Peak 1Q Earnings Season This Week – Communication Services in the Crosshairs

This week moves into peak 1Q earnings season with 110 large-cap S&P 500 companies (with a market value between $10 billion – $200 billion) reporting their financial result for 1Q20. To date, 55% of S&P 500 companies have reported results and, in aggregate, are reporting figures that are 2.5% above Wall Street analysts estimates. Consumer Staples are fairing best with 87% beating estimates compared to the Communication Services and Consumer Discretionary sectors fairing worst with only 45% of reported companies exceeding expected 1Q earnings.

Communication Services in the Crosshairs

This week the market gets to hear from some benchmark communication companies such as Disney (NYSE: DIS), who reports after the market close on Tuesday followed by CenturyLink (NYSE: CTL), Fox Corporation (NASDAQ: FOXA) and T-Mobile US (NASDAQ: TMUS) on Wednesday. On Thursday, ViacomCBS Inc. (NASDAQ: VIAC) reports before the opening bell. With so many companies reporting in this sector having disappointed Wall Street in 1Q so far, the market will judge if analysts have revised expectations down enough for some of these names to meet new expectations.

For example, analysts have lowered earnings estimates for Disney and T-Mobile US sharply over the last three months, down 41.6% and 36.2%, respectively, according to data from Finscreener.com. Analysts will be keenly waiting for the Disney management call to get some insight into how they plan to reopen their theme parks, which accounted for approximately 40% of company revenues over the last three years ended 2019. Disney’s share price is down over 27% in 2020 as Wall Street assesses the hit to the company’s operations from the Coronavirus (COVID-19) induced shutdown.

Among reporting companies this week, it is ViacomCBS Inc.’s share price that is the clear laggard in 2020, down an eye-watering 58.9% this year. The share performance stands in stark contrast to T-Mobile US who has returned nearly 12% for investors this year thanks mainly to the planned rollout of a new 5G network as part of the T-Mobile/Sprint merger completed on April 1, 2020.

ViacomCBS suffered a severe price dislocation on February 20, 2020, when it gapped lower on the open to around $32 per share from a previous close of $35.67, and continued a steady trudge lower well into March, reaching a low at one point of just $10.10 per share. The company’s problems go well beyond the present COVID-19 crisis. Investors seem increasingly underwhelmed by the merger of Viacom and CBS, completed in December 2019, intended to create a media conglomerate to compete with Disney+ and Netflix. The present share price performance suggests the market feels the merger is too little too late and lacks enough scale and content to succeed.

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.