U.S. earnings offer protection from Trump

<p>For all Donald Trump’s fist-pumping vows to ‘make America great again’, leading U.S. companies occupy one of several spheres that barely need the President’s ‘help’. </p>

Do Mega Corps need MAGA?

For all Donald Trump’s fist-pumping vows to ‘make America great again’, leading U.S. companies occupy one of several spheres that barely need the President’s ‘help’. S&P 500 firms are set to post their second straight quarter of earnings growth, according to Reuters’ data, and the best growth in two years at that. In fact, investors fear Trump’s protectionist, anti-trade policies—signalled as a priority in his inauguration speech last Friday—may have exactly the opposite effect on corporate America that’s intended.

This won’t happen in the next few quarters. But earnings reports set to be unveiled this week will still be uncomfortable reading for a handful of giant U.S. groups that have already found themselves on the receiving end of unwanted attention from the White House’s new incumbent.

These include America’s largest exporter, Boeing, and the U.S. No.2 car maker, Ford. Both face long-term impact from the President’s order to “Buy American, hire American”. Both have already experienced Trump’s most fearsome anti-corporate weapon, his Twitter account, putting them, and others, on notice that their shares face further beatings unless they comply.

Big exporters also face negatives that will arise from the U.S.’s withdrawal, signed on Monday, from the Trans-Pacific Partnership, and Trump’s pledge to renegotiate the North American Free Trade Agreement (NAFTA). The President was on a protectionist roll on Monday. He also threatened the CEOs of a dozen multibillion dollar companies with “a very major border tax” on products made from new factories outside the states.

One key takeaway U.S. investors are seeking from this reporting season then, is a sense of how resilient earnings will be in the face of direct and indirect headwinds like the ones outlined above.

The earnings season reaches its height this week, with one hundred and five groups—about a quarter of the S&P 500—releasing results. That means sentiment on the overall market will hinge strongly on how key earnings turn out, as well as on the performance of the week’s entire slate.

Reuters’ consensus forecasts point to a solid 6.6% year-on-year rise in the fourth quarter. Problem is, the breakneck ascent of the market into the end of 2016, has almost certainly priced in that growth already. Strong results from the biggest-name companies would help prevent the S&P 500 and Dow Jones Industrial Average from stalling, something both gauges have been threatening to do for weeks.

Here we look in some detail at key points to watch when Boeing and Ford report results later this week, together with the first results of the season from established Big Tech groups, Google and Microsoft.

 

Boeing: much more than Air Force One

“Cancel order”, the President tweeted, referring to the government’s Air Force One contract with the plane maker, for which Trump said “costs were out of control”, amounting to more than $4bn. The reality is, as ever with most things said by Trump, more prosaic. For one thing, the exact lifetime cost of the 12-year programme (which actually covers two identical state of the art Presidential jets) is £3.73bn. That represents a remittance by the government of about £310m to Boeing per year, roughly 0.3% of the group’s £94.4bn 2016 forecast revenue. In other words, even if the government, ‘cancels order’, Boeing would barely feel a pin prick.

In light of that, investor attention really ought to shift back to aerospace and defence trends globally, which remain largely favourable, regardless of potential headwinds at home.

Q4 Boeing earnings, which will be reported on Wednesday 25th January, are likely to be well over 50% higher than the year before, in our view, and could touch $2.50 per share. That would be above Wall St’s $2.35 earnings per share (EPS) forecast, itself almost 47% higher on the year. Revenues are widely expected to be slightly higher than $23bn, about 2% lower than Q4 2015.

Boeing’s strength right now remains its packed order book, which on the defence side alone was worth around $53bn by the end of Q3. The outlook is not without risks given BA’s intent to ramp up international expansion. However, assuming at least some of the new administration’s protectionist rhetoric turns out to be bluster, the group can be expected to continue inking deals like its recent $16.6bn order from Iran Air, benefiting from a cyclical inflection point in aircraft purchasing. The group is likely to focus on its advantageous positioning on Tuesday and its stock should rise, particularly in the event of an moderate earnings surprise.

