The Street was bracing for a mixed earnings season. While the impact of the coronavirus has, in many cases, been immediate and dire, corporate earnings for the first quarter are on a lag. “Two-plus of the three months were pretty decent,” says Charles Schwab chief investment strategist Liz Ann Sonders, making earnings for the quarter as a whole “not terribly relevant.”
So far, roughly half of companies have reported. According to a Refinitiv note on Wednesday, there have been 90 negative EPS preannouncements issued by S&P 500 companies, versus 42 positive ones. But much like the GDP report for the first quarter, which came in at -4.8%, first-quarter earnings won’t “tell you all that much about the depth and scope of the impact of the lockdowns,” suggests LPL Financial equity strategist Jeff Buchbinder.
Most estimates show that year-over-year earnings growth for the quarter is down about 15% or 16%, and BofA Global Research noted on Wednesday that based on actual values and the latest consensus estimates, “[year-over-year] revenue growth [is] –0.5%.” For those who have already reported, earnings and sales growth came in “10.9% and 0.4% weaker than expected at the start of the season, respectively, while earnings growth ex-financials has surprised to the upside by 2.5%,” according to BofA research.
But the picture is extremely murky, given the unprecedented business shutdown. According to BofA Global Research on Monday, about 100 companies in the S&P 500 suspended guidance. Yet a large portion of companies in the S&P 500 haven’t been issuing quarterly guidance for a while, even pre-coronavirus, and Schwab’s Sonders suggests the slew of companies withdrawing or not issuing guidance now will only accelerate that trend even after the crisis is largely over.
Instead of guidance numbers, “what I think is most important to try to glean from commentary on calls is what the more macro implications are,” Sonders tells Fortune. Alternatively, she suggests taking note of “What does your balance sheet look like? Do you have cash flows to stay afloat for x period of time? Have you started to lay workers off? If you have, are they furloughed or permanent layoffs? Have you taken government assistance?”
Meanwhile, LPL’s Buchbinder is not suggesting investors look on the sunny side. In fact, he believes investors should watch for “credible downside risk estimates” from companies.
“Investors are looking for comfort: How bad is this going to get in the second quarter?” he says. “The big question, though, is where’s the trough? The companies that can give people an idea of where that trough is are going to perform better.” So far, it’s the big tech names that are doing just that, he says.
Looking back, full-year 2020 earnings estimates were close to $180 earnings per share to start the year. Now, the most optimistic projections are $132. Both Sonders and Buchbinder think those earnings estimates need to come down further still (Sonders estimates it will be around $100 when all is said and done).
Yet perhaps more than ever, strategists note there’s a big gap between winners and losers, and the first-quarter earnings season only emphasizes the “stock-pickers market” we’re in, says Buchbinder.
Winners
Tech has obviously been hot, even before the coronavirus. But now, Sonders suggests there is even “more dispersion in terms of the prospects for individual companies, even within the same sector.”
A couple standouts?
Microsoft surprised the Street on Wednesday, beating earnings per share estimates of 1.26, reporting 1.40. Revenue, meanwhile, topped $35 billion (also above expectations), driven in part by the company’s strong cloud business. Wedbush analyst Dan Ives wrote that the “[work from home] and COVID-19 environment [is] another catalyst driving Azure/Office 365 growth,” as Azure revenue growth was “robust” at 59%. The analyst also raised his price target from $210 to $220 per share.
Another tech name that (happily) surprised investors on Wednesday was Facebook. The company posted revenues of $17.7 billion (versus the $17.4 billion estimate), up almost 18% from the first quarter of 2019, and saw 2.6 billion monthly active users (higher than expected). Yet in comments that are starting to sound very familiar to analysts this season, Facebook’s CFO David Wehner told CNBC that “[the] outlook is really uncertain. We have a really cautious outlook on how things are going to develop.”
Of course, Tesla was a stock many investors had their eye on, having traded up over 200% in the past year. The Elon Musk–led company managed to post a profit in the first quarter at $16 million, also reporting 1.24 adjusted earnings per share versus an estimated loss of 0.36 earnings per share. Yet Tesla also had negative free cash flow of $895 million.
Alphabet missed earnings estimates, reporting $9.87 per share, but beat revenue estimates, reporting $41.2 billion on Tuesday—up 13% from the previous year. Yet investors were somewhat encouraged that, despite a drop in ad revenue in March, execs told analysts, “Based on our estimates from the end of March through last week for Search, we haven’t seen further deterioration in the percentage of year-on-year revenue declines” in April.
For the Street, Twitter’s earnings fell somewhere between a win and a loss: The company beat earnings estimates, reporting earnings of 0.11 per share versus the 0.10 estimate on Thursday before market open, but the stock quickly traded down some 7% by midday on discouraging remarks about a slowdown in advertising revenue. While the company eked out an earnings beat, Twitter also didn’t provide guidance for the second quarter, and is suspending full-year guidance.
Even hotly anticipated Amazon earnings fell into a vein similar to Twitter’s: The coronavirus staple stock missed estimates on earnings but beat revenue expectations, posting $75.5 billion. Investors were dismayed after markets closed on Thursday, trading the stock down around 5% in after-hours trading, after the company announced it plans to spend its entire estimated $4 billion operating profit in the second quarter on coronavirus-related expenses. Yet cloud computing and online shopping were bright spots for Amazon, as the company saw Amazon Web Services revenue top $10 billion. “COVID’s impact accelerates the secular shift to e-commerce [U.S. e-commerce represents 12% of retail sales], and Amazon is well positioned to continue taking share,” Oppenheimer analysts wrote on Monday.
Losers
LPL’s Buchbinder suggests that “essentially all of the [overall earnings] misses came from the big banks” this time around.
JPMorgan kicked off its first-quarter earnings with a largely disappointing show, reporting earnings per share of 0.78 cents, missing the 1.84 estimate, while profits dove 69%. One ominous point was the bank’s $6.8 billion reserved for loan loss provisions. Perhaps the only bright spot was the bank’s record trading division revenue, up 32% to $7.2 billion.
Wells Fargo also disappointed, posting earnings per share of just 0.1 cent, versus a 0.33 cent estimate. The bank set aside some $3.1 billion for loan losses as well.
Bank of America hasn’t fared much better, reporting a first-quarter profit decline of 45% to $1.79 billion for its consumer banking business. The bank reported EPS of 0.40 cents a share, versus 0.46 cent estimates. Of note, loan losses would only mount this year, potentially continuing into 2021, CFO Paul Donofrio told analysts. To boot, the bank also set $3.6 billion aside for loan-loss reserves for the quarter, in line with peers JPMorgan and Wells Fargo.
One company feeling the brunt of global shutdowns is McDonald’s. The company reported that earnings fell 17% in the first quarter, missing estimates. The global fast-food chain also withdrew its 2020 outlook and long-term forecast, issued back in February, owing to the uncertainty surrounding the evolving coronavirus environment worldwide.
McDonald’s CEO Chris Kempczinski warned analysts: “We expect the second quarter as a whole to be significantly worse than what we experienced for the full month of March.”
Given the way projections are heading overall, he’ll certainly have company.
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