Following a strong second quarter of 2021, investors seem to have anticipated deceleration in company profit growth as the world continues to grapple with COVID-19. These rather pessimistic expectations have on average been beaten in Europe. Across the board, in Q3 2021 Eurostoxx 50 companies have reported a cca. 4.8 per cent positive surprise on the top line that translated to a 9 per cent surprise increase in net income overall – a more bullish scenario that had originally been priced in by investors. For clarity, the Eurostoxx 50 index represents the 50 largest listed companies of the Eurozone and could be considered as a critical gauge of Europe’s overall economic health.
On a sectoral level, the Utilities, Energy, and Materials sectors were the best performers in terms of revenue when compared to analyst expectations. Utilities companies beat analyst projections by 44.26 per cent, the same figure was 13.56 per cent for Energy Companies and 6.82 per cent for the Materials sector.
Revenues of Iberdrola and Enel, the two Utilities sector companies in the index, could massively outperform analyst expectations because most probably these companies could partially translate the increasing energy prices into prices they charge to their customers.
ENI and TOTAL, the two Energy names in the index both generated outstanding results both from a top-line and from the bottom line end, mainly owing to the global economic recovery following lockdowns in Europe and the U.S. and due to the high energy prices. Gas prices in Asia and Europe were up more than 85 per cent from the previous quarter, reaching unprecedented levels while oil prices were up 7 per cent in the third quarter of 2021 compared to Q2. Higher prices together with a jump in demand supported the additional revenue of these companies.
In the Consumer Discretionary sector, surprisingly, automotive companies in general beat analyst projections on the bottom line. Interestingly, Volkswagen reported close to 75 per cent above expected earnings figures while BMW reported almost 20 per cent higher earnings than previously projected by analysts. The reason could be that even though chip shortage problems in the sector are serious and are far from being over, continuing to hurt their sales figures, much lower earnings had been priced in by market participants who seem to have been overly pessimistic about these carmakers’ net income. On the other hand, the market consensus was more bullish about Daimler, anticipating an 18 per cent higher revenue. The company potentially suffered more from the chip shortage than originally projected that deteriorated the sales figures of the Group.
The Industrial sector was flat to slightly above expectations on the top line however underperformed when it comes to earnings. KONE, the Finnish engineering company reported a negative earnings surprise. They mentioned high materials costs as the biggest headwind for the company. Deutsche Post also published a negative surprise in earnings. They indicated that the major drivers for difficulties were mostly related to the pent-up consumer demand that has overwhelmed available infrastructure and labour capacities.
Price reaction to these surprises has been rather interesting. If a company posts a positive surprise, one would expect to see a better stock performance in the following days as a result of that. However, on a general level, we have seen largely muted price movement to Eurostoxx 50 earnings results this quarter.
Holistically, we can deduce that a few overarching macroeconomic processes influenced the performance of Eurozone large caps. The world is still struggling to gain the upper hand in its fight against the pandemic and its macro consequences i.e. the high energy and raw materials prices, the semiconductor shortage, and changing inflationary expectations defined the economic framework of how European companies fared in the past quarter. While the solutions for short-term problems are numerous and complex, how quickly humanity will manage to defeat the pandemic will eventually determine the economic performance of European large caps as well in the medium term.
Disclaimer: This article was issued by Tamas Jozsa, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.