECD inventory, have reduced significantly over the last year to the middle of the range. With lower stock levels, the oil price remains volatile to any uncertainties, particularly around supply and geopolitics. Recent factors include the impact of U.S. sanctions on Iranian exports, supply disruption from Venezuela, together with production uncertainty from Libya and levels of spare capacity within OPEC … in summary, the oil price outlook has strengthened. We expect the oil market to remain volatile in the near term, characterized by lower stock levels and ongoing geopolitical factors. Looking further out, we expect current supply concerns to ease and continued robust demand growth to be matched by growth in the U.S. tight oil production and additional supply from non-OPEC countries.”
Royal Dutch Shell PLC (RDSa.AS) was a beneficiary of higher oil prices in Q3, as CFO Jessica Uhl praises the companies highest Cash Flow from Operations in years. “Shell’s cash flow from operations, excluding working capital movements in the quarter, was $14.7 billion, making Q3 one of our strongest ever. Free cash flow was $8 billion. Our strong financial performance allowed us to cover the full cash dividend, interest payments, share buybacks and to further pay down debt. We remain committed to pulling levers necessary to complete the $25 billion share buyback program by the end of 2020. We bought back over 60 million shares for a total of $2 billion.”
Exhibit 3 looks at Shell’s Cash Flow From Operations which has been at a 3-year high.
Exhibit 3: Royal Dutch Shell Cash Flow from Operations (CFO)