US earnings review: week two

Investors are approaching the halfway mark in the reporting period, as nearly one-third of the S&P 500’s market capitalization reports in the week ahead. In this week’s Investor Spotlight, we look at what happened last week in Wall Street’s corporate results and the diminishing expectations for earnings.

The earnings story until now

The bar was set low for companies heading into the third quarter results period. Despite this, it would appear that in aggregate, earnings are undershooting the even modest expectations set before the reporting season kicked off. After last week’s numbers, data compiled by fact set suggests that earnings growth for the quarter ought to be 1.5% – down from the 2.8% estimate prior to the commencement of earnings season.

With the bulk of financial firms having reported already, the sector appears to be weighted on aggregate EPS growth estimates. While generally striking an upbeat message about the future of the US economy, the major commercial and investment banks set aside greater provisions for bad debts. Their markets and asset management divisions also underperformed amidst a souring investment backdrop.

So far, only energy, industrial, and real estate firms have seen aggregate EPS estimates improve. Seven of 11 sectors are expected to post negative earnings growth in the third quarter.

Three stocks that reported last week

Here are three major companies that reported quarterly earnings last week.

• Tesla

The world’s largest car manufacturer handed down a mixed set of results for the quarter. EPS topped estimates, coming in at $1.05 against a $1.01 consensus estimate. However, topline growth slowed and missed forecasts materially, with revenues of $21.45 billion versus the $22.09 billion forecast. The miss was put down to persistent supply-side constraints, as had been pointed out in the company’s recent delivery update. There are also fears that the drop in sales could be due to weakening demand.

CEO Elon Musk was featured on the earnings call with investors, during which he painted an optimistic picture of Tesla. In typical musk fashion, he made the call that Tesla could rise to become the biggest company in the world, and that it could be worth more than Saudi Aramco and Apple Inc combined. On current numbers, that would value the automaker at well over $US4 trillion, approximately seven times larger than it is now.

In the nearer term, Tesla’s management says it still envisages that it can maintain a 50% growth rate in deliveries going forward. There is scepticism as to how that might be achieved in the next few years, as the business battles operational issues in its plants and skyrocketing prices for inputs.

Tesla shares fell roughly seven percent on the first trading day following its results. The company’s stock remains mired in a downtrend, with questions about its growth outlook, unfavourable macroeconomic and policy conditions, and generally weak sentiment weighing on its price. A hold of support at $205 will be crucial to arrest the downtrend.

• Netflix

Netflix has proven to be one of the shining lights of the reporting period so far. It delivered a set of numbers much stronger than expected, with revenues of $7.9 billion, and EPS hitting $3.10. The consensus estimate was for $7.8 billion and $2.14 – which would have been higher had it not been for the effects of a strong US dollar.

The key detail in Netflix’s results was the net change in subscribers. After several quarters of net subtractions in subscribers, the company saw a much larger-than-expected increase of 2.4 million for the quarter. Management also outlined its plans to maintain user growth, announcing that it would be launching a cheaper subscription which would include paid advertising during programs. It also outlined how it plans to crack down on account sharing.

Netflix’s shares rocketed on the day of its result, closing trade up by more than 13%. The company’s share price remains in a downtrend. However, after last week’s surge, there are some signs of reversal. The weekly RSI has shot above 50 after breaking resistance at $250. The next key level to watch looks to be around $290 per share.

• Goldman Sachs

merica’s last major bank to report for the quarter, Goldman Sachs reflected many of the themes present in the results of its other major counterparts. The financial metrics were strong, with the bank beating EPS estimates with an $8.25 result, against a $7.51 estimate. That was underpinned by revenues of nearly $US12 billion, which smashed the $US11.5 billion forecast, with a major tailwind the rapid rise in interest rates.

There were some minor headwinds for the investment bank. The numbers were driven by commercial banking activities, with investment and institutional banking a drag on profits due to recent financial market conditions. The bank is making a bid to grow its consumer-facing business. Goldman’s management also flagged similar fears and uncertainty about the US economy, as growth slows amidst rapid rising interest rates and potential growth shocks around the world.

Goldman Sachs shares jumped more than five percent on the day of its results. Despite the rising interest rate environment, concerns about the outlook for US economic activity have weighed on the bank’s share price. There are some positive signals emerging on the charts, however. Momentum is beginning to shift to the upside, while a potential set of higher lows is taking shape.