AlphaValue’s analysts rushed the earnings-cut exercise as businesses dislocate worldwide with the stay-at-home policy. The amazing thing is that some corporates refuse to see the second order impact of the COVID-19 crisis when they have a strong B2B business. They should think twice and consider Airbus/Boeing’s travails to understand that a healthy duopoly can be crashed by health priorities and that the cost to their balance sheet may well be phenomenal. As it happens, some corporates have maintained this most absurd capital decision, buy-backs, while the world’s financial system is in deep pain.

As we mentioned in a short paper (LIARS BY OMISSION, 18/02) most corporate governance has not been up to the task of facing a very visible tsunami and has utterly failed to communicate about Plan B.

Back to 2020 earnings

The AlphaValue earnings-trimming exercise is rather a crude exercise that amounts to a rout.

We started 2020 with a +10% 2020 earnings growth expectation only because 2019 failed to deliver. As a reminder, 2019 earnings growth started at +10% in January 2019 and fell as steadily as stock prices went up. 2019 earnings growth stands at “minus zero” for the time being and should close at -1% or so. Say a -11% drop in the base for 2020 expectations.

Reverting to 2020 EPS growth, it was at +6.5% on 11/03 when AlphaValue decided to precipitate earnings cuts. The figure is currently -25% and falling.

What can one say?  

The above drop is mostly due, so far, to the fast-forward correction on banks’ earnings. While they were actively trimmed by early March with the view that loan losses would essentially increase by 50% on the back of slower business, the choice has been made to use the heavy guns by 11/03 and use the worst case scenario of the 2018 banks’ stress tests. That means 2020 earnings at MINUS €32bn (yes a loss) vs. +€99bn a week ago and +€112bn a month ago. For bulls, a first quote for 2021 is €40bn (yes a profit).

We hope to be wrong but the word that best describes the western world predicament is dislocation. Banks will survive but their equity will take a beating and thank God they were forced to go for over-capitalisation by the regulators.  

Oils earnings are no small contributor with a 60% drop so far. But, it may be slashed further. The big work in progress is Autos where the €44bn still envisaged a month ago must be converging to zero. Transport is heading towards a combined loss from an €11bn expected a month ago. This has more systemic implications (back to Banks) than an impact on listed earnings as it is a tiny sector earnings-wise (how many times has it  been repeated that Airlines shareholders are the last stakeholders with lenders and staff coming first).

As we suggested a week ago, the post earnings correction 2020 P/E is …15x , no different from the levels seen ahead of the crisis. Assume that there is a potential for earnings growth to fall to -40%, then that P/E is a good 17x.

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