Analysts Buoyed By Draghi Send Profit Upgrades To Four-Year High
By Roxana Zega and Sofia Horta e Costa
(Bloomberg) — First it was stocks, now it?s stock analysts
affirming confidence in Mario Draghi?s economic blueprint.
For more than a month since the central-bank president
began his program of buying government bonds to stimulate the
economy, the number of analysts raising their earnings estimates
on European companies has exceeded those lowering them, an index
compiled by Citigroup Inc. shows. That?s the longest stretch in
four years.
Slowly, the people who follow companies are coming around
to the message sent by markets, after European equities posted
the biggest quarterly jump since 2009. Draghi, who discusses the
ECB?s policy plans on Wednesday, has pledged to buy 60 billion
euros ($64 billion) of assets a month through September 2016 to
kick-start economic growth.
?Even after the recent upgrades, the full effect of all of
this is not yet fully priced into analysts? models,? said James
Butterfill, the head of global equity strategy at Coutts & Co.
in London. ?Just like the economic recovery was underestimated,
profit forecasts are also still too low.?
Estimates for how fast earnings will increase this year in
the Stoxx Europe 600 Index are going up, from an average
projection of 6.2 percent in February to 7.2 percent last week.
Stocks have risen faster, rallying 20 percent this year. The
Stoxx 600 gained 0.3 percent at 8:16 a.m. in London.
Decade High
That pushed valuations to near their highest levels in at
least a decade, with the Stoxx 600 trading at 17.2 times
estimated profits. Analysts at JPMorgan Chase & Co. said in an
April 13 note that economic growth of more than 1 percent in
Europe will bring double-digit earnings gains. The region will
probably expand 1.3 percent this year, forecasts compiled by
Bloomberg show.
JPMorgan sees value in industries including energy,
industrials and banking. 2015 profit estimates for Neste Oil Oyj
and Standard Life Plc, two of the brokerage?s top picks, have
increased 4.7 percent since their lows in February. Growth
projections for Bayer AG have risen almost every week since
then.
The Stoxx 600 climbed to a record, first surpassing a peak
reached in 2000 last week. Before then, the index hadn?t gone
more than two years without a fresh all-time high and had an
average of 23 records annually from 1987 through 2000 as it rose
at an annualized rate of 13 percent. The yearly return from a
low in 2003 through the April 13 high was 8.1 percent.
Michael Ingram, a market strategist at BGC Brokers LP in
London, remains skeptical. Profitability has stagnated in recent
years, while industries such as banking will need more time to
complete their recovery, he said.
Awful Lot
?Euro stocks are pricing in an awful lot of good news, but
evidence of that is quite thin on the ground,? Ingram said in a
phone interview. ?It increasingly looks as though the index is
being bid up on fumes and if any sizable investor moves for the
exit, it could be bloody.?
Most upgrades came from companies in industries that will
benefit the most from an improvement in the economy, according
to a UBS Group AG report dated April 13. Even in a scenario
where the euro stabilized at the current level, the currency
still gives the biggest tailwind to earnings in almost 20 years,
UBS said.
?Earnings revisions have been improving for a while now,
and we can finally call this a trend,? said Lars Kreckel, Legal
& General Investment Management?s global-equity strategist in
London. ?So many positive macro drivers are coming together at
the right time. With the first-quarter earnings season, you?re
going to get a good reminder of where the growth is.?