 

Ford: bad timing for a slowdown

The US car maker will report Q4 and full year 2016 earnings at 1200 GMT on Thursday 26th January. After smashing expectations with particularly strong results in Q3 2016, the market will be watching to see if it can repeat this for the last three months of the year. It has seen a big increase in sales volumes across its markets in recent months. Sales in China, a key market, grew 14% in 2016, and even Europe, where there have been plenty of economic challenges, witnessed sales growth of more than 5% last year. However, although sales are higher in some key markets, Ford is predicting weaker pre-tax profit of $10.2bn, compared to $10.8bn in 2015. This is partly due to a $3bn one-off charge in relation to its pension and post-retirement benefits programme. Its cost base is also expected to show a large increase as Ford rolls out a raft of new vehicles, and ends production of older models. This stage of the production pipeline leads to a substantial increase in costs, which then eats into the company’s profits.

Ford could also be a victim of its own success this year. After years of rising auto sales, a glut of used vehicles has started to depress prices. More than 3 million leased vehicles are expected to be returned this year, after a 30% increase in 2016. This has already led Ford to slash $300mn from its profit forecast for its financial services business for 2017. The market will be interested to hear any further updates on this, and if the situation looks worse than expected then we may see some downward pressure on Ford’s share price in the aftermath of this report.  Ford’s share price has already fallen more than 7% this year, if it reports weaker results than forecast and mentions the challenges facing its bottom line in 2017, then the share price could tumble to $12 or even lower in the medium-term.

 

Microsoft: set to grow under another President, despite Trump

The tech giant will announce its earnings for Q2 2017 (it reports results a few quarters ahead of time), on Wednesday 26th January at 2100 GMT. The market will be looking to see if its latest earnings report will beat the market’s expectation of EPS at $0.789. There is some expectation that the tech giant could beat estimates, which would be a big win for Microsoft’s share price, especially as the tech industry faces growing uncertainty under a Trump administration that is ready to punish firms like Microsoft who build products abroad and then sell them back to the US. However, Microsoft appears to be in a strong position as we head into these results, its purchase of Linkedin completed last month, and its cloud business, a key new revenue stream for the tech giant, is expected to show strong growth. If Microsoft can pull off an EPS beat, then its share price may attempt to move back to the record high reached on 19th December at $63.62.

Just a few days after the inauguration of President Trump, It is worth noting that Microsoft has seen its market capitalization increase under every President since Bill Clinton. Whether or not this trend can last, time will tell.

 

Google: it’s not ABC

The main entity is called Alphabet—with more than a nod to the group’s moon-shot projects (as in ‘alpha-bet’) but for investors, it’s still all about Google. Investors have evidently grown more confident in the solid start to the second half of 2016 shown by the search-engine-to-digital advertising gargantuan. We note consensus forecasts for earnings that will be reported after U.S. market close on Thursday 26th January have been drifting higher, seemingly unperturbed by Trump’s election win.  Forecasts currently stand at $9.65 for non-GAAP EPS, up 11%, and $25bn for revenue, representing 17.7% growth. Concerns over those moonshot costs are lingering, but they’ve been pushed into the background following the Q3 surge in core mobile search and video. Paid clicks leaping above rivals by 10 percentage points to 42% year-on-year growth also helped. Focus is now widening to Google’s ever growing stable of gadgets and other diversification initiatives including YouTube monetisation. One sharp competitive point of interest during the conference call will be Google Home and Pixel. Whilst well-received so far, Google still needs to demonstrate early traction from its Internet of Things and voice enabled search assets in order to grab some of the initiative back from Amazon’s Alexa, and the growing ubiquity of Apple’s Siri.

 

Thanks to Kathleen Brooks for contributing to this article

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.