Analysis: Spotlight falls on earnings season in Ireland and US

Each quarter, every quoted US company provides results and updated guidance which is honed in on by analysts and investors to provide a gauge as to how the company is performing and how the outlook for the remainder of the year compares with the prior view.

It may seem perverse for a management team to be tasked with running large international firms in addition to ensuring that they are able to meet quarterly estimates of analysts, but the market can be brutal in its treatment of companies that miss forecasts, even slight misses.

Likewise, small beats to guidance can result in significant moves higher in the share price. 

Ultimately, analysts focus a lot of their attention on short-term fluctuations in quarterly earnings that can overshadow longer-term trends which may be intact.

In the majority of cases, companies do beat consensus expectations, but this is usually as a result of those expectations moving lower in the run up the results.

The current earnings season has been mixed in that many US companies that are upgrading guidance are doing so because the weak dollar is now working in their favour, rather than seeing a material improvement in the global macro environment.

However, the outlook for the world still appears challenging and many companies are happier increasing stock buyback programmes rather than investing in capital expenditure.

In some cases, such as Intel, management have sought to reduce staff levels in order to maintain profitability.

Few sectors experience the level of volatility associated with earnings seasons than technology. 

Apple last week reported disappointing guidance, linked to lower shipments of iPhones, and experienced a sharp 6% decline in its shares the following day, exacerbated by the disclosure that Carl Icahn sold his shares in February.

Google shares also came under pressure after the company released earnings that were below consensus forecasts. The shares which were trading at $780 before the results are now trading in the region of $710.

Countering the challenges experienced by both by Apple and Google, Amazon impressed the market by revealing that it will make an operating profit in the next quarter of $1 billion (€873m), twice the expectation of analysts.

The result was a 12% increase in the shares, or the creation of $35bn in additional market value.

Linkedin also delivered strong results and management tweaked guidance higher or the remainder of 2016. 

The shares reacted positively, increasing 10%, which is in stark contrast to the drop in the stock earlier in the year.

In Ireland, there have also been mixed results and trading statements last week. Irish companies exposed to the food and agriculture markets have provided weaker trading updates in recent days with disappointing results coming from Kerry, Glanbia and Origin Enterprises.

Having long been in vogue, the performance of Glanbia, Kerry and Origin has been disappointing so far in 2016, as headwinds build that are likely to persist for the rest of the year.

CRH bucked the negative trend, highlighting the group’s core geographies are performing in line with expectations and profits continue to be buoyed by a strong US construction market in particular.

Upcoming updates from Paddy Power-Betfair, Kingspan and Smurfit Kappa will also be of interest to investors.

Paddy Power-Betfair has experienced downgrades to a ‘sell’ recommendation for the first time in several years. The trading statement and news on the integration of the two companies will be closely watched.

Kingspan is likely to be experiencing good trading across many of the company’s geographies but there will be the headwind of a strengthening euro. 

With a very strong balance sheet, management will likely provide an update on further acquisitions. 

Smurfit Kappa tends to provide a good insight as to how the underlying economy of Europe and, increasingly, the US are performing. 

The area of challenge for the company is likely to be South America, where Venezuela is experiencing an economic crash - though it accounts for a small part of the group.

Earnings season provides an update as to how trading is going relative to earlier forecasts but for investors it is worth bearing in mind that it can be among the most volatile periods of the year.

 Beating estimates by a small amount can generate windfall performances, while small misses can result in big stock losses.

David Holohan is chief investment officer at Merrion Capital


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