February 5, 2016 / 4:12 PM / 2 years ago

INVESTMENT FOCUS-Lower costs and better margins buoy European earnings

* European Q4 earnings in positive territory

* U.S. lags, margin growth less favourable than Europe

* Earnings of European energy firms seen halving in Q4

By Atul Prakash

LONDON, Feb 5 (Reuters) - Fourth-quarter earnings of Europe's leading companies have been boosted by cost cutting and better operating margins, with higher profits contrasting with falls seen in the United States.

European stock markets are yet to get any solid boost as external events, such as a sharp drop in commodity prices, have offset any positive impact.

But the results could help underpin the pan-European STOXX 600 index, which is down 10 percent this year, going forward if commodity prices stabilise around current levels, analysts said.

It is still early days in the European earnings season.

Only 27 percent of companies in the STOXX 600 index have announced results, against more than 60 percent of U.S blue-chip companies. But the initial trend suggests Europe remains on course to beat U.S. earnings in the October-December quarter.

U.S. S&P 500 companies have on average seen a drop of about 4 percent in fourth-quarter earnings so far, against a gain of around 5 percent in Europe, according to industry data.

"European earnings have been good so far. Unfortunately for European companies, the good performance has drowned in the noise and turmoil of first five weeks of the year," said Peter Garnry, head of equity strategy at Saxo Bank.

"More fiscal stimulus in Europe should add to European equities' outperformance. In the U.S., margins and revenues will continue to be under pressure," he added.

According to Thomson Reuters I/B/E/S data, European earnings are seen rising nearly 40 percent in the fourth quarter, mainly due to stronger financials, against a likely contraction of 4 percent in the United States. Without financials, European earnings are seen gaining 0.5 percent during the quarter.


Financials in Europe are likely to see their profits jumping to nearly $26 billion in the October-December period from just $2.1 billion the fourth quarter of 2014, when several banks made one-off provisions after writing off some loans.

That has managed to negate the impact of poor results from energy companies, which have been hit by weak oil prices that have halved in the past nine months on concerns about oversupply and falling demand especially in countries such as China, the world's second-biggest economy.

To be sure, some top European banks have posted poor results, such as Deutsche Bank and Credit Suisse this week.

But others have been much better, with ING, Bankia , Banco Sabadell and Danske all posting strong earnings.

Analysts added that while the weak oil price was impacting top European energy companies, whose earnings are seen falling 50 percent in the fourth quarter from the corresponding period of the previous year, it could have positive side-effects.

"We will continue to see cost cutting generate a healthy tailwind for some companies, the rapid fall in the oil price is still of enormous benefit to Europe, domestic demand still likely to improve and unemployment remains stubbornly high in the euro zone, which will mean wage pressure will be muted," said Juliet Cohn, portfolio manager at Principal Global Equities.

Analysts added the fact earnings had risen for many quarters in the United States meant there was limited scope for already high profit margins to expand - in stark contrast with Europe.

"European economic growth is still sluggish but is gradually accelerating, whereas it is stalling in the U.S.. Monetary policies in Europe are much more supportive and there is an increased competitiveness from a weaker euro," said Robert Parkes, equity strategist at HSBC Global Research. (Reporting by Atul Prakash; Editing by Sudip Kar-Gupta and Mark Potter)

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