Microsoft is set to report earnings later than usual following M&A activity in April

Executive Summary

• Microsoft is set to report earnings later than usual following M&A activity in April
• Firms remain flushed with cash following the pandemic
• European stocks have tapped the brakes this summer—we profile one Italian construction company that recently revised its earnings date
• Several major US and European companies have issued preliminary earnings announcements

The Heart of Earnings Season

Reporting season heats up now that the first few large financial companies posted results. Thus far, bottom-line figures have been strong relative to analysts’ expectations once again. We discussed “the drive for five” last week as the prior four quarters featured massive revenue and earnings beats. We also want to keep the proper perspective, however, since the year-on-year timing makes US corporations’ profits appear better than they are.

This week, we highlight an earnings outlier and an earnings revision that portend some negative news for the profiled firms. We also hit on several companies issuing preliminary earnings reports.

Earnings Outlier

It’s not often we bring up the happenings of the very biggest stocks in the world—but we do so this week. Microsoft Corp. (MSFT), the second-largest market cap company at $2.13 trillion, lit up our radar concerning its upcoming earnings date. Recent corporate activity could be the cause.

Mega Cap US Growth's Dominance Re-emerges

Taking a step back, what a run it has been for the biggest of big stocks. While Q4 2020 and Q1 2021 saw small caps, cyclicals, and value plays surge, the last two months have been a return to growth stocks’ dominance. The FAAMG names are leading the market. MSFT has rallied nearly 20% just in the last two months. Can that continue? Could earnings season cause a hiccup? The upcoming earnings report might provide the answer.

Outlier Analysis

The Washington-based software firm in the Information Technology sector completed its fiscal year on June 30. “Mr. Softy”, as Wall Street dubs it, has historically posted Q4 results between July 16 and July 20. On April 28, Wall Street Horizon set an inferred date of July 21 per the trend.

MSFT often pre-announces two weeks before its earnings date, so we had clues that they were reporting late. Indeed on July 13, the company announced it would post results on the afternoon of July 27—a week later than first estimated. The result is a high Z-score of 3.97 indicating a later than normal announcement. Portfolio managers should bear in mind that Microsoft is acquiring Nuance Communications which could have an impact on the late announcement.

Acquisition Details - Broader Implications?

The Nuance deal, a nearly $20 billion all-cash transaction announced on April 12¹, bolsters Microsoft’s healthcare cloud business and other activities. It’s another step in the direction of AI. Investors should be on the lookout for more major corporate deal-making as earnings season rolls on.

Companies are flushed with cash following the central bank, fiscal, and consumer response to the pandemic. Putting some of that money to use via mergers and acquisitions is a logical step at this point in the economic cycle now that balance sheets are shored up. Firms will want to take caution considering lofty market valuations, though.

Figure 1: MSFT Stock Price History (1-Year)²

Earnings Revision

Infrastructure Wireless Italiane S.p.A. (INW.IT) is a real estate construction company based in Rome and is listed on the FTSE MIB Index as well as the STOXX Europe 600. This €9.5 billion market cap cyclical stock has ranged between €8 and €11 over the last year while a broad index of European equities surged from November through early June.

The NYSE-traded SPDR EURO STOXX 50 ETF (FEZ) has given back a small portion of its gains in recent weeks as COVID-19 Delta Variant jitters drive uncertainty about near-term economic growth. Interestingly, shares of INW.IT have held up well.

Figure 2: INW.IT Stock Price History (1-Year)³

Revision Analysis

INW.IT has a history of reporting Q2 earnings between July 30 and August 2. Wall Street Horizon updated the Q2 2021 earnings date to August 4, confirmed from the company calendar located on the INW.IT website. After corresponding with the company, Wall Street Horizon reconfirmed the earnings date of INW.IT to July 29 with an unspecified time of day.

Revisions Are Important to Monitor

International asset managers should be on guard for potentially unusual information to be disclosed within the upcoming earnings report. Earnings date revisions occur when a firm publicly declares an earnings date, then changes it. This information is critical to your trading strategy. Data like this are available in Wall Street Horizon DateBreaks.

Preliminary Earnings

Investors should also monitor several major US-listed and European-listed names that have issued preliminary earnings over the last two months. Firms will often issue preliminary earnings announcements to send a warning flag to the market regarding unusual news or financial results in the near future. This type of corporate event often portends single-stock volatility, particularly during earnings season. We wrote about it in late 2020 after a multitude of prelims during that volatile year.

Among the companies on the S&P 500 to issue a preliminary announcement lately are Seagate Technologies PLC (STX), The Sherwin-Williams Company (SHW), and Welltower Inc. (WELL). Other large caps on the Russell 1000 index with preliminaries are Steel Dynamics (STLD), US Steel Corp (X), and Group 1 Automotive, Inc. (GPI). Diageo (DGE.GB), on the FTSE 100, also issued a preliminary earnings announcement.

Conclusion

The hoopla of the big US banks reporting has come and gone—now we can focus on the heart of earnings season. Analyst expectations are for the best S&P 500 profit growth since the fourth quarter of 2009 on a year-over-year basis according to FactSet.⁴ Small and mid-caps are set to see even bigger year-on-year EPS growth (due in part to base effects).

A few things will be closely watched (and listened for) this quarter including executives’ mentions of inflation and ESG. Inflation fears have eased judging by the move in 5-year and 10-year breakeven interest rates despite much hotter than expected consumer and producer price index data released last week. It was high inflation readings back in May that helped changed the market dynamic away from value’s outperformance back toward growth leading the market higher. Inflation remains an important topic among corporate managers.

Monitoring and reporting corporate actions are what we do at Wall Street Horizon. Keeping our finger on the pulse of significant corporate events empowers traders to effectively manage risk.

¹ https://news.microsoft.com
² https://stockcharts.com
³ https://www.wsj.com
⁴ https://www.factset.com