With so many market-moving headlines dominating the discourse, the coming earnings season for the first quarter of 2020 is justifiably not on investors’ minds. To be fair to the average investor, the 2020 Q1 earnings season will really get going when the big banks come out with results in about a month’s time.
That’s when everyone in the market will start paying attention to the Q1 earnings season. Unfortunately for us, we don’t have the luxury to wait that long as we are responsible for maintaining the ‘books’ on every earnings season.
From our standpoint, the 2020 Q1 earnings season has actually gotten underway already. Including the March 12 releases from Adobe ADBE and Oracle ORCL that both reported quarterly results for their fiscal quarters ending in February, we now have results from four such S&P 500 members. Costco COST and AutoZone AZO are the other index members that have reported results for their February quarters.
The majority of companies use calendar quarters as their fiscal reporting periods. But as we all know, fiscal and calendar quarters don’t match for all companies, as is the case with Adobe, Oracle, AutoZone and Costco whose fiscal quarters ended in February. We club such fiscal February-quarter results as part of our March-quarter tally. It is in this context that the 2020 Q1 earnings season has gotten underway for us already. We have another 8 S&P 500 members with fiscal quarters ending in February on deck to report such 2020 Q1 results this week, which includes a number of industry leaders like FedEx FDX, Nike NKE and others.
The fact is that by the time the JPMorgan JPM and Wells Fargo WFC come around to report their March-quarter results on April 14th, we will have seen 2020 Q1 results from almost two dozen S&P 500 members already.
The Coronavirus Impact
Needless to say that this global pandemic is the biggest cloud on the earnings horizon, as it has such an overwhelming impact on the economic and operating environment in which these companies operate. Each of the four index members that have reported already mentioned the virus outbreak in their releases, with Costco COST reporting a +12.1% same-store sales growth in February as nervous shoppers stocked up on essential supplies. But for most other companies, the pandemic undoubtedly been a negative development whose full impact they are struggling to quantify.
The chart below shows how estimates for 2020 Q1 have evolved since the quarter got underway.
As negative as this revisions trend looks, it is actually only modestly bigger than what we witnessed in the comparable periods over the preceding four quarters. In other words, the magnitude of negative revisions to Q1 estimates is hardly unusual when seen in a historical context, even if we go beyond the last few quarters.
Such a relatively ‘average’ decline in Q1 estimates runs counter to the actual and perceived disruptions to normal business activities by the global pandemic.
The explanation for this seeming disconnect is that many companies simply withdrew their earlier issued guidance as it was practically impossible for them to quantify the full extent of the pandemic’s impact. Guidance is important, as it serves as a reference point for sell-side analysts in coming up with their EPS estimates.
This suggests that we will likely see an unusually busy pre-announcement season as companies close their books on the quarter on March 31st and come to grips with the full negative impact of this outbreak.
In our view, the market is currently trying to size up the full impact of this outbreak, but we will find out only the Q1 impact in the coming days.
Estimates for 2020 Q2 have been coming down as well and have now moved modestly into negative, as the highlighted portion of the chart below shows.
As you can see above, consensus estimates show growth resuming in the back half of the year. But that view likely reflects the hope that the pandemic and its associated effects get under control in the coming months. Hard to tell at this stage as to how reasonable or otherwise this expectation.
The chart below puts earnings and revenue growth expectations for full-year 2020 in the context of where growth has been in recent years and what is expected next year.
The ongoing market sell-off shows there isn’t a lot of confidence in these consensus expectations. That will likely change only once visibility on containment of the pandemic improves, which will enable companies to get a handle on the full extent of their exposure and the pandemic’s macroeconomic impact.
For an in-depth look at the overall earnings picture and expectations for Q1, please check out our weekly Earnings Trends report >>>> How the Coronavirus Has Impacted Earnings
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