Q1 2018 Earnings Wrap Up

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Strong growth continues


Exhibit1: Sector results relative to expectations – A fixed income perspective

Broad results

The S&P 500 experienced another very strong quarter as firms continue to benefit from a resilient economy and pro-growth tax reforms. Overall, revenue grew 8% year-over-year and earnings per share (EPS) improved by 24% on the same basis, despite strong comps in the year ago period.

Growth was very broad based, occurring across all major sectors with nearly all experiencing double digit earnings improvement. From an expectation standpoint, the bar was set pretty high going into the quarter, but companies were able to meet and even slightly exceed the high expectations. Overall, EPS results came in 6% above expectations, a level slightly higher than in the prior several quarters.

Interesting takeaways

In addition to the high level results, we thought it would be useful to take a deeper dive into a few selected topics to see what companies had to say during this earnings season. Below is a chart showing how frequently a selection of key topics were referenced on this season's calls:

Exhibit 2: Percent of S&P 500 companies referencing topic on earnings calls

Source: Aegon AM US Credit Research Team, Bloomberg

Tax reform and topics related to what companies may do with proceeds remained at the top of the list, but given the depth of discussion on these last quarter, here is a deeper dive into topics further down in the chart:

  • Inflation: While macro level results continue to show relatively benign inflation, companies themselves continue to experience some level of inflation within their businesses, especially relating to various commodities, labor and transportation. Overall, however, companies generally indicate that the level of price increases they are experiencing are relatively similar to recent quarters and have been in line with their forecasts. Depending on the industry and the company's pricing power, much of this inflation appears to be occurring on the input side of the business and not necessarily on the revenue side. This means that while companies themselves are seeing higher costs, it has been challenging to pass all of it along to the end consumers in the form of higher prices. This has resulted in management teams continuing to look for technology, innovation, supply chain consolidation or other methods to strip costs out of the system. For businesses who are unable to successfully achieve this and are unable to increase prices sufficiently, margins have come under pressure. An interesting observation is that relative to the prior quarter, references to inflation by companies within more consumer focused industries are down. This is partially offset by increased references within the energy, utilities and industrial firms, primarily due to rising oil prices and the ripple effects within these areas of the market. In addition, some industrial firms also noted inflation due to the recently announced tariffs. It will be interesting to see if industries further down in the production chain and ultimately closer to the end consumer voice increased inflation concerns in future quarters as this works its way through the system.
  • Interest rates: As one might expect given their business model, many financial related firms discussed their thoughts around the current interest rate environment in the US during the quarter. While some noted a slight risk of lower rates given the risk of trade wars and continued geopolitical uncertainty, the vast majority are acknowledging the rate increase that is occurring and expect it to continue. Commentary away from the financial sector was primarily focused on expectations of higher interest expense that could negatively impact the bottom line in the year ahead. In addition, with LIBOR also on the rise, a few companies noted exploring opportunities to rotate from floating-rate into fixed-rate debt where attractive as the year progresses. A rating agency noted that while corporate issuance was down y/y in the first quarter, this has possibly pulled forward issuance discussions that had been expected at a later date, although the overall issuance picture remains very dependent on the broader market environment. Another rating agency also noted that data indicates companies really haven't adjusted their maturity profile since recovering from the financial crisis despite historically low interest rates. This behavior seems to align with the general market expectation that rates on the long end will remain relatively muted, however, if the curve starts to steepen via the long end, there could be a round of issuance as company treasurers start to become more concerned about their overall long-term interest expense profile.
  • Tariffs: While towards the bottom of the list, tariffs saw the largest quarter over quarter increase in percentage of companies referencing the term. Given the nature of the tariffs, much of this occurred within the industrial and materials sectors where ~40-45% of firms discussed the topic. The most direct impact experienced during the quarter was experienced with steel. However, it's also important to mention that management teams acknowledged that the current tariff discussions introduce uncertainty into their businesses, making it more difficult for not only themselves, but also their customers, to plan. Outside the industrial and materials space, concern around whether tariffs will be extended into more agricultural products was also noted by several related companies.

Appendix I

Exhibit 3: S&P 500 Y/Y Revenue growth by quarter


Source: Aegon AM US Credit Research Team, Bloomberg. As of 5/14/2018

Exhibit 4: S&P 500 Y/Y EPS growth by quarter


Source: Aegon AM US Credit Research Team, Bloomberg. As of 5/14/2018


Appendix II


Exhibit 5: S&P 500 Y/Y Revenue surprise by quarter


Source: Aegon AM US Credit Research Team, Bloomberg. As of 5/14/2018

Exhibit 6: S&P 500 Y/Y EPS surprise by quarter


Source: Aegon AM US Credit Research Team, Bloomberg. As of 5/14/2018

 

 

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Jennifer Moore, CFA

About Jennifer Moore, CFA

Jennifer Moore, CFA, is the director of US credit research responsible for overseeing the public investment grade and public high yield research teams in the US, and she is a member of the Management Committee. Prior to her current role, Jennifer spent several years in the quantitative research, money market trading, and investment grade trading areas. She also analyzed public investment grade bonds for the investment branch of Legal and General. She has 20 years of industry experience and has been with the firm since 1998. Jennifer received her BBA from Mount Mercy College and her MBA from the University of Iowa. She is a CFA® charterholder.