Earnings Roundup: First Week of Earnings Season Kicks Off with Big Surprises
Alcoa’s earnings strongly outperformed the analyst consensus, while earnings for the gold and steel sub-industries are expected to be down sharply. It is still early in the Q3 earnings season, but 31% of companies have missed their earnings estimates.
Alcoa Inc. (AA.N) started off earnings season this week with solid earnings results, posting earnings per share of 11 cents, beating the analyst consensus of 5 cents. Despite decreases in the prices of aluminum throughout the quarter, the company was able to improve earnings over the 3 cents per share earned a year ago. Productivity gains helped Alcoa avoid the fate that analysts expect for most of the metals companies in the materials sector. As metal prices declined throughout the third quarter, earnings growth estimates for the sector declined from 16.2% in the beginning of July to the current -0.2% estimate. Metals have been hit particularly hard, with the gold sub-industry expected to see a 63% earnings decline and steel earnings expected to be down 48% from a year ago.
The struggles continued for Yum! Brands, Inc. (YUM.N), which missed its $0.93 estimate with earnings of $0.85, a 14% year-over-year decline. The KFC business in China still hasn’t rebounded from the damage to the brand’s reputation from the avian flu outbreak, which has made Chinese consumers hesitant to eat at the restaurants. To give consumers other non-chicken options, KFC introduced a beef burger, which has not been embraced as hoped. In addition to disappointing third-quarter results, Yum! gave a pessimistic outlook for the fourth quarter. During the earnings call, CEO David Novak projected that “China same-store sales growth will unlikely be positive for the fourth quarter” while stating that the company is “now estimating a high single- to low double-digit percentage decline in full-year EPS.”
One of the more surprising earnings announcements this week came from JPMorgan Chase & Co. (JPM.N). The bank took a $9.2B charge for legal reserves related, among other things, to lawsuits over mortgage-backed securities and issues surrounding disclosure of trading losses. However, excluding this special item, the company reported EPS of $1.42, smashing the $1.17 estimate. Through strong growth in deposits, lending and investment banking revenues, the core businesses of JPMorgan appear to be thriving despite the media attention paid to the company’s legal woes. JPMorgan is emblematic of the trend within the financials sector, where the big banks are expected to lead the way in earnings growth, while the smaller regional banks that are more levered to the mortgage business are beginning to suffer as mortgage rates have gone up and refinancing activity slows.
At this very early point in the third-quarter earnings season, the percentage of companies missing estimates is relatively high, at 31%. While this may be a result of the small sample size, it may be an indication that analysts did not respond as strongly as normal to the guidance provided during the most recent earnings season. With more than five times as many negative preannouncements as positive ones, the sentiment was very negative. With earnings growth estimates falling from 8.5% to 4.5% during the course of the calendar quarter, it appears that analysts may not have cut estimates enough to set the stage for large numbers of positive surprises, as is typical.
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