Companies, en masse, have withdrawn guidance for 2020 because of all the uncertainly Covid-19 has created. That leaves investors flying blind. There are some clues about how the second quarter is shaping up. It isn’t going to be pretty.
About 285 companies in the S&P 500 have reported first quarter earnings so far. Sales growth, year over year, is about 1%. Earnings have dropped about 8% on average. In the fourth quarter of 2019, sales grew about 3% year over year and earnings grew about 2%.
It isn’t just earnings growth that is problematic. Fewer companies are beating estimates. Quarter to date, about 70% of S&P companies have produced a positive earnings “surprise.” That might sound great, but companies always beat estimates. Typically 70% to 80% of companies beat earnings estimates each quarter.
The average surprise this quarter is about 0.3%. Earnings, essentially, are matching expectations. Last quarter, earnings exceeded consensus Wall Street estimates by about 5%.
It’s going to get harder to judge the quality of earnings because companies aren’t guiding right now. “Given the evolving nature of the Covid-19 pandemic, at this time, GE cannot forecast with reasonable accuracy the full duration, magnitude, and pace of recovery across our end markets, operations, and supply chains,” said the company in it’s first quarter earnings release.
There is no reason to pick on General Electric (ticker: GE ). It’s just one example of an oft-repeated statement from recent earnings reports.
But companies including Honeywell International (ticker: HON), Ford Motor (F) and Tyson Foods (TSN) have outlined in greater detail problems the pandemic is causing. And there is other economic data such as monthly car sales. Taken together, they allow investors to paint a more accurate picture of second quarter results.
Honeywell said it expected aerospace sales to be down 25% in the second quarter. Sales to energy end markets are expected to fall 15% and sales into the commercial building industry would drop 10%.
Falling aerospace and energy sales aren’t a shock. After all, about two-thirds of the global commercial jet fleet is parked due to lack of demand. And benchmark oil prices are down 65% year to date. That is hurting sales of all energy producers.
Falling building sales might be a surprise. But no one is in the buildings right now. Shelter in place mandates are keeping millions at home.
Buildings are big business. Commercial construction, excluding roads, is roughly a $500 billion a year business in America. What’s more, global energy producers spend more than that each year looking for oil and natural gas each year.
Commercial aerospace sales at Boeing (BA), Airbus (AIR.France) total roughly $110 in a normal year. And the aerospace aftermarket business is at least as large as the market for original equipment.
All in, based on Honeywell projections, at least of $100 billion in corporate sales will been vaporized by Covid-19 in the second quarter.
Then there is car sales and air travel. Car sales actually surprised to the upside in April. Still, monthly sales at an 8 million unit annualized rate are down more than 50% year over year. That decline wipes out another $50 billion in sales for U.S. industrial companies.
Air travel is depressed. General Electric hinted Monday that commercial air travel could be down 80% year over year. That’s another $40 billion in U.S. corporate sales gone.
These numbers alone have wipe out almost $200 billion in annualized sales. Quarterly sales at S&P 500 companies total about $8 trillion. The missing revenue amounts to about 3% of total sales.
This is a crude approximation, but declines are coming, and sales declines are only half of the problem. Ford, for instance, guided to a second-quarter much larger than Wall Street expected. Profit margins take a hit when sales volume declines. Businesses, such as Ford, have a lot of fixed expenses that stay stable in all economic environments.
Tyson reported a profit problem, too. It’s problem was a little different than Ford’s. The company reported lower profit margins year over year even though packaged food volumes were flat. Tyson is having trouble keeping employees at work in a a Covid-19 environment. Costs are rising as a result.
The operating profit margin of the S&P is about 13%. It fell to 8% during the 2008-09 financial crisis. If both sales an margins come in as badly as feared S&P 500 earnings could hit $20 a share, down 50% year over year.
This is a theoretical exercise. And a 50% decline in earnings also doesn’t mean that the stock market needs to drop. Wall Street consensus S&P earnings for the second quarter are roughly $25 a share. Everyone knows things are bad. What matters more is the second half this year and earnings in 2021.
But what the earnings declines do mean is that second quarter of 2020 is going to see economic pain on par with the Great Depression. The U.S. economy contracted about 13% year over year in 1932. GDP is expected to decline just over 12% year over year in the second quarter.
The Great Depression was Great, in part, because it lasted a really long time. How long the coming dip will last isn’t known. That’s due, in part, to the virus.
Write to Al Root at allen.root@dowjones.com
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May 05, 2020 at 07:15PM
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First-Quarter Earnings Are Bad. Here’s How the Second Quarter Is Shaping Up. - Barron's
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