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Overseas Earnings Estimated to Outdo US: Top 5 Gainers

Zacks

The first-quarter reporting cycle has taken center stage in the U.S., with the quarter anticipated to see the strongest earnings since 2011. But, improvement in the global economy has encouraged analysts to invest outside the country. Not only are the earnings estimates for overseas companies poised to outpace their domestic equivalents in the quarter, the picture for the full year is equally bullish.

A number of market experts, in the meanwhile, believe that U.S. stocks are exorbitantly expensive with apprehensions of valuations touching the highest level since 2001 surfacing. This has further encouraged portfolio managers to invest overseas, with big moves to emerging markets, Japan and Europe. Lest we forget, the U.S. business cycle is in a late stage, but that’s not the case for overseas markets. This calls for investing in stocks out of the country that are likely to make the most of the first-quarter earnings season and beyond.

Q1 Earnings Off to a Stellar Start

There is a lot to cheer about the U.S. earnings season. Total earnings are expected to be up 8.6% from the same period last year on 6.2% revenue growth. Earnings in the quarter are on an uptrend, with banks coming up with solid year-over-year growth. JPMorgan JPM and Citigroup C have reversed declining loan growth trends, raking in solid gains from their investment banking businesses.


Actual earnings growth, however, is expected to be as high as 10.4%. And if that happens, it will be the first double-digit increase since the third quarter of 2014. Furthermore, it will mark the best quarter of growth in about five years, the highest since the companies posted 11.6% growth in the fourth quarter of 2011. This would also follow 7.4% earnings growth recorded in the fourth quarter of 2016 on 4.8% higher revenues, the best performance by the index in almost two years (read more: Q1 Likely to See Strongest Earnings Since 2011: Top 5 Picks).

Overseas Estimates Look Better than the U.S.

Analysts are even more bullish on investing outside the U.S. now. Goldman Sachs Group Inc GS is anticipating that the first-quarter earnings for the STOXX Europe 600 that represents a basket of stocks across 17 European countries will be up 17%. In case of Japan stocks, earnings are likely to increase 16% and emerging markets too are seeing an improving earnings picture.

When it comes to the full year, the picture is pretty much the same. For the year, overseas earnings estimates look even better than that for U.S. companies. The following table shows how overseas markets fared better than the U.S. in terms of earnings estimates:

Markets

Earnings Estimates for 2017

S&P 500

Up 10%

Europe

Up 14.4%

Japan

Up 12.1%

Emerging Markets

Up 19.3%

Source: JPMorgan Cazenove

In fact, in terms of year-to-date returns, European markets have outperformed the U.S. market. While the S&P 500 is up around 4.4% this year, STOXX Europe 600 has rallied over 5%. So, what’s behind the earnings rush?

The Hidden Boost for Overseas Earnings

Economic growth has started to pick up overseas. Even though the U.S. economy is expected to grow from 1.6% to 2.1% this year, growth in the Europe is expected at around 2%. And economic growth may even be better than expected. JPMorgan says Eurozone PMI, at 56.4 in March, is the best since April 2011 and is consistent with nearly 2% annualized GDP growth.

Japan is expected to grow 1.7%, but, that’s a significant jump especially after an anemic 1% last year. Emerging markets, on the other hand, are expected to grow the most at 4.6%, according to JPMorgan Cazenove. Global earnings momentum, in the meanwhile, is also linked to commodity prices. As such prices have started to move north, which will certainly boost global economic growth.

Stronger growth, definitely, boosts corporate margins. But there are other factors that favor overseas markets, primary among them being U.S. stocks are too expensive compared to their global counterparts. More than four out of five investors believe that U.S. stocks are overvalued, driving them to other parts of the world. According to the monthly Bank of America Merrill Lynch fund manager report, about 83% of fund managers said that domestic stocks are overtly expensive, a record number since 1999.

Portfolio managers are moving overseas, with allocations to emerging markets hitting a five-year high and Europe seeing the most in about 15 months. Interestingly, money is flowing to overseas markets despite geopolitical concerns, including the Europe Union.

In the U.S., valuations have turned out to be a concern after major indices catapulted to record highs following the presidential election. The S&P 500 is trading at 18.4x 2017 earnings, much higher than the rough 15.3 multiple in Europe. While in Japan and emerging markets, it is 15.6x and 12.5x, respectively, according to JPMorgan Cazenove.

5 Solid Overseas Stocks for this Earnings Season

Thanks to the aforementioned positives, corporates margins for overseas companies are expected to be more than the U.S. We have, thus, selected five overseas stocks, whose expected earnings growth in the current quarter and throughout the year is positioned to gain momentum. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

adidas AG ADDYY designs, develops, produces and markets a range of athletic and sports lifestyle products. The company’s segments include Western Europe, North America, Greater China, Russia/CIS, Latin America, Japan, Middle East, South Korea, Southeast Asia/Pacific. adidas AG has a Zacks Rank #1.

The company’s estimated earnings growth rate for the current quarter is 23.84%. The company’s likely earnings growth rate for this year is 15.3%, higher than the Shoes and Retail Apparel industry’s estimated gain of 5.9%.

Amarin Corporation plc AMRN is a biopharmaceutical company with operations in lipid science focused on the commercialization and development of therapeutics for cardiovascular health. The company was founded in 1989 and is based in Dublin, Ireland. Amarin has a Zacks Rank #2.

The company’s estimated earnings growth rate for the current quarter is 53.33%. Its projected earnings growth rate for this year is 46.9%, way higher than the Medical – Biomedical and Genetics industry’s projected gain of 7.6%.

ArcelorMittal SA MT, together with its subsidiaries, owns and operates steel manufacturing and mining facilities in Europe, North and South America, Asia and Africa. The company sports a Zacks Rank #1.

The company’s estimated earnings growth rate for the current quarter is a whopping 310%. ArcelorMittal’searnings growth rate for this year is estimated at 74.3%, way higher than the Steel – Producers industry’s expected gain of 34.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Canon Inc CAJ is a manufacturer of office multifunction devices (MFDs), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment. The company has manufacturing subsidiaries in a range of countries, including the U.S., Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and the Philippines. Canon has a Zacks Rank #1.

The company’s estimated earnings growth rate for the current quarter is 4.35%. The company’s expected earnings growth rate for this year is 30.7%, higher than the Office Automation and Equipment industry’s estimated gain of 15.8%.

Banco de Chile BCH is a full service financial institution, which is engaged in providing credit and non-credit products and services in Chile. The company has a Zacks Rank #2.

The company’s estimated earnings growth rate for the current quarter is 18.11%. The company’s likely earnings growth rate for this year is 8.6%, higher than the Banks – Foreign industry’s estimated gain of 4.7%.

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