Like the U.S. a couple of years ago, Europe’s QE economic stimulus is clearly kicking in as “easy money” is enabling businesses to borrow money at record low rates to fund growth. Equities analysts on both sides of the Atlantic have noted this trend and have upped their numbers for the Eurozone across the board.
The team at Barclays Equity Research, however, argues that analysts are underestimating the ongoing economic growth spurt, and argue that revenue growth could be as high as 6% in 2015 for publicly traded European firms.
In a July 23rd report, Barclays analyst Ian Scott and colleagues note: “Although bottom-up analysts have already increased their 2015 revenue growth forecasts from 2% to 4% since late January, our top-down model suggests a further acceleration is imminent, with 6% likely for the year as a whole.
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For earnings too, we find the current consensus to be on the low side, and our top-down model suggests Euro Area companies in particular could see earnings rise by close to 26% this year.”
Eurozone revenue growth ramping up
Scott at el. point out that the revenue growth trend is already established, with 12 of the 16 European firms reporting so far surpassing revenue estimates based on Bloomberg data. They highlight their top-down models suggesting that the second and third quarter should see the majority of the increase in revenue growth, from a mere 1.2% in the first quarter to close to 8% by the fourth quarter. Also of note, a flat profile for the Euro would lead to revenue growth slowing to 5% next year, or a further depreciation of the Euro )as projected by Barclays’ FX Research) would lead to revenue growth approaching 10% next year.
Keep in mind that financials have led the way with a 9% boost in 2015 revenue forecasts since QE was announced at the first of the year, followed by healthcare and cyclical sectors such as IT and Consumer Discretionary. Energy stocks on the other hand have seen their 2015 revenue projections slashed by as much as 50%.
Euro area earnings are also improving
The Barclays team also highlights that upgrades to current earnings estimates for many European firms have already begun. They note their top-down model point to 26% EPS growth 2015, followed by another 26% boost in 2016. That is twice the growth currently projected by bottom-up consensus EPS estimates of 13.1% and 12.2%, respectively. The admit their model has been liable to overestimate in the past, but still say they do expect to see positive earnings surprises over the next couple of weeks.
This kind of a huge move up in profits may seem surprising, but given the fact that "market level EPS" remains 35% below the peak reached in 2011 and 75% below the 2008 peak, it seems reasonable to view this improvement more as a “recovery” from very low levels of profitability and margins, rather than a “blue sky” increase in profits..
Finally, it is the financial sector that is leading the recovery in euro area earnings as well. Financial sector EPS levels are also 35% below their 2011 peak, but a mere 25% of their 2007 peak, and the current EPS 32% run rate is much above the rest of the market.