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The Coronavirus Pandemic and its Impact on Corporate Earnings

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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • The ongoing Q1 earnings season is less about what happened in the January-through-March period and more about evolving expectations for the current and coming quarters, which continue to be set lower as a result of the pandemic.
     
  • For the 193 S&P 500 members that have reported Q1 results, total earnings or aggregate net income is down -17.1% on +0.6% higher revenues, with 64.8% beating EPS estimates and 60.6% beating revenue estimates.
     
  • This is a weaker showing than we have seen from the group in other recent periods and reflects the pandemic-related lockdowns that started coming into effect towards the end of the quarter.
     
  • For the Tech sector, we now have Q1 results from 35.3% of the sector’s market capitalization in the S&P 500 index. Total Q1earnings for these Tech companies are down -1.6% from the same period last year on +2.7% higher revenues, with 74.1% beating EPS estimates and 70.4% beating revenue estimates.
     
  • Bigger than expected credit costs to account for the economic downturn have weighed heavily on the Finance sector’s profitability, which is dragging down the overall Q1 earnings growth pace for the S&P 500 index. 
     
  • For the Finance sector, we now have Q1 results from 57.0% of the sector’s total market capitalization in the S&P 500 index. Total earnings for these Finance companies are down -44.6% from the same period last year on +1.6% higher revenues, with only 46.8% of the sector companies beating EPS estimates and 63.8% beating revenue estimates.
     
  • Excluding the Finance sector drag, Q1 earnings growth for the remaining S&P 500 companies that have reported results would be down -4.4% (vs. -17.1% including the reported Finance results).
     
  • For the Consumer Staples companies (66.3% of the sector’s market cap in the S&P 500 companies has reported), total Q1 earnings are up +8.4% on +4.7% higher revenues, with 75.0% beating EPS estimates and 50% beating revenue estimates.
     
  • For Q1 as a whole, total S&P 500 earnings or aggregate net income is now expected to decline -15.5% from the same period last year on +1.5% higher revenues. Excluding the Finance sector drag, Q1 earnings for the rest of the index would be down -11.4%.
     
  • Q1 earnings are expected to be below the year-earlier level for 11 of the 16 Zacks sectors, with double-digit declines at Autos (-88.5% earnings decline), Aerospace (-41.4%), Energy (-61.4%), Basic Materials (-33.1%), Transportation (-62.4%), Industrial Products (-20.9%), Conglomerates (-20.6%), Consumer Discretionary (-25.4%), Finance (-29.1%),  and Retail (-17.0%).
     
  • Sectors with positive earnings growth in Q1 include Construction (+20.3%), Business Services (+3.2%), Medical (+4.5%), Consumer Staples (+6.1%), and Utilities (+3.0%).
     
  • Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -34.3% and Q3 expected to suffer a -18.9% decline. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-134.9% decline in earnings), Autos (-171.9%), Transportation (-144.0%), Aerospace (-47.8%). Other sectors with big year-over-year earnings declines include: Consumer Discretionary (-62.0%), Basic Materials (-37.4%), Industrial Products (-42.5%), and Conglomerates (-35.0%).
     
  • Given the uncertain public health backdrop that is driving these estimates cuts, it is reasonable to expect still deeper cuts to estimates in the days ahead, particularly as companies report Q1 results and share their outlook for underlying business conditions during these unusual times even though most of them are withdrawing previously issued guidance.
     
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -19.6% on -7.2% lower revenues. This is down from close to +8% growth expected at the start of the year. For reference, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.
     
  • The implied ‘EPS’ for the index, calculated using current 2020 P/E of 22.0X and index close, as of April 28th, is $130.20, down from $161.97 in 2019. Using the same methodology, the index ‘EPS’ works out to $162.09 for 2021 (P/E of 17.7X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

 

  • Please note that while full-year 2021 earnings for the S&P 500 index are currently expected to be up +24.5% from the steadily lowered 2020 level, the absolute dollar amount of 2021 earnings are essentially flat from the 2019 level.
     
  • For the small-cap S&P 600 index, total Q1 earnings are now expected to be down -41.5% from the same period last year on -4.0% lower revenues. This would follow +0.7% earnings growth in the preceding period. The Q1 earnings growth picture would be even weaker had it not been for the strong growth in the Finance sector.

 

We are in uncharted territory with respect to the economic and corporate earnings impact of the ongoing lockdown environment. The level of uncertainty about the extent and duration of the underlying public health issue makes quantifying the impact very difficult, if not altogether impossible.

Some industries have literally been in the eye of the storm and results from companies in those spaces like Ford (F - Free Report) , Delta Air (DAL - Free Report) , Southwest (LUV - Free Report) , Starbucks (SBUX - Free Report) , Boeing (BA - Free Report) and others, amply prove this point. Many others that aren’t directly affected like Alphabet (GOOGL - Free Report) , Advanced Micro Devices (AMD - Free Report) and others are not shielded either.

While the lockdown conditions in the U.S. arrived only in the final weeks of the quarter, they spanned most of the quarter in China and other regions. We saw that in the results from truly global players like Coca-Cola (KO - Free Report) and Proctor & Gamble (PG - Free Report) , with the former suffering and later benefiting from the pandemic.

With the bulk of the pandemic’s economic impact expected to take place in the current period (2020 Q2), analysts have been sharply lowering their estimates over the last few weeks, as the chart below shows.

 

 

 

 

 

 

 

 

With Q2 expected to be the ground zero for the lockdown’s economic impact, three of the 16 Zacks sectors are expected to lose money in the quarter. These are Energy, Autos and Transportation, whose Q2 earnings are expected to be down -134.9%, -171.9%, and -144.0% from the year-earlier level, respectively.

Other sectors with year-over-year earnings declines include Consumer Discretionary (-62.0%), Basic Materials (-37.4%), Industrial Products (-42.5%), Conglomerates (-35.0%), Aerospace (-47.8%) and Finance (-32.8%). 

The chart on the next page presents expectations for Q1 and Q2 in the context of what was actually reported in the preceding periods and what is currently expected in the back half of the year.

 

 

 

 

 

 

 

The chart below shows the growth picture on an annual basis. As you can see, estimates for this year are going down in a major way.

 

 

 

 

 

 

 

 

Estimates for full-year 2020 have come down sharply and the trend will likely continue as move through Q2 and beyond. The big issue now is what happens to next year’s estimates, currently expected to be up +24.5% from the still-declining 2020 level.

The chart below shows the absolute dollar value of annual estimates.

 

 

 

 

 

 

 

 

But as you can see above, the estimated 2021 earnings level for the S&P 500 index is essentially flat from the 2019 and 2018 level, even though it represents a big jump over wherever the 2020 level settles.

A lot will depend on the speed of the eventual recovery, which emerges as the current shelter-in-place policies starting easing.

In the best-case scenario, the bulk of the economic impact is confined to Q2, with growth trend stabilizing in Q3 and accelerating toward the end of the year. Driving this view is the expectation is that the outbreak peaks in the late-April/early-May timeframe and starts subsiding thereafter. We will see if these expectations pan out, but the coming earnings season will be unusual in many ways.

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