Netflix Sets High Bar in an Already-Strong Earnings Season

(Bloomberg) -- The current earnings-report cycle was already off to a strong start when Netflix Inc. set an exceptionally high bar this week, blowing so far beyond subscriber estimates that the video service entered the exalted club of companies valued at more than $100 billion.

Netflix joins the array of U.S., European and Asian companies whose earnings are getting a lift from quickened global economic growth. Meanwhile, U.S. tax cuts should give American companies like Wal-Mart Stores Inc. the chance to reward investors with goodies such as buybacks on top of bonuses they’ve already sprinkled out to workers.

Not every CEO will have as pleasant news to deliver as Netflix’s Reed Hastings. Stung by an October earnings call that went awry, Oscar Munoz on Tuesday afternoon is scheduled to report United Continental Inc.’s second straight annual profit decline. And speculation is mounting that John Flannery will have to cut General Electric Co.’s 2018 profit outlook on Wednesday due to deep problems in the company’s industrial and finance operations.

With more than a tenth of the Standard & Poor’s 500 companies already reported, profit’s up 14 percent from a year earlier while sales have risen about 8 percent. Here are a few things to watch:

The Tax Man cometh and he’s got good news

The lower corporate tax rate Congress approved late last year has already helped some companies boost profit forecasts for 2018 -- and they’ve entered earnings season willing to share the largess. Macquarie Research estimates most U.S. airlines will see an average 20 percent increase in earnings per share. The benefits will hit first for cash taxpayers like Southwest Airlines Co., which reports Thursday and has already announced bonuses of $1,000 for its workers.

Wal-Mart is getting a roughly $2 billion tax benefit, and analysts expect it to boost share buybacks and potentially cut prices in addition to the worker raises and bonuses it’s already announced. The world’s largest retailer reports Feb. 20.

While Verizon Communications Inc. reported earnings that missed estimates Tuesday, it said it expects a massive windfall from the tax cut to boost 2018 cash flow by $3.5 billion to $4 billion. The largest U.S. wireless carrier hinted it may also reward bonuses, saying in a statement that it will make an announcement later in the day on “how employees will further share in the company’s success.”

Lower tax = more growth = more shovels

The U.S. tax cut contributed to expectations for faster global growth, and that should help companies that sell goods and services worldwide. The International Monetary Fund this week said it expects the world economy to jump 3.9 percent this year and next -- in each case a 0.2 percentage point bump from its projection in October.

With that growth comes more digging, paving and loading, and analysts have raised 2018 forecasts for Caterpillar Inc. even as it wraps its strongest earnings year since 2012 with Thursday’s report. Those roads need more cars, and IHS Markit predicts global auto sales will rise about 1.5 percent in 2018. General Motors Co. has forecast its profit this year will be consistent with a record of as much as $6.50 a share for 2017.

Heady times don’t prevent FX headwinds

The strong global economy can only go so far -- corporate earnings are also exposed to the whims of foreign exchange. The euro gained against every major currency in 2017 and strengthened further in January, so expect more profit warnings from European companies like the one last week from Paris-based distiller Remy Cointreau SA. Luxury conglomerate LVMH, which reports Thursday after the Paris stock market closes, and German software maker SAP AG, which reports Jan. 30, are among others that may be hurt by the euro. The question is how big of a hit, and whether it’s already reflected in stock prices.

The flipside? The dollar’s decline against most major currencies should give a boost to U.S. exporters and companies that translate foreign sales back into dollars. PPG Industries Inc. said last week, for example, that the weaker greenback would increase the paint-maker’s 2018 revenue by as much as $300 million. Post-it Notes maker 3M Co., which generates about 60 percent of its sales overseas, reports on Thursday and expects favorable exchange rates to add 10 cents a share to profit this year.

Can profits stay ahead of energy costs?

While surging oil prices will benefit energy companies, they’re also having a wider effect. Canadian Pacific Railway Ltd. last week said fourth-quarter earnings got a boost from rising crude prices and growing shipments of other commodities. For chemical makers like DowDuPont Inc., which reports Feb. 1, a big question is whether product prices can rise fast enough to recoup higher costs for oil-derived raw materials.

An iPhone’s ring is heard round the world

And as always, investors will be watching Apple Inc., the world’s most valuable company, when it reports Feb. 1 for signs of how demand is faring for the iPhone X. The results are likely to affect Asian suppliers. South Korea’s LG Display Co. reported Tuesday that operating profit missed the lowest analyst estimate. The news came about a week after Taiwan Semiconductor Manufacturing Co. forecast revenue that fell short of expectations, as waning smartphone sales in China and a strong local currency outweighed booming demand from cryptocurrency miners. Samsung Electronics Co., a supplier and rival to Apple, reported lower-than-projected profit this month as it lost momentum in memory chips.

--With assistance from Dave McCombs Nick Turner Tara Patel Crayton Harrison Rebecca Penty Richard Clough Julie Johnsson Jack Kaskey Mary Schlangenstein Joe Deaux Scott Moritz and Jessica Brice

To contact the reporters on this story: Kevin Miller in Chicago at kmiller@bloomberg.net, Phil Serafino in Paris at pserafino@bloomberg.net.

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net, Caroline Salas Gage at csalas1@bloomberg.net, Marthe Fourcade, Lisa Wolfson

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