By Bill Peters
Earnings Watch: Analysts expect record earnings in 2022 and 2023 even as holiday profit estimates decline at a greater-than-average rate and the majority of fourth-quarter forecasts disappoint
With less than one month left in the fourth quarter, Wall Street is getting more pessimistic on company earnings for the all-important holiday season, and now expects earnings to recede year-over-year for the first time since early in the COVID-19 pandemic.
But despite that downturn in expectations, analysts still expect record profit this year and an increase to another record next year, even as consumers battle inflation and recession concerns endure.
Wall Street analysts have lowered their expectations for fourth-quarter earnings by more than 5% so far this quarter, as roughly two-third of S&P 500 companies have issued disappointing forecasts, FactSet senior earnings analyst John Butters said in a report on Friday. During October and November, analysts lowered their fourth-quarter earnings-per-share forecasts by 5.6%.
While analysts typically trim their estimates as a quarter progresses, those reductions usually aren't as steep. Over the past 20 years, those estimates have typically come down 2.9% on average during the first two months of a quarter, Butters said in the report.
Wall Street expects a 2.4% decrease in fourth-quarter earnings for S&P 500 companies, but gains of 5.2% for the year overall, Butters said. But analysts are currently more upbeat on 2023, with expectations for 5.6% growth, as businesses get by on sturdy consumer demand and price increases.
In-depth: Corporate profit is at a level well beyond what we have ever seen, and it's expected to keep growing
Butters said in an email that the current bottom-up earnings-per-share estimate for 2023 is $232.53 for S&P 500 companies. If that number sticks at the end of next year, it would be the highest to come out of the index since FactSet began tracking the figure in 1996, he said. The current estimate for 2022 is $221.19, which would also be higher than any prior figure over that time, according to FactSet.
However, FactSet's data shows that earnings forecasts a year out tend to be a little more hopeful than the results the market actually gets. Butters, in the report on Friday, said that "industry analysts on average have overestimated the final EPS number by 7.0% one year in advance."
This week in earnings
Against that backdrop, some companies this week will report earnings that include early results from the holiday season. Warehouse-retail giant Coscto Wholesale Corp. (COST) will provide numbers for a quarter that includes November, when sales growth slowed despite the key Black Friday shopping holiday.
Elsewhere, chip maker Broadcom Inc. (AVGO) reports quarterly results as last year's semiconductor shortage risks becoming an oversupply this year. Earnings reports from Campbell Soup Co. (CPB) and United Natural Foods Inc. (UNFI) could offer more context on food prices and whether they'll return to Earth soon as inflation forces consumers to prioritize groceries and food companies try to cover rising costs.
Six S&P 500 companies are set to report in the week ahead. Costco and Broadcom report Thursday, after AutoZone Inc. (AZO) on Tuesday and Campbell Soup and Jack Daniel's owner Brown-Forman Corp. (BFA) on Wednesday. Medical-device company Cooper Cos. (COO) also reports on Thursday.
Elsewhere, GameStop Corp. (GME), the videogame retailer and original meme stock, reports Wednesday. The company is coming off a smaller-than-expected quarterly loss in September, when it announced a partnership with crypto exchange FTX. The retailer last month said it would end that relationship following FTX's implosion.
Full preview: What to expect from Gamestop's third-quarter results
Online fashion platforms Stitch Fix Inc. (SFIX) and Rent the Runway Inc., (RENT) report on Tuesday and Wednesday, respectively, after facing layoffs and questions about e-commerce demand. Lululemon Athletica Inc. (LULU), the yoga-wear maker that some analysts have said is less prone to retailers' markdown crusade this year, reports on Thursday.
Investors will also get further diagnosis on the stalling housing market when home builder Toll Brothers Inc. (TOL) reports on Tuesday. RV-maker Thor Industries Inc. (THO) reports on Wednesday, after noting a "softening" in some demand in September, following a pandemic-era boom in outdoor activity. Pet-products e-commerce site Chewy Inc. (CHWY) reports on Thursday, posing another test to what its chief executive in September called a "recession-resistant" business. Electronic-signature platform DocuSign Inc. (DOCU) also reports Thursday, following layoffs earlier in the year after a wave of digital adoption during the pandemic.
The call to put on your calendar
Broadcom: Broadcom's fiscal fourth-quarter results and conference call on Thursday will offer more detail on the chip market, amid questions about a pullback in spending on tech and electronics, demand at Apple Inc. (AAPL) and U.S. restrictions on semiconductor shipments to China put in place in October.
"Enterprise storage correction, slower cloud spend...and potential cuts at no.1 customer Apple dim outlook and likely weigh on CY23," Oppenheimer analysts said in a note about Broadcom on Friday.
Broadcom Chief Executive Hock Tan has tried to expand the company via acquisitions. In May, he agreed to acquire VMware Inc. (VMW) for $61 billion, adding to a software business made up of previous acquisitions CA Inc and Symantec that diversified the company away from chips.
For more: Broadcom CEO defends optimistic 'true demand' outlook as PC, smartphone sales slide
But semiconductors are still its primary business, and one of its biggest customers could hurt Broadcom's results. Apple -- whose iPhones have used Broadcom wireless chips, according to some teardown reports -- recently reported quarterly iPhone sales that were slightly below expectations, and the company has also moved to rely less on outside suppliers for wireless chips. COVID-related lockdowns in China have also reportedly disrupted Apple's manufacturing process.
Broadcom in early 2020 agreed to supply Apple with "high-performance wireless components" in a deal that covered Apple product launches over the next 3 1/2 years. Broadcom at the time estimated that the arrangement, combined with a deal in 2019, could bring in around $15 billion in sales.
On Thursday, shares of chip maker Marvell Technology Inc. (MRVL) fell after reporting disappointing results and an outlook came up short of analyst expectations. Management warned of "inventory reductions" among some customers that weighed on results.
The numbers to watch
Food prices at Costco, Campbell Soup and United Natural Foods. Part of the reason why demand for electronics has faded this year is rising food prices, which have left less room for customers to spend money on other things. Costco will report fiscal first-quarter results in the wake of slowing monthly sales growth for November and a 10% decrease in e-commerce revenue.
Oppenheimer analysts said those results pointed to a considerable drop in demand, along with big markdowns on electronics and bigger items that might not be drawing consumers. They removed Costco stock from their top pick list as a result.
"With this report and our existing concerns on aggressive Street forecasts, we now expect an even more material reset in consensus forecasts," the analysts, Rupesh Parikh and Erica Eiler, said in a research note.
See for more: Food prices keep rising. Food-company execs are betting Americans will keep paying
Grocery prices have remained high, thanks to an array of supply constraints and what executives have said is greater leeway to charge more, given that everyone still needs to eat.
United Natural Foods, the primary distributor to upscale Amazon.com Inc. (AMZN)grocery chain Whole Foods, reports after executives noted in their previous report that rising prices helped sales, even though customers were buying fewer items. Campbell Soup has also leaned on higher prices to offset its own rising costs.
(END) Dow Jones Newswires
December 05, 2022 13:36 ET (18:36 GMT)
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