This Week in Earnings – Q1’23

With 69% of the S&P 500 reporting earnings to date, 69% have reported a positive EPS surprise, below the 1-year average of 75%. Companies are reporting earnings 1.6% above consensus estimates, well below the 1-year average of (+6.5%) and the 5-year average (+8.6%).

We analyzed earnings calls and annual revenue and EPS guidance provided by calendar-year Materials companies with market caps greater than $500M that have reported to date.

Key Themes

• Outlook: ‘Not-Too-Hot, Not-Too-Cold’; Materials Forecast Strength Following Inventory Recalibration Through Q1 and Hopeful China Normalization, though Residential Downtrend Lingers
• Inflation and Margins: Inflationary Pressures Remain Eminent, and Companies Tout Efficiency Controls and Further Price Increases; ‘