We are entering the second half of the Q3 earnings season, with 130 S&P 500 members coming up with results this week.
Picture Emerging Thus Far
We now have Q3 results from 291 S&P 500 members that combined account for 68.5% of the index’s total market capitalization. Total earnings for these companies are up 2.2% from the same period last year on 1.3% higher revenues, with 73.5% positive earnings surprises and 57.4% beating revenue estimates. (Data from the Earnings Trends report dated Oct 28, 2016).
A 2.2% quarterly earnings growth may look quite insignificant but what’s encouraging is that the figure is a considerable improvement over the ones observed over the previous five quarters. Should the positive trend continue throughout the quarter, it will represent the first positive growth for the S&P 500 index after five quarters of back-to-back declines.
Energy: A Drag but Not as Bad as Thought
Expectedly, the ‘Oils/Energy’ sector has been a big drag on the aggregate growth picture. For the 50% sector components on the S&P 500 index that have reported Q3 results – including behemoths like Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) – total earnings are down 58.8% on 15.1% lower revenues.
However, despite being the largest decliner among major sectors, an overwhelming 77.8% Oils/Energy companies have beaten earnings estimates – though undoubtedly aided by low expectations.
Oil Refining & Marketing: Operating Environment Remain Depressed
Till recently, the downstream operators (oil refiners and marketers) benefited from crude’s collapse. This is because the companies use oil as an input from which they derive refined petroleum products like gasoline, the prime transportation fuel in the U.S. Hence, the lower the oil price, the higher will be their profits.
However, this also led to overproduction and stock build-up that now threatens to bite the refiners. The companies have been struggling this year with the existing stocks of refined product inventories – gasoline and distillate – remaining at their maximum seasonal levels in at least 20 years despite healthy demand. Consequently, margins have narrowed forcing some of the operators to announce production cuts, postpone capital spending and retrench employees.
In fact, as per industry data from British oil major BP plc (LON:BP) , refining margin – the income from converting crude into gasoline and diesel – is set to drop 42% year over year to $11.60 per barrel.
Therefore, notwithstanding oil’s still relatively low levels, the earnings picture for refiners looks rather murky.
Stocks to Watch for Earnings on Nov 1
Let’s see what’s in store for two such companies expected to come up with third-quarter numbers on Tuesday, Nov 1.
An independent refiner and marketer of refined petroleum products in the Southwestern and Mid-Atlantic regions of the U.S., Western Refining Inc. (NYSE:WNR) is expected to report results before the opening bell.
In the preceding three-month period, the El Paso, TX-based downstream operator beat earnings estimates on strong retail fuel volume.
But coming to the earnings surprise history, the company has a mixed record: its missed estimates in two of the last four quarters, resulting in an average negative surprise of 5.77%.
An earnings beat is uncertain for Western Refining this time around too. This is because, as per our proven model, a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP to beat on earnings. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.
For the quarter to be reported, Western Refining has an Earnings ESP of 0.00%, while it carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Simultaneously, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
EnLink Midstream LLC (NYSE:ENLC) is another energy firm to report after the market closes.
Headquartered in Dallas, TX, EnLink Midstream is involved in natural gas gathering, treating, processing, transmission, distribution, supply and marketing, and crude oil marketing. But the partnership doesn’t exactly have a great track record when it comes to earnings surprises, as it missed estimates in the last two quarters.
With an Earnings ESP of -16.67% and Zacks Rank #3, our proven model shows that an earnings beat is unlikely for EnLink Midstream in the to-be-reported quarter as well.
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WESTERN REFING (WNR): Free Stock Analysis Report
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