European companies have enjoyed their strongest quarter for four years and an improving economic backdrop and a supportive euro currency should ensure that they maintain their momentum.
With more than four fifths of companies in the STOXX Europe 600 index now having reported first quarter results, StarMine data show that 61 percent have met or beaten forecasts. Their earnings have grown by seven percent from the same quarter in 2014.
Telecoms, discretionary consumer goods and energy sectors were among the top performers, with more than 70 percent of those companies meeting or beating analyst predictions in the first three months of the year.
European companies’ earnings per share (EPS) are likely to grow by 5.4 percent in 2015, against a rise of 4.6 percent predicted in early March, according to Thomson Reuters Datastream.
Some analysts said the number was likely to go even higher and that forecasts were not fully reflecting the positive trend.
“We are surprised that the consensus number for 2015 earnings growth has not moved significantly higher, given the strength of the tailwinds behind earnings,” said Robert Parkes, equity strategist at HSBC Global Research.
“This leaves scope for further upside surprises on earnings in rest of 2015,” he added.
BRIGHTER ECONOMIC PROSPECTS
The price-to-earnings (PE) ratio for the STOXX Europe 600 index has fallen to 15.7 times from an 11-year high of 16.5 a month ago, Datastream figures show. The index has changed little in the past month, indicating that the decline in the ratio is mainly as a result of a pick-up in earnings expectations.
Although there is some nervousness due to a 7 percent rise in the euro against the dollar since mid-April and a 27 percent recovery in oil prices over the last two months, analysts said the region’s brighter economic outlook and improved margins would be the main influences on earnings.
“A lot of investors (we’ve spoken to) have been dismissive of the first-quarter earnings performance, linking it to one-offs, the oil price, foreign exchange,” said Emmanuel Cau, strategist at J.P. Morgan.
“But the fact is European growth was much better than expected in the first quarter. Everything is pointing up … That should be a very healthy backdrop for profit margins.”
Cau added that action by the European Central Bank was also starting to have a positive effect on the economy.
The ECB earlier this year announced plans to buy 60 billion euros of bonds per month from March in a programme to run to September 2016 and boost the region’s economy.
Wednesday’s data showed the eurozone grew at its strongest rate since the second quarter of 2013, while France’s economy expanded at its fastest pace in two years.
There are some signs that investors are gradually becoming more positive on the earnings prospects. The number of analyst upgrades have overtaken downgrades for the first time this year, with 52 percent analysts upgrading their EPS forecasts for 2015, against 28 percent at the start of the year.
“I am pretty positive on the second quarter earnings as leading economic indicators are pointing towards a gradual recovery in Europe,” said Christian Stocker, equity strategist at UniCredit in Munich.
“A recent hike in oil prices and currency moves are not likely to have any material adverse impact on the earnings as many European companies such as airlines tend to hedge oil and the euro is still much weaker than the year-ago level.”
Source: Reuters (Additional reporting by Lionel Laurent; Editing by Keith Weir)