The first earnings season of 2020 is dominated by the corona crisis. While, barring China, the lung disease caused by the virus did not turn into a massive problem in most countries until March, the last month of Q1, the economic restrictions imposed by the pandemic are already having a considerable impact. Not only have already-published results been significantly weakened; investors and analysts also expect lower profits medium-term due to the consequences of the global fight against the virus.
Shortly before the first presentation of figures in the USA, signs of a sharp decline in profits were already becoming apparent. Data from Refinitiv from mid-April shows that companies in the US leading index S&P 500 were expected to post an average of almost 13 per cent lower profits in the first quarter of the year compared to the same period last year. Particularly large drops in profit were expected in the energy sector (-55 per cent), while industrial, consumer goods and financial groups were estimated to post around one-third less profit.
Precautionary measures affecting the figures
In the USA, the big banks traditionally open the quarterly earnings season with their figures: Goldman Sachs, Bank of America and Citigroup faced a 50-per-cent decline in profits in Q1. Industry leader JPMorgan saw its profits drop by more than two thirds, Wells Fargo by almost 90 per cent. Morgan Stanley shows the best performance in the industry with a mere 30-per-cent drop in profits to USD 1.7bn. At first glance, this makes the first round of annual reports even more devastating than expected. However, the lower profits are still mainly due to precautionary measures taken by the banks, who set aside reserves to be prepared for possible loan defaults triggered by the economic consequences of the Corona crisis.
Even in this gloomy environment, winners exist
In addition to companies, rough waters also loom ahead for private households in particular. In the US, more than 26 million Americans lost their jobs in the first five weeks of the pandemic. This in turn will have a negative impact on the sales of consumer-dependent corporations. However, despite the bleak outlook, other companies have so far even benefited from the current situation. Curfews and contact restrictions, for example, have favored communications service providers’ businesses, one shining example being video streaming provider Netflix. The company reported 15.8 million new paying customers in the previous week, almost twice as many new customers as analysts had expected. Quarterly revenues rose from USD 4.5bn in Q1 2019 to USD 5.8bn. Net income was 709 million, more than twice as high as in the previous quarter.
In view of the challenges caused by the corona crisis, attention is also very much focused on pharmaceutical companies and healthcare groups: stockpiling by consumers benefitted pharmaceutical manufacturer Eli Lilly, whose sales increased by over 15 per cent to USD 5.86bn. In the case of French competitor in the sector, Sanofi, sales at the turn of the year rose by around 7 per cent to almost EUR 9bn, the group announced before the weekend. Adjusted earnings per share excluding exchange rate effects increased by almost 16 per cent to 1.63 euros. Net profit increased by 48 per cent to EUR 1.7bn. About half of this growth was attributable to the inventory increase in the wake of the Covid 19 crisis.
While governments around the world are attempting to contain the economic consequences of the Corona crisis as quickly as possible with aid packages and economic stimulus packages, further prominent stock corporations on both sides of the Atlantic will be publishing their quarterly reports in the coming days, among which might well be one or two positive surprises. According to the Refinitiv data, these might be found not only in the communications and healthcare sectors, but also among utilities and technology stocks.
Prognoses are no reliable indicator for future performance.