Today's Must Read
NIKE's (NKE) Digital Playbook to Help Steer Coronavirus Woes
Robust Demand Aids Lockheed (LMT), F-35 program's Cost Hurts
Thursday, April 23, 2020
In addition to featuring new research reports on 16 major stocks, we have also provided here a real-time update on the ongoing Q1 earnings season. We also discuss below our assessment of the extent to which earnings estimates have come down as result of the Coronavirus pandemic.
The Outbreak's Earnings Impact
Estimates have come down across the board as analysts have come to grips with the pandemic's full impact. The ongoing Q1 earnnings season is helping clarify matters as well, even though the lockdown conditions currently in force covered only the last few days of March and most management teams are simply withdrawing their previously issued guidance.
S&P 500 earnings in all four quarters of 2020 are currently expected to decline on a year-over-year basis, with Q2 earnings expected to decline the most at -29.5%. For Q1 whose reports are coming in these days, earnings are expected to decline -14.7%, with 2020 Q3 and Q4 currently expected to decline by -16.3% and -7.9%, respectively.
S&P 500 earnings for full-year 2020 are currently expected to decline by -17.1%. This is down from positive growth of +7.9% at the start of the year.
If we look at these estimates in absolute dollar terms, instead of changes from the previous year, aggregate (bottom up) net income for the index is currently expected to be approximately $1179 billion in 2020, down from approximately $1533 billion at the start of the year. This is a decline of $354 billion, almost all of which is because of the pandemic.
If you prefer to look at aggregate index earnings estimates on an 'EPS' basis, then the our data shows that the index is currently expected to earn $134.20 in 2020, which is down from the approximately $174.40 estimate at the start of the year or a decline of $40.25, primarily because of the pandemic.
SAP shares have lagged the Zacks Computer Software industry over the past six months (-10.6% vs. +13.1%), but the Zacks analyst sees the company as benefiting from strong growth in cloud and software revenues, and expanding customer base.
Robust adoption of S/4HANA, Fieldglass, Concur and SuccessFactors Employee Central solutions is a key catalyst. Moreover, synergies from its acquisition of Qualtrics bodes well for the top-line growth. Additionally, strong demand for cloud solutions in the Europe, Middle East and Africa (EMEA) region holds promise.
However, increasing investments to enhance cloud-based offerings are likely to weigh on margins. Further, the coronavirus outbreak is weighing on software licenses & support revenues. Also, SAP trimmed 2020 guidance on account of uncertainty around coronavirus-led impact on business.
NIKE shares have outperformed the Zacks Shoes and Retail Apparel industry despite the hit to company's March quarter results because of store closures in China due to the coronavirus outbreak.
This resulted in lower sales mix in Greater China, which is its high margin geography, causing gross margin decline in the quarter.
The company retained its positive earnings track record, with earnings and sales beat in third-quarter fiscal 2020. The NIKE Direct business displayed strength backed by more than 30% digital revenue growth across all geographies and Converse. Notably, the use of its digital ecosystem as a key playbook to combat the COVID-19 crisis, has been receiving applause.
Lockheed Martin’s shares have done better than the Zacks Aerospace Defense industry, for whcih the Zacks analyst credits the current U.S. administration's expansionary budgetary policies, a trend that will likely continue over the near- to medium-term.
Lockheed Martin ended the first quarter of 2020 with both earnings and revenues surpassing the Zacks Consensus Estimate. It enjoys strong demand for its high-end military equipment in domestic and international markets, being the world’s largest defense contractor.
However, the company’s higher debt-to-equity ratio shows that the stock is highly leveraged when compared with its industry. Lockheed Martin also faces intense global competition for its broad portfolio of products and services. Furthermore, forced cost reduction initiatives for the F-35 program might hamper its operating results.
Other noteworthy reports we are featuring today include Netflix (NFLX), Danaher (DHR) and Regeneron Pharmaceuticals (REGN).
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Director of Research
Note: Sheraz Mian heads the Zacks Equity Research department and is a well-regarded expert of aggregate earnings. He is frequently quoted in the print and electronic media and publishes the weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz publishes a new article, please click here>>>