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Earnings season provides some shocks. How will this impact your portfolio?

Market Activity

Earnings season provides some shocks. How will this impact your portfolio?

August 11, 2023

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Many analysts were predicting disaster at the start of 2023 due to collapsing corporate profits.

As you know we always look at the facts; read the data and ignore the noise. Those who shout loudest, aren’t always right. It would seem that profits haven’t fallen, in fact, most large companies are actually doing very well at the moment.

We are in the middle of earnings season and here, we pick a handful of results, focusing mostly, but not entirely on the UK.

Generally speaking, we have seen what we would expect: banks have done very well whereas mining, oil and gas have fallen back into line after bumper results last year. Lower prices, lower profit.

Laughing all the way to the bank.

We had solid results from HSBC, NatWest and Barclays, reiterating just how much money banks make from higher rates.

HSBC announced a new buyback program and painted a bullish outlook for its 2023 earnings, joining peers in benefiting from global rate rises that have been boosting income.

The London-based lender, which generates most of its income in Asia, will repurchase an additional £1.5 billion on top of a previous program announced just three months ago, according to a second-quarter earnings statement on Tuesday. HSBC also said it is now expecting net interest income for 2023 to be above £27 billion, up from more than £26 billion.

Net interest margin rose to 1.72% pushing pretax profits to £6.8 billion in the three months through June, beating a company-compiled analyst estimate of £6.2 billion.

Barclay's profit rose 24 per cent in the second quarter as its retail banking and corporate business also continued to benefit from higher interest rates, offsetting another decline in trading and dealmaking revenue at its investment bank.

Net profit increased to £1.3bn from £1.1bn in the same period last year, beating analysts’ expectations of £1.2bn, the British bank said on Thursday.

Barclays also announced a £750m share buyback deal, upon the £500m completed earlier.

Net interest margin – a key metric charting the difference between loan and savings rates, soared to 3.2% from 2.67% as savers continued to receive feeble returns on their deposits amid mounting accusations of “profiteering” in the sector.

Barclays said it now expected NIM to be less than 3.20%, with a current view of around 3.15%.

NatWest has attempted to draw a line under a tumultuous month which saw the departure of its chief executive with a set of strong second-quarter results which beat analysts’ expectations.

Revenues in the quarter rose 20 per cent to £3.9bn, beating analyst expectations of £3.7bn. Pre-tax operating profits of £1.7bn were 26 per cent higher year on year, and ahead of estimates of £1.5bn

It’s been a different story for the wholesale energy companies, although again, the headlines can be misleading.

Shell, the UK oil and gas major reported net profits of just over £3.9bn for the three months to the end of June.

The figure represents a drop of more than 50% on the £8.9bn achieved in the same period last year and fell short of analysts' estimates.

It was also well down on the £7.45bn sum the company raked in during the first three months of the year.

It was a similar story for BP who increased its dividend and announced more share buybacks despite the drop in profits.

The group’s underlying profits for the second quarter were $2.6bn, down almost 70 per cent from the $8.5bn it recorded in the same period last year and missing analysts’ expectations of $3.5bn by almost $1bn.

However, previous profits were simply record-breaking and now they’re back to ‘normal’. Commodity prices have collapsed so a fall was expected.

The drop isn’t anything to do with performance but simply a change in the price of their product leading to lower refining margins.

BP was the last of the large western oil and gas companies to report their half-year results. Each company suffered a similar decline in profits as oil and gas prices fell over the quarter.

Brent crude, the global oil benchmark, averaged $78 a barrel between April and June compared with $114 a barrel in the same period last year. Profits at ExxonMobil and Shell were both down 56 per cent last year, while TotalEnergies earnings shrank by 49 per cent.

High commodity price means Shell, BP etc. made a huge profit as the costs of producing the commodities don’t change. Lower commodity prices have the reverse effect. They’re still posting huge profits, but just less than they were a year ago.

The chart above shows gross quarterly profit for the last 13 years.  As you can see, last week’s results were not ‘bad’ or disappointing, merely back to where they were before the conflict inflated the value of their product.

This is a good thing, not a bad thing. Reports are too focused on the drop because it’s more dramatic, rather than the explanation as to why. Hopefully, the fall in commodity prices will lead to a fall in inflation.

We’re not alone. The same has happened in the US.

ExxonMobil’s profits tumbled as the company said oil prices were returning to “normal”, signalling an end to the commodity turmoil that has hit the global economy since the Ukraine invasion.

America’s biggest oil company posted a net income of $7.9bn for the second quarter, less than half of the unprecedented haul of $17.9bn it generated during the same period in 2022.

Despite the drop, the profit figure, which was broadly in line with Wall Street estimates, was the company’s strongest for this time of year in more than a decade.

A drop in commodity prices also hit Anglo American which became the latest mining group to report weaker earnings driven by a disappointing China recovery.

“We’ve been a little bit surprised at how slow the opening of China has been,” Duncan Wanblad said on Thursday, adding that a turn in the commodity price cycle is “more likely to be early next year”.

