Earnings season in Europe is in full swing with numerous blue chip companies reporting Q2 results each day. The second quarter of 2020 was widely expected to be much worse than the second quarter of 2019 so it did not come as a surprise when most companies reported weaker earnings. However, will quarters to come be similarly weak? Let's take a look at forecasts and hints from this week's European earnings reports.
Executives of cyclical companies remain optimistic about H2 2020
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Create account Try a demo Download mobile app Download mobile appCoronavirus restrictions and related economic slowdown was viewed to be a major hit to cyclical companies. German carmakers confirmed this view with BMW (BMW.DE) reporting the first quarterly loss since the global financial crisis. Net loss was also reported by Daimler (DAI.DE). However, Daimler surprised markets with guidance as it said it still expects to be profitable on a full-year basis. A common theme in reports from European carmakers was gradual recovery of demand in May-June and optimism of executives when it comes to the second half of the year. Siemens (SIE.DE) managed to offset drop in industrial demand with strong software sales and decided to maintain full-year guidance pointing to a moderate revenue decline.
Daimler (DAI.DE) recovered after testing the lower limit of the Overbalance structure. The German carmaker is trading near post-pandemic highs. However, whether we see an attack on pre-pandemic levels will depend on the reaction to resistance at €40.70. Source: xStation5
German pharmaceuticals companies with strong life science performance
Two German pharmaceutical companies - Bayer (BAYN.DE) and Merck KGaA (MRK.DE) reported earnings declines for the second quarter of 2020. However, Merck managed to boost its sales by 3.7% YoY while Bayer experienced 16.5% YoY revenue drop. Both companies showed strong performance of life science units while drug sales lagged. When it comes full-year guidance, the situation is mixed. Merck backed its previous guidance and still expects slight increase in revenue while profit forecast ticked higher. On the other hand, Bayer decided to lower its outlook marginally.
Bayer (BAYN.DE) has been trading in a downward move since late-June, when the company announced a $9.6 billion settlement in the Roundup case. Stock is testing long-term support at €55.80, that coincides with 61.8% retracement of the recovery rally. As downward momentum is strong, risk of breaking lower remains high. Source: xStation5
Poor outlook for oil demand
Earnings reports from airlines or European oil supermajors painted a poor outlook for oil demand going forward. Lufthansa (LHA.DE) reported a massive 80% plunge in revenue and said that it does not expect demand for air travel to recover to pre-Covid levels before 2024. The German carrier had 96% less passengers than a year ago! However, BP (BP.UK) offered even more striking evidence that fossil fuel eclipse draws near - UK oil supermajor decided to slash oil and gas production by 40% and make massive investments into renewable energy. Poor situation in the oil sector was highlighted by BP making the first dividend cut in a decade.
While a lot of stocks managed to recoup a big part of this year's losses, Lufthansa (LHA.DE) still trades around 50% lower on the year. Stock launched today's session higher but erased all gains as the broad market started to slide. Support zone at €7.15, marking this year's lows is the level to watch should pullback continue. Source: xStation5
Commerzbank and Societe Generale pressured by company-specific issues
Big banks from Wall Street reported strong earnings thanks to solid performance of trading desks during the stock market recovery rally. However, investors were offered earnings from Commerzbank (CBK.DE) and Societe Generale (GLE.FR) this week and their contradicted trend presented by US peers. Societe Generale reported an unexpected loss as its equity trading revenue dropped 80%! Commerzbank had to abandon its full-year profit goal due to losses connected to Wirecard's collapse. German bank also said that it may have to set aside more funds for bad loans. A point to note is that in both cases unexpected losses were company-specific so drawing conclusions for the whole European banking sector from results of those two lenders may not be the best option.
Commerzbank (CBK.DE) climbed to the resistance zone marked by the 50% retracement of February- March sell-off. Note that the stock has already made two failed attempts of breaking above this hurdle and a long upper wick of today's candlestick does not bode well for bulls. Source: Station5
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