First, a quick point of clarification... "What the EPS?" is an experimental new blog series I am going to be running which will be focusing on earnings. As a reminder being a top-down global active asset allocation investment research house, the scope naturally is going to be on regions, countries, sectors, and styles. The type of stuff covered will be forward earnings trends, revisions ratios, PE ratios, and more. The purpose is to add another regular feature to the blog and give a glimpse of some of the work we are doing with clients.
Anyway, enough on the introduction. This week it's France and Germany under the "What the EPS?" spotlight. It's particularly timely to be looking at France and Germany given the topping out we've seen in some of the economic confidence indicators and high frequency economic data we track. And if you look at the trend in forward earnings growth it appears analysts are paying attention to the macro backdrop. The source of the data is the Thomson Reuters Datastream I/B/E/S aggregates, which is basically the gold standard for bottom up consensus estimates.
The key trends in French and German corporate earnings are:
-Forward earnings growth appears to be rolling over for France and Germany.
-This topping out in the pace of growth in forward earnings lines up with the wavering economic confidence numbers.
-From a valuation standpoint (forward PE ratio), the overall picture is fairly neutral, however there appears to be a slight relative value case for Germany.
1. Forward Earnings Growth: The growth in forward earnings (for clarity, this is the YoY (Year over Year) change in the IBES forward earnings figures for the French and German stock indexes (in this case we are using the MSCI indexes). So it's effectively how analysts expect earnings will be growing. There's a couple of things that stand out on this one, the first is how similar the lines are for each country across time. The second is that both seem to be rolling over - which mirrors the topping out in the manufacturing PMIs. It raises the question as to whether the Eurozone can really stand to bear any material strengthening of the Euro.
2. Forward PE Ratio: The second chart also makes use of the forward earnings numbers, but also brings in price to present the forward PE ratio. Again, the two countries for the most part trade more or less in line with each other, although it is interesting to note that Germany at 12.9x is slightly cheaper than France at 14.5x (compares to the USA at 17x). So there seems to be a relative value case for Germany - although this is only one metric for looking at valuations (aside from the PE10, trailing PE, price to sales, price to cash flow, dividend yield, price to book, etc). Compared to history, both are trading in line with the post-dot-com average, not particularly standing out as significantly cheap or expensive. From a positioning standpoint it would be much more problematic to see earnings growth rolling over from high valuations than from neutral valuations.
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