Earning season in Europe is in full swing. Seventy per cent of the companies in the Euro Stoxx 50 and 65 per cent of the companies in the Euro Stoxx 600 have already reported their results for the first half of the year.
The majority of companies have reported decent earnings for the first six months of the year resulting in the Euro Stoxx 50 up eight per cent since earnings season kicked off.
A main contributor to the positive results is quantitative easing in Europe which boosted consumer confidence particularly in the first quarter of the year, leading to an improvement in economic indicators.
We have seen a pick-up in both inflation and house prices and we have also seen a reduction in the unemployment rate for the European Union.
For the rest of 2015, I expect the data in Europe to continue to strengthen as quantitative easing continues to have a positive impact on various industries.
What remains a concern is the growth rate in China. A sector which has toned down its outlook for 2015 due to the expected slowdown in China is the auto and parts industry.
The auto sector
The main reason for the sell-off in this sector post H115 results was the reduction in their sales forecasts for 2015, mainly due to a lower expected demand from China.
Although China remains a large contributor to the top line of the auto sector in Europe, I believe that the recent sell off created an attractive entry point into the industry.
Just like when China made up for the lost revenues when Europe and the US were slowing down, today we now expect a pickup in growth in Europe and the US to make up for weakness in China.
A simple calculation to put you into the picture is as follows. If you look at the financials of BMW and assume that because of the weakness in China the company won’t grow its profits in 2015, the shares are trading on an earnings yield of 10 per cent and giving a dividend yield of 3.20 per cent. This ticks one of the many boxes which indicate a buying opportunity into the sector.
The winners this reporting season
Moving on to the winners this season, five companies in the Euro Stoxx 50 which reported results which beat analysts’ expectations and have an attractive future are as follows:
Oil & Gas – TOTAL SA (FP FP equity, YTD shares are up 5%)
Total SA’s second-quarter profit almost matched year-earlier results as higher margins at Europe’s biggest refining business helped the company shrug off a 50 percent slump in crude prices.
Total confirmed a target to cut costs by $1.2 billion while increasing output by 12 percent to the equivalent of 2.3 million barrels of oil a day as new projects started in Angola, the North Sea and Russia. The production gain and the highest refining margins in at least 12 years are helping Europe’s second-biggest oil company weather a crude-price crash.
Health care – Bayer AG (BAYN GY equity, YTD shares are up 19%)
Bayer AG’s second-quarter earnings beat analysts’ estimates, helped by the blood thinner Xarelto and the plastics division that will be spun off this year.
Xarelto sales surged 43 per cent to €549 million in the quarter, just surpassing the average analyst estimate of €546 million. While the drug, which was approved by the FDA four years ago, is facing competition from Pfizer Inc.’s Eliquis, both blood thinners have snagged market share from decades-old Warfarin.
Financials – BNP Paribas (BNP FP equity – YTD shares are up 38%)
BNP Paribas SA, France’s largest bank, swung to the highest quarterly profit in more than three years as trading revenue rose and the lender benefited from one-time gains.
BNP Paribas is among the region’s banks benefiting from a return to economic growth as the European Central Bank provides unprecedented stimulus, while market swings have bolstered trading activities. Still, like competitors including Deutsche Bank AG and Barclays Plc, BNP is overhauling its securities unit as regulatory demands for larger capital buffers hurt profitability.
Industrials – Airbus Group SE (AIR FP equity, YTD shares are up 55%)
Airbus Group SE said demand for its workhorse single-aisle A320 plane, the company’s biggest earnings driver, is sufficiently strong to further lift output, a move that would risk straining already-stretched suppliers.
Airbus is trying to work through a backlog of aircraft orders stretching out several years, with its A320neo the fastest-selling commercial airliner in aviation history. Pushing more planes out of factories in Germany, France, China and the US means Airbus will be more demanding on its suppliers, with partners such as engine maker Safran SA saying this week that it’s at the limit of its production capabilities.
Consumer Goods – Daimler AG (DAI GR equity, YTD shares are up 18%)
Daimler AG’s second-quarter operating profit surged 54 per cent to a record as sales growth at the Mercedes-Benz brand outpaced gains at luxury-car rivals.
Daimler’s overhaul of Mercedes’s lineup has helped prop up sales in China, the world’s biggest auto market. Larger competitors BMW AG and Audi AG have tempered forecasts there and provided support to dealers amid an industry-wide contraction. Mercedes is pushing to overtake the two other German manufacturers as the world’s top-selling luxury-car maker by the end of the decade.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is 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. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.