3 Sectors To Avoid Ahead Of Q1 2019 Earnings Season
Investing.com | Apr 08, 2019 14:05
With less than a week to go until the start of Wall Street's Q1 earnings season, investors are bracing for what may be the first U.S. profit decline since the second quarter of 2016. FactSet data show analysts expect first-quarter S&P 500 earnings to fall by 3.9% on a year-over-year basis. If confirmed, it would also represent the largest YoY decline in earnings since the first quarter of 2016.
Estimated earnings per share (EPS) for the first quarter have fallen by 7.2% since December 31, according to FactSet. This percentage decline is heftier than the 5-year average (-3.2%), the 10-year average (-3.7%), and the 15-year average (-4.0%) for a quarter. As well, relative to recent quarters, a larger percentage of S&P 500 companies have lowered the bar for earnings for the first quarter.
Of the 107 companies that have issued Q1 EPS guidance, 79 have released negative forecasts. At the sector level, seven are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Information Technology.
The Energy sector is expected to report the largest year-over-year earnings decline of all eleven sectors, -18.4%, as lower oil prices helped drive the expected decline. Despite an increase in price during the current quarter, the average price of oil in Q1 2018 ($62.89) was 13% higher than the average price of oil in Q1 2019 ($54.81).
Overall, 26 of the 29 companies (90%) in the Energy sector have seen a decrease in their mean EPS estimate, led by Hess Corporation (NYSE:HES) (to -$0.32 from -$0.02), Noble Energy (NYSE:NBL) (to -$0.03 from $0.16) and National Oilwell Varco (NYSE:NOV) (to -$0.01 from $0.07). At the sub-industry level, four of the six sub-industries in the sector are projected to report a decline in earnings for the quarter: Integrated Oil & Gas (-23%), S&P Oil & Gas Exploration & Production Select Industry (-21%), Oil & Gas Refining & Marketing (-16%), and S&P Oil & Gas Equipment & Services Select Industry (-16%).
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As well, the Energy sector is expected to report the highest year-over-year decline in revenue of all eleven sectors at -3.5%.
h2 2. Materials/h2The second largest year-over-year earnings drop is expected to come from the Materials sector, at -12.2%. At the industry level, three of the four industries in this sector are predicted to report a decline in earnings for the quarter. One of these thee industries, Metals & Mining, is anticipated to report a serious double-digit decline, -40%.
Freeport-McMoran (NYSE:FCX) and DowDuPont (NYSE:DWDP) are expected to see the most significant earnings declines within the sector. The mean EPS estimate for Freeport-McMoRan for Q1 2019 is $0.08, compared to year-ago EPS of $0.46, while the mean EPS estimate for DowDuPont for Q1 2019 is $0.87, compared to year-ago EPS of $1.12.
The two companies are so heavily weighted within the sector, that, were they to be excluded, the estimated earnings growth rate would rise to 0.4% from -12.2%.
h2 3. Information Technology/h2The Information Technology sector is projected to report the third highest year-over-year earnings slump of all eleven sectors, at -10.5%. Three of the six industries in the sector are expected to report a decline in earnings for the quarter. Indeed, two of these three are projected to report double-digit earnings declines: Semiconductors & Semiconductor Equipment (-23%) and Dow Jones Technology Hardware & Equipment (-22%).
Of the 68 companies in the Information Technology sector, 50, or 74%, have seen a decrease in their mean EPS. Of these 50 companies, 21 have recorded a decrease in their mean EPS estimate of more than 10%, led by Western Digital (NASDAQ:WDC) (to $0.47 from $1.11), NVIDIA (NASDAQ:NVDA) (to $0.62 from $1.30), and Juniper Networks (NYSE:JNPR) (to $0.21 from $0.37).
However, Apple (NASDAQ:AAPL) and Micron Technology (NASDAQ:MU) are expected to be the largest contributors to the decline in earnings for the sector.
This sector has also witnessed an unusually high number of companies issuing negative revenue guidance for the quarter. Overall, 31 companies in the sector have released negative revenue guidance, which is above the 5-year average (20).
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