Deutsche Bank analysts cut their 2017E Energy sector profits from $60 billion to $48 billion in line with their revised assumption that oil prices average $50-55/bbl in 2017 as against $60/bbl previously. David Bianco and colleagues said in their August 5 research piece titled “2017E S&P EPS cut from $130 to $128, 2017 end target remains 2350” that they lowered their estimate for cost of equity by 25bp at all sectors, except Financials, Con Dics, Telecom.
Energy & Financials contribute most of 2017E S&P EPS cut
Bianco and team point out that renewed oil price weakness indicates that rebalancing the global oil market will take longer and be bumpier than many anticipated. Gleaning through 1Q and 2Q results, the analysts highlight that these results suggest a breakeven WTI price for S&P Energy profits at $40-45/bbl. Citing lower oil price and rates outlooks, the DB analysts have cut their 2017E S&P EPS estimate from $130 to $128 while retaining their 2017 end target at 2350:
The analysts note that nearly all of the 2017E S&P EPS estimate cut came from Energy and Financials owing to lower oil price and interest rate assumptions. They have slightly trimmed Industrials and Con Disc on cautious mgr. outlooks and pensions, though other sectors were left unchanged. The DB analysts’ estimates assume that oil prices average $50-55/bbl in 2017 as against $60/bbl previously.
The DB analysts add that their estimate for 2016 S&P Energy sector profits was $20 previously. However, 2Q S&P Energy sector earnings are worse than expected at $2.1 billion. They believe their 2H estimates are at risk as $45/bbl oil is at risk until at least 3Q. The analysts trimmed their 2016 Energy sector profits estimate $12.5 billion, which by quarterly is: -$0.7bn, $2.1bn, $3bn, $8.1bn.
DB analysts trimmed their 2017 Financial sector profit estimate
Focusing on Financials, Bianco and colleagues are uncertain about the Fed hikes, though they expect the dollar to grind upward and 10yr Tsy yields to stay under 2% well into 2017. The analysts cut their Financials sector profits estimate for 2017 on lower interest rate outlook.
On cost of equity, the DB analysts have trimmed their real Ke for the S&P 500 from 5.5% to 5.25-5.5%, using CAPM. They note that the sectors with potential upside to their 2016-end fair value targets are Health Care, Tech, Utilities, Telecom, Cons. Disc. and Financials. The analysts point out that even with 25bp of lowered CoE, they still believe Energy, Industrials and Consumer Staples are over-valued. They anticipate that these sectors will lead the 5%+ sell-off soon.
Though Bianco and colleagues anticipate that decent y/y S&P EPS growth will resume in 4Q16 and 2017, they believe achieving 5%+ EPS growth ex-Energy will be challenging if oil prices don’t average more than $50/bbl in 2017.
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