* Top analysts predict company earnings will lag consensus
* Miners, banks unlikely to be punished by earnings misses
* Healthcare sector set to surprise positively - StarMine
* Investors seek reasons to buy defensives after reporting
By Alistair Smout
LONDON, Feb 6 European company earnings will lag
consensus forecasts in the results season now under way but that
should not put too big a dent in equity market performance, top
While slow growth may hurt many firms' bottom line, strong
demand for shares from investors, whose confidence has been
lifted by easy monetary policy and reduced political risk in
Europe, should limit the toll on share prices.
Companies in most sectors, including those that led stocks'
rally since mid-2012, are expected to disappoint, according to
analysts with strong predictive track records.
But there are bright spots, especially in so-called
defensive sectors such as healthcare, where earnings should beat
forecasts, and those companies' shares could be in for a lift.
"There's almost a cap on underperformance from bad results
but there's still that potential for upside if you do manage to
beat expectations," Adrian Cattley, pan-European equity
strategist at Citi, said.
Thomson Reuters StarMine data shows the top analysts ranked
by historical accuracy and timeliness expect aggregate 2012
earnings for STOXX 600 Europe companies to fall 2.7
percent compared with 2011.
For the rest of the current season, they see quarterly
earnings undershooting broader consensus estimates by 1.3
percent, with estimates for 2012 missing by 1 percent.
Of all European sectors, only healthcare is forecast to
deliver a positive surprise in both yearly and quarterly
While the sector recouped around a third of its 3 percent
fourth-quarter stock price underperformance against the broader
market in January, it remains a relative laggard and so could
prove a top earnings season winner for those willing to bet now.
"These healthcare stocks are defensive stocks and they are
yielding well," a UK-based healthcare sector analyst said,
referring to the attractive dividend returns on offer.
"If we see evidence that Q4 has been faring better, then
they (share prices) might see a bit of a tick up."
Leading the healthcare sector is Swiss company Actelion
, with a 5.4 percent "predicted surprise" -- a Thomson
Reuters measure which calculates the difference between
consensus, as calculated through a mean of predictions, and a
"smart" estimate of earnings which gives greater weight to the
most accurate and up-to-date forecasts.
Actelion also features on a list of stocks favoured by Citi
that have strong earnings momentum, with growth accelerating
from previous periods, but whose recent underperformance gives
them an attractive valuation.
ACCENTUATE THE POSITIVE
Other defensives -- sectors expected to perform well even in
straitened economic times -- are expected to beat consensus on
at least one front. Top analysts predict a positive surprise of
1.7 percent for consumer staples that are yet to report
fourth-quarter results, but no such surprise in yearly results.
By contrast, the defensive consumer discretionary sector is
expected to beat consensus for the year, but slightly miss
H&M, for example, reported a negative surprise on
last quarter earnings of 0.2 percent last Wednesday despite
reporting strong expansion in the year as a whole.
An initial 4.2 percent drop in price became a 0.5 percent
gain by the end of the day, with its valuation attractive given
the stock's 0.2 percent fall over the last quarter.
"Any stocks that are defensives that beat expectations, or
even narrowly miss them, will be in demand," Fawad Razaqzada,
market strategist at GFT, said.
"We have been in a major risk rally recently, so people will
be looking for excuses to buy these major defensive stocks, even
if they ease off initially."
The rally's main beneficiaries, in the financials and
materials sector, are set to post the biggest negative
surprises, at 9.0 and 2.6 percent respectively for the last
Bank shares gained 10.6 percent in the last three months of
Negative earnings surprises should not hit rallying banks
and miners too hard, with cheap valuations and an improving
macroeconomic environment -- rather than earnings expectations
-- fuelling their recent move higher.
"The rally last year wasn't about growth, and even as
earnings and expectations of earnings evaporated, the market
continued to move up," Mike Ingram, market analyst at BGC
European banks still trade at an average
price-to-book value of around 1 even after the rally, meaning
their equity price is just about equal to the their accounting
However, after six months of rallying, they look expensive
compared to recent history, and with the threat of euro zone
break-up diminished, banks and miners may take a back seat in
any gains on equity markets until earnings improve as well.
"If a bank reports results that do disappoint market
expectations, there might be quite a muted reaction to that,
because there's still a supportive macro environment around the
sector," Cattley said.
" given where the valuations have got to, we think that
the companies with bad earnings trends are less likely to be the
ongoing leaders. Performance will come from those with the
better earnings trends."