One Industry Is Dragging Down Earnings Growth for All of Europe

(Bloomberg) --

European earnings might have swung to positive growth in the third quarter but for one sector playing spoilsport.

The energy sector is responsible for much of the region’s profit woes in the period, according to Barclays and Bloomberg Intelligence. While earnings-per-share for Stoxx Europe 600 Index companies are broadly beating much-lowered consensus expectations, they are down about 4.7%, Barclays strategist Emmanuel Cau wrote in a note Friday. Excluding oil-and-gas stocks, they would be up 0.5%.

Earnings at energy companies tumbled about 26% in the quarter, according to Barclays, the biggest drop after materials, which have a smaller weighting on the Stoxx 600. That contributed to the lowest EPS growth in three years for the benchmark’s members. Oil-and-gas firms also were also the most disappointing by sales growth.

The culprit for the earnings decline is the slump in oil prices, say Bloomberg Intelligence analysts Tim Craighead and Laurent Douillet. They note that in the third quarter, Brent crude on average was trading about 20% lower than a year earlier.

Still, the overall beat for Europe indicates that earnings “have merely decelerated in-line with activity momentum rather than an outright collapse as feared by consensus,” according to Cau. The recent improvement in PMIs could even point to an easing in the pace of downgrades into the year-end, the strategist said, while noting that consensus estimates for the fourth quarter and 2020 look too optimistic.

Strategy-wise, defensive sectors delivered higher earnings growth than cyclicals, but the latter provided more positive surprises, according to Barclays.

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh, Paul Jarvis

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