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Third quarter earnings – a big surprise so far


One third of European companies listed on the Euro Stoxx 600 Index have reported third quarter earnings results over the past few weeks. So far, despite evidence of a deterioration in the top line, third quarter earnings have surprised by 16% to the upside.

Sales performance has continued to remain under pressure over the summer months, with the aggregate index currently showing a decline in sales of almost 6% over the quarter. Out of the index constituents that have reported, close to 60% have reported lower sales. Nevertheless, although quarterly sales declined, the numbers were not as bad as expected. Half of the companies that have reported still managed to beat expectations, which were sharply downgraded in the first half of the year.

Despite the lower sales volumes, aggregate third quarter earnings for European companies have so far amounted to a double-digit growth of 18% and came in 16% higher than expected. Almost all sectors have managed to increase profitability over the quarter, with the exception of the energy, industrials and utilities sectors. A slight decline in earnings is also recorded across the consumer staples sector. In particular, the energy sector remains the weakest performer, with a double digit decline in top line growth and the strongest miss on expectations.

The biggest surprise yet, however, is the European financial sector. The sector has locked in the strongest income growth over the quarter, so far, beating expectations by slightly less than 8%. Furthermore, earnings expanded by 35%, one third higher than market expectations.

While it is still early in the reporting period, key themes are developing from this quarter’s earnings. Firstly, companies exposed to Asia, particularly China, are benefitting from the region’s relatively faster economic recovery. This is mainly attributed to its success at re-opening its economy while covid-19 case growth remained low. Companies including L’Oreal and Louis Vuitton have recorded a double-digit growth rate in Mainland China, which contributed strongly to the quarterly results.

Secondly, some companies have shared their intention to restart share buyback programs. During the first quarter, on the back of heightened uncertainty over future expectations, most companies had announced a reduction in capital expenditures which were not deemed critical, and the removal or reduction of share buybacks and dividends. Therefore, it is an encouraging signal from companies announcing their intention to restart share buyback programs, both from a liquidity perspective and as support to the share price going forward. ASML for example have announced that its two-year €6 billion share buyback program ending in 2022 remains in place and will resume buying back shares in the fourth quarter.

Thirdly, while the aggregate third quarter results so far have managed to surprise to the upside, this tends to mask the mixed picture beneath the surface. While some companies have gained confidence in their operations and upgraded 2020 targets, such as Schneider Electric, or resumed share buybacks like ASML, others have raised their concerns on the path towards recovery.

The share price of SAP plunged by 21.62% on Monday, following the company’s decision to downgrade its 2020 guidance and mid-term outlook, pushing back its targets by two years. Despite benefitting from the accelerated demand for cloud-based services triggered by the covid-19 pandemic, SAP expects that the hardest hit industries will continue to be negatively impacted into the first half of 2021. The company’s strategic shift to focus on its cloud delivery operations is also expected to impact revenues and profitability over the next two years, to then accelerate into 2025.

European countries, battling the second wave of the covid-19 pandemic are once again announcing new restrictive measures to contain the spread. The outlook, therefore, remains clouded with uncertainty, particularly for those most exposed to the hardest hit industries.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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