What is COVID-19’s Impact on Earnings and Guidance?

In a previous COVID-19 update email, we discussed our interest in Q1 2020 earnings with the expectation that those figures were not likely to show the full economic impact on individual companies. That being said, we have been monitoring earnings announcements closely and want to share some of the highlights and early trends we are currently seeing.

As expected, many of the strongest companies going into the crisis have been able to fare reasonably well, especially big tech, big pharma, and services that cater to at-home consumption. One interesting detail that we are seeing is the additional costs incurred by some of these companies to generate these higher revenue numbers. Amazon is a good example of a company showing remarkably high top-line revenue growth while also giving commentary about expected cost increases incurred to meet demand.

We expect other sectors, such as energy, to show some weakness, as well. However, the first-quarter earnings so far haven’t matched up with the low-price pressure of oil. For instance, Exxon’s reported earnings earlier today were well above expectations, but also included a charge-per-share greater than their earnings to account for the lower value of oil inventory. This provides some foreshadowing of the negative impact that current oil prices will have on the next quarter’s earnings.

Also, as we expected, most companies are opting to withhold guidance on future earnings. With the current instability of global and domestic economies, public companies are wise not to set performance expectations with so many unknowns regarding the economic conditions of the next couple of months. It would be much more detrimental to the stock price for a company to provide guidance and then come up short versus not giving any guidance at all. Similarly, a company’s management can be called into question if projections prove to be overly short-sighted.

As always, the Slaughter Associates Investment Team will continue to monitor corporate earnings, guidance (or lack thereof), and any other data that could impact our clients’ wealth portfolios. In particular, we’ll be watching for upcoming reports by the financial sector as well as the ongoing analysis of U.S. Gross Domestic Product and unemployment figures.