Executive Summary
Third quarter earnings season kicks off and expectations are, once again, very high
Casting some doubt on corporate profitability is the commodity crunch and a developing global energy crisis
Labor shortages and supply-chain disruptions are other macro themes to look for on earnings calls
Third quarter earnings season begins in earnest this week. As usual, several important banks are up first in the batting order. Expectations are high after a monster run of five consecutive quarters featuring impressive earnings per share (EPS) beats among S&P 500 companies.
In aggregate, profits have topped Wall Street’s expectations by 15% to 21% since the second quarter of last year according to FactSet. Will it be six quarters in a row of booming earnings? While earnings estimates for the quarter are higher now than they were on June 30, the aggregate EPS forecast has come down from its September peak.
Driving the modest dip could be rapidly rising commodity prices. In this week’s Event Data Outlook, we feature two companies in the materials sector that boast very strong profitability—so strong that both issued positive preliminary earnings announcements. There are also a pair of earnings outliers we have on our radar: a hospital administrator facing a labor shortage and a consumer discretionary company dealing with higher input costs.
Earnings Outliers
First up is HCA Healthcare (NYSE:HCA), Inc., a $78-billion health-care services provider based in Nashville, Tennessee. The firm operates hospitals, surgery centers, emergency rooms and urgent care facilities. The health care sector has been a whirlwind in the last 18 months amid the pandemic, and many hospitals face staff shortages. (Bank of America (NYSE:BAC) Research notes that HCA faces a 12.2% nurse shortage.) The good news is the Delta variant is clearly on the decline across the U.S. and a return to normal operations appears on the horizon.
As far as the company's financials, net income has flatlined in recent quarters, while the stock price has been on the rise. The firm’s price-to-earnings ratio climbed from under eight in the first quarter of 2020 to 18 at the September peak as investors grow more optimistic for future profits and the labor shortage easing.
Figure 1: HCA Stock Price History (1 Year)
In corporate news, HCA recently appointed a new Chief Legal Officer and was active on the acquisition front—the firm purchased five Utah hospitals from Steward Health Care in September.
Outlier Analysis
HCA normally reports third-quarter earnings during the latter half of October, with a strong Monday/Tuesday trend.
- On July 21, Wall Street Horizon set an unconfirmed earnings date of Oct. 25.
- On Sept. 27, however, HCA announced via press release that it would report Q3 earnings on Friday, Oct. 22 (before market).
The earlier than usual earnings date results in a Z-score of –3.22. Traders should note this stock for potential earnings-related volatility.
Crown Holdings Inc (NYSE:CCK) also lit up our radar. The $14-billion consumer discretionary company has seen its share price wobble this year as the narrative quickly flips between consumer optimism and inflation fears. Crown Holdings designs, manufactures and sells packaged products including beverage cans and bottles.
Figure 2: Crown Holdings Stock Price History (1-Year)
Crown Holdings has significant business operations in Europe. The firm has recent corporate actions in the region including settling its U.K. pension plan obligations and a recent sale of its European Tinplate business. Europe is also known for its strong support of ESG issues—CCK received an accolade for being first in metal and glass packaging by the ESG ratings firm Sustainalytics last quarter. Ongoing energy market turmoil in the region could pressure future profits though. Traders should monitor its upcoming earnings report for any negative comments on that region’s business operations.
Outlier Analysis
CCK normally reports Q3 results between Oct. 16 and 19.
- On July 20, Wall Street Horizon set an Unconfirmed earnings date of Oct. 18 based on the company’s reporting history.
- On Sept. 28, Crown Holdings issued a press release stating that third quarter earnings would be released on Monday, Oct. 25 (after market). An earnings conference call takes place the following morning.
The later than usual report results in a high Z-score is 4.08.
Firms Issuing Preliminary Earnings
We noticed two important players in the steel production industry issued preliminary earnings reports. For background, a preliminary earning announcement (or a preliminary result), is a financial statement issued at the end of a reporting period but before the release of the official earnings numbers. These reports often drive share price volatility. The options market is also impacted. Firms will often pre-announce to incorporate pertinent information beyond financials, such as M&A activity, regulatory issues, or share repurchases.
Steel Dynamics (STLD) and Schnitzer Steel Industries Inc (SCHN) are two stocks in the materials sector with upcoming earnings dates that also pre-announced.
Steel Dynamics Inc (NASDAQ:STLD) provided third quarter EPS guidance of $4.78 to $4.82 per diluted share. That would be a record quarterly performance, according to the company. Earnings during the same quarter a year ago were just $0.47. Steel Dynamics’ preliminary earnings release is part of a broader market trend of increasing profit expectations for Q3. FactSet noted that analysts have increased EPS estimates for a fifth straight quarter. Steel Dynamics official earnings date is confirmed for Monday, Oct. 18, after market.
So, what about Schnitzer Steel Industries (NASDAQ:SCHN)? More good news. SCHN’s preliminary earnings announcement was a positive outlook for fourth quarter earnings. The company expects its best Q4 operating performance since 2011—which was also a commodity mini-boom period. The Oregon-based firm issued a Sept. 30 press release stating that EPS for the period ending Aug. 31, 2021, to be in the range of $1.40 to $1.48.¹⁰ Actual Q4 earnings are confirmed to be released on Thursday, Oct. 21, before market. Selling prices for its materials have reached the highest level since 2008, according to Schnitzer.
While higher commodity costs negatively impact consumers, the producers reap benefits. These two stocks, beaten down during the last decade, have seen a resurgence in the last year.
Figure 3: STLD and SCHN Stock Price History (1-Year) |
Conclusion
Traders will have a lot of corporate events to digest in the coming weeks. Earnings season is the highlight, but Q4 conferences are under way with many traditional face-to-face events taking place. A rapidly changing landscape of rising prices and supply crunches has the corporate world on edge with sudden bouts of financial market volatility popping up.