A More Optimistic Outlook for 3Q Earnings
The third-quarter earnings season will officially heat up around mid-October when several big-name financial companies release results from the latest quarter. Given the global turmoil, estimates envision a pretty dismal third quarter.
However, several analysts are now changing their tune. In fact, early earnings reports are leading many on Wall Street to believe that the third-quarter earnings season could be much better than originally anticipated. Case in point: AutoZone, Inc. (AZO).
On September 22, AutoZone unveiled results for its fourth quarter in fiscal year 2020—and both earnings and revenue topped analysts’ expectations. The retailer of auto parts and supplies for the do-it-yourself mechanic achieved revenue of $4.55 billion, or 14% year-over-year growth. Earnings per share increased 37% year-over-year to $30.93. FactSet analysts were expecting fourth-quarter earnings of $25.46 per share on $4.18 billion in revenue.[1]
What’s great is that AutoZone isn’t alone.
Not only have more people taken on their car maintenance duties during the pandemic, they’re also cooking at home, as seen in first-quarter 2021 results from General Mills, Inc. (GIS). First-quarter adjusted earnings per share grew 28.2% year-over-year to $1.00, while revenue climbed 10% year-over-year to $4.0 billion. Earnings topped analysts’ forecasts for $0.87 per share.[2]
Now the question is, are AutoZone’s and General Mills’ results a precursor to what we can expect during the third-quarter earnings season, or will they be the exception?
It’s important to note that not all companies are thriving in the current economic environment like AutoZone and General Mills.
We all know that the travel and leisure industry has been hammered since the pandemic took hold.
Most S&P 500 companies remain very cautious. More than 100 S&P 500 companies have pulled or not issued guidance for 2020. According to FactSet, only 67 companies provided earnings guidance for the third quarter. That’s substantially lower than the five-year average of 104, but it’s up from the 53 companies that issued an earnings outlook for the second quarter.
Interestingly, FactSet also noted that the vast majority of S&P 500 companies that provided guidance have issued positive guidance for the third quarter. In fact, 45 of the 67 companies issuing guidance are optimistic about their third-quarter earnings.
Although most companies are remaining cautious, analysts are actually growing more optimistic about third-quarter results. FactSet recently reported third-quarter earnings estimates have been revised 2.6% higher during the first two months of the quarter. That certainly bodes well for better-than-expected third-quarter earnings in the coming weeks.
Overall, analysts are looking for the S&P 500’s third-quarter earnings to decline by an average 21.8%, which is slightly better than previous forecasts for an average 25.4% decline back at the end of June.[3] Clearly, analysts are growing more optimistic, but many companies’ earnings will still be disappointing,
I don’t pretend to have a crystal ball when it comes to earnings but I will be watching the numbers closely, for now is the time to begin assessing who will emerge from this period and who will be impaired.
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[1] https://www.thestreet.com/investing/autozone-stock-higher-as-4th-quarter-profit-beats-estimates?puc=yahoo&cm_ven=YAHOO&yptr=yahoo
[2] https://www.thestreet.com/investing/general-mills-beats-q1-earnings-forecast-as-food-sales-surge?puc=yahoo&cm_ven=YAHOO&yptr=yahoo
[3] https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_091820.pdf