The FTSE 100 miner of commodities such as iron ore, copper and steelmaking coal cut dividends by more than half to $700mn, after first-half earnings before interest, tax, depreciation and amortisation slumped 41 per cent to $5.1bn due to plummeting metal prices and inflationary cost pressures.

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Away from commodities though things are looking good.

Foxtons, the London-based estate agency, posted revenue growth in the first half as a slowdown in house sales was offset by strong lettings activity in the UK capital’s tight rental market.

The estate agency posted £6.1mn in pre-tax profit, up from £4.3mn year on year. A 26 per cent increase in lettings revenue boosted earnings, offsetting a 19 per cent drop in sales revenue caused by higher mortgage costs.

Foxtons said its mortgage refinancing volumes were up 29 per cent year on year. Revenue at its financial services unit however fell 12 per cent as customers took smaller loans and made fewer new purchases.

Volkswagen has lowered its forecast of car deliveries for the year amid a drop in the number of vehicles delivered by its Chinese branch.

The German car company said on Thursday that its goal of 9.5mn cars would now be at the top end of a range starting at 9mn, as deliveries in China dropped by just over 1 per cent.

On Wednesday, the company announced it would partner with Chinese rival Xpeng to jointly develop electric vehicles for the VW brand in the world's largest car market.

Profits before tax in the first half of the year grew 6 per cent to €5.5bn compared with the same period last year, with revenues up 15 per cent to €80.1bn.

Higher prices, new car models, and the fruits of a cost-cutting programme saw Renault's profits reach record levels in the first half of the year.

The French carmaker’s operating margin hit 7.6 per cent, more than triple a year ago, while net income hit €2.1bn, compared with a loss of €1.7bn a year earlier, the company said on Thursday. When its withdrawal from Russia was excluded, last year’s first-half profit was €647mn.

Sales in the first six months of 2023 were up by a quarter at €26.8bn; more than a third of models sold in Europe were electric or hybrid.

Chief executive Luca de Meo credited Renault’s “efforts to reduce costs” and a focus on value for its strong performance.

Nestle reported a dip in sales volumes in a sign that consumers are resisting food and drink price hikes as the cost of living bites but raised its forecasts following better-than-expected organic sales growth.

The group’s real internal growth — a proxy for sales volumes — dipped 0.8 per cent in the first half of the year, following a 0.5 per cent dip in the first quarter.

“Overall, demand elasticity was limited in the context of pricing actions,” Nestle said.

The maker of Smarties, Nesquik and Nescafé raised prices 9.5 per cent, moderating only slightly compared to a 9.8 per cent reported in the first three months of the year.

Hermès, the maker of the Birkin bag, increased sales by a quarter in the first half of the year, defying a trend of slowing US sales growth weighing on luxury sector rivals.

The French luxury group, known for its high-end handbags and silk scarves, was buoyed by strong sales in the US, a market where the breakneck pace of growth has started to normalise for larger rivals such as LVMH, as well as a sharp acceleration in China as its economy rebounds after the lifting of strict zero-Covid policies.

Overall sales at Hermès increased by 25 per cent at constant exchange rates to €6.7bn, while recurring operating income reached €2.9bn, a rise of 28 per cent in the same period last year.

The owner of British Airways has become the latest airline group to report record profits, boosted by high ticket prices and resilient demand for travel.

IAG on Friday reported first-half operating profit before exceptional items of €1.26bn, a record, compared with a loss of €446mn a year earlier.

The Anglo-Spanish company, which owns a clutch of airlines including Iberia and Aer Lingus, said customer demand remained strong, particularly for leisure trips, and reported “no sign of weakness in forward bookings”.

IAG followed airlines including easyJet and Ryanair in reporting record profits this year as demand for travel has boomed despite the weak economic backdrop in Europe.

Strong sales of drugs for cancer and diabetes helped AstraZeneca beat sales and earnings expectations in the second quarter.

The Anglo-Swedish drugmaker reported adjusted earnings per share of $2.15, up 38 per cent year-on-year, and higher than the consensus forecast for $1.98.

Sales were $11.2bn, up 17 per cent from the same period the year before, excluding medicines for Covid-19, and above the average analyst estimate of $10.97.

AstraZeneca also announced its plan to acquire Pfizer’s early-stage portfolio of gene therapies, in a deal worth up to $1bn, plus royalties on future sales.

Let’s finish with some controversy.

Centrica has reported a nearly ten-fold rise in profits at its household energy supplier British Gas.

Adjusted operating profits at the unit climbed from £98mn in the first half of 2022 to £969mn in the first half of 2023.

Most of this — about £500mn — was due to allowances under Britain’s price cap on energy bills to recover high costs during the energy crisis.

However, Centrica said British Gas’s margins had also been boosted by higher gas and electricity prices.

British Gas is Britain’s largest household energy supplier, with almost 7.5mn customers.

At the group level, Centrica reported an adjusted operating profit of £2.1bn, up from £1.3bn in 2022.

We know that gas prices are back to where they were before the pandemic, before the invasion of Ukraine, but we also know that household gas prices have barely dropped at all. Profiteering is always a tricky finger to point as making money is very much the point of most companies, but this now needs to stop.

Bring down energy prices, bring down inflation, and end the ‘cost of living crisis’.

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