Rising Profits Meet Trade Fears: Commodity Earnings Preview

(Bloomberg) -- Investors will probably like most of what they see when energy, mining and farm-products companies report earnings for the most recent quarter. It’s the rest of the year they’re worried about.

Commodity bellwethers including Exxon Mobil Corp., Freeport-McMoRan Inc., and Archer-Daniels-Midland Co. are among a raft of raw-materials companies expected to post higher profits in financial results this week and next. Many benefited from cost cutting and some are seeing higher prices since the last commodity slump.

But trade friction is threatening to derail global growth just as supply risks ease in some markets. Those concerns have already helped send the Bloomberg Commodity Index toward its biggest monthly loss since 2016. Last week, Alcoa Corp. reported better-than-expected earnings, only to have investors punish the shares when the aluminum maker cut its 2018 forecast because of U.S. tariffs.

“What’s taken place as a result of this escalation in trade and the negative impact it’s had on commodity prices, there’s no escaping that,” said Peter Sorrentino, the Dallas-based chief investment officer of Comerica Asset Management Group, which oversees $47 billion. “That will be telegraphed through the global natural-resource extractors.”

Those concerns are being reflected in stock valuations that are near a one-year low relative to cash flow in the S&P Global Natural Resources USD Index of 88 companies, which includes Halliburton Co., Phoenix-based Freeport and ADM.

Rising Profits Meet Trade Fears: Commodity Earnings Preview

The Bloomberg Commodity Index rose 0.2 percent at 6:33 a.m. in New York. The gauge has fallen in seven of the past eight weeks.

Agriculture

Investors in agriculture were given reason for hope earlier this month with Cargill Inc.’s performance. The biggest closely held U.S. company posted its best fiscal year since at least 2011, with fourth-quarter adjusted operating earnings jumping 76 percent from the same period last year.

ADM, which reports earnings on July 31, is expected to report the fastest growth in earnings in a year, based on the average of analysts’ estimates compiled by Bloomberg. Profit at Bunge Ltd. is seen rising more than six fold from the same period a year earlier.

Still, agricultural products have been among the hardest hit in the commodities sell-off. Cargill has been vocal about agriculture’s dependence on free trade. Devry Boughner Vorwerk, Cargill’s corporate vice president of global affairs, warned that the trade conflict between the U.S. and China, the two largest economies, threatens economic growth and American jobs.

Rising Profits Meet Trade Fears: Commodity Earnings Preview

Metals

Second-quarter per-share earnings at the 32 companies in the Bloomberg Americas Mining Index are expected to rise 6.7 percent, according to data compiled by Bloomberg. The gauge is poised for a sixth straight monthly loss, the worst streak in records going back to 2000.

On Wednesday, Freeport, the largest publicly traded copper producer, will report second-quarter earnings before the start of U.S. trading in New York. The company is expected to post the highest per-share earnings since the third quarter of 2014.

While Goldman Sachs Group Inc. analysts acknowledge the risk that a more rapid slowdown in the Chinese economy could curb demand for copper, they continue to rate Freeport a “buy,” with a 12-month target price of $20 a share, compared with Monday’s close of $15.83.

For metals and mining stocks, “we sense a mix of heightened risk aversion and general lack of interest within a busy, confusing macro backdrop as we prepare for the second-quarter earnings season,” Goldman analysts including Matthew Korn, said in a note July 12.

Rising Profits Meet Trade Fears: Commodity Earnings Preview

Gold mining is one industry where earnings prospects are slipping for many companies, with prices of the metal headed for a fourth straight monthly loss, the worst streak since 2013. Last week, a gauge of producers tracked by Bloomberg Intelligence slumped to the lowest since 2016.

Barrick Gold Corp., Goldcorp Inc. and Agnico Eagle Mines Ltd. are set to release their financial results on Wednesday, followed by Newmont Mining Corp. the next day.

Energy

The energy industry has fared better than most metals and agricultural companies, as tight supplies and robust demand bolster crude prices.

Companies in the Energy Select Sector Index are expected to post growth in earnings of 29 percent on average, according to data compiled by Bloomberg. The gauge, which includes Exxon Mobil and Chevron Corp., surged 13 percent last quarter as West Texas Intermediate crude advanced to a more-than three-year high.

Macquarie Group Ltd. said a group of the largest integrated oil companies are “heading for a cash flow paradise,” raising enough money to support “significant share buybacks” and some dividend growth in the medium and longer term.

Rising Profits Meet Trade Fears: Commodity Earnings Preview

Exxon Mobil and Chevron, both reporting Friday, are expected to post their best quarters since 2014.

The trade concerns are “just short-term noise,” Brian Giuliano, a vice president at Brandywine Global Investment Management LLC, a unit of Legg Mason Inc., said in a telephone interview. “Looking around the world, growth isn’t strong everywhere, but it’s generally in positive territory.”

That may be, but oil too is showing that it’s not immune from trade maladies. The fuel has posted three straight weekly losses, in part on concern that escalating trade rows will undermine energy demand.

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