Inflation, the abolition of medical measures, a sharp rise in prices for goods and energy, higher tariffs … The current season of profits is marked by many economic factors. They are also very instructive for investors.
In the United States, corporate results for the first quarter were marked by the third consecutive decline in the net profit margin of large corporations. According to the latest consensus of FactSet’s financial data manager, the S&P 500’s profits have actually grown by less than 5% and their turnover by more than 10%.
In the United States, corporate results for the first quarter were marked by the third consecutive decline in the net profit margin of large corporations. According to the latest consensus of FactSet’s financial data manager, the S&P 500’s profits have actually grown by less than 5% and their turnover by more than 10%. However, the situation is much worse in developing countries, where so far only a quarter of companies are performing better than expected in the first quarter, compared to 77% in the United States. Countries such as India and Turkey have been particularly hard hit by rising energy prices. In China, new blockades from March and rules aimed at technology companies are weighing in on profits. On the other hand, Europe stands out, as Stoxx 600 is now estimated to have grown by almost 25% in the first quarter due to a sharp increase in turnover (+ 20%) and improved profitability. . These good figures, however, are partly due to the impact of the currency, as the euro lost about ten percent against the US dollar from early 2021 to early 2022. However, first of all, at the level of sectors, the differences are the most significant. and the most revealing. Not surprisingly, the energy sector showed the best performance: revenues almost tripled in both Europe (Stoxx 600) and the United States (S&P 500), according to the latest IBES consensus from data provider Refinitiv. But other industries are disappointing. Thus, according to available figures and the latest estimates, the profits of technology companies in Europe fell by more than 10%. In the United States, profits in 3 sectors out of 11 fell, including for financial companies by almost 20%. If we focus on companies that have already released data across the Atlantic, the communications services sector (including telecommunications) has so far exceeded expectations by 27.9%, while the technology sector has exceeded expectations by only 2.8%, well below the historical average. . . More than one in four technology companies even showed lower-than-expected figures, compared to less than one in 20 on average last year. As always, American banks were the first to show their results, almost three quarters have already released their quarterly data. In general, the approval was very mixed, as the decline in profits was slightly smaller than originally expected, but analysts slightly lowered their estimates for the whole year, expecting a decline of more than 11%. The fall in profits may be surprising, as markets have long hoped for a recovery in rates, which will allow banks to increase their interest margins. In the United States, the average rate on 30-year mortgages (the reference term) jumped from less than 3% last fall to more than 5% in mid-April. If we take the case of the giant JP Morgan Chase, its net interest income really jumped 7% in the first quarter. But his other income fell as market volatility affected, in particular, the investment bank’s operations. And, above all, higher interest rates combined with the economic downturn forced the bank to record reserves for credit losses (risk of default) of almost $ 1.5 billion, explaining the decline in profits. The trend, which is expected to accelerate in the second quarter, explains the caution of analysts. European banks have traditionally been more dependent on interest income and less inclined to invest in banking. Therefore, they are in a better position to benefit from higher interest rates. However, they will also have to record reserves for credit losses in the current economic environment and in the face of a sharp increase in bankruptcies since the beginning of the year (+ 35% in France, + 49% in Belgium, + 27% in Germany in March …). This contrasts with last year, when results improved due to the lifting of reserves made in the midst of the 2020 pandemic. We should not expect a short-term rise, according to analysts, who even expect a drop in almost 9% of profits in European financial reserves for the year. So far, the hour of the revenue season, of course, comes down to Netflix’s liabilities, which fell 35% on April 20. The pioneer and world leader in streaming video lost 200,000 subscribers in the first quarter after quitting in Russia (700,000 subscribers). Even without this impact, the group is very far from its goal of gaining 2.5 million subscribers. And this first drop in customer numbers in 10 years is not likely to be a single one, as Netflix expects to lose 2 million subscribers in the second quarter due to competition, including with Disney +, and especially the resumption of leisure activities. In order not to lose too many positions, the group decided to announce the launch of a subscription at a reduced price with advertising. This new disappointing quarterly report from Netflix has affected all companies that have enjoyed life at home (remote work, digital entertainment, etc.) since the beginning of the pandemic. Zoom Video conferencing specialist, connected fitness leader Peloton, food box giant HelloFresh or bookmaker DraftKings have highlighted their downfall. The video game sector, social networks, fintech or IT security (with disappointing figures from DocuSign) have also been affected. After the euphoria of 2020, there is even talk of excessive pessimism, as markets have sanctioned all companies involved in digitalization. Those who can demonstrate that their growth and profitability are structural should benefit from renewal. In Europe, the luxury sector has also been generally marked since the beginning of the pandemic: many consumers have enjoyed branded products in the absence of other leisure activities (restaurants, holidays, etc.). World leader LVMH saw a 29% jump in the first quarter again due to the good work of its flagship fashion and leather division with more than 20% prices for Louis Vuitton, according to HSBC analysts, resuming sales of its selective distribution activities (duty free shops) at airports, etc.) and the very favorable impact of the exchange rate. However, the title did not benefit from this in the stock market, while the group, like its competitors Hermès and Kering, said it would be vigilant until the end of the year. Thus, in March, the company closed its stores in Russia, even if Bernard Arnault assured the general meeting that the economic impact remains very low (due to other sales channels). Strict quarantine in Shanghai and other Chinese cities is also bad news for the industry, as is volatility in stock markets and cryptocurrencies. According to Andrea Felsted, a Bloomberg Consumer Observer, last year’s surge boosted solid sales in a major North American market (more than a quarter of sales at LMVH, Hermès’ main growth center). The latter also clearly indicates the impact of rising prices for luxury goods, which may deter consumers who are already facing high inflation. The aviation sector is also at a crossroads, taking advantage of the abolition of medical measures in the face of rapid oil prices. In the United States, the first results are quite encouraging. As a result, American Airlines’ revenue more than doubled to 84% from the pre-pandemic level. The first American and global company (in terms of capacity) first of all pointed out that in March it recorded record sales and operating profit. American Airlines expects to confirm a return to profitability over the next few quarters. United Airlines said it expects record revenue in the second quarter with an operating margin of about 10%, which is comparable to the pre-pandemic figure for this period (12.9% in 2019 and 10.6% in 2018). Thus, the company estimates that it will be profitable in 2022, despite sharp fuel costs. This confidence can be explained, in particular, by capacity controls, which should allow the sector to improve congestion and revenue in one place. Thus, Delta Airlines said that its bookings are reaching records for this summer, although the proposed capacity is still 10% lower than before the pandemic. And in Europe? Most companies publish their results there only in early May. Therefore, it is too early to say, but the example across the Atlantic may be favorable for easyJet, Lufthansa, IAG, Ryanair and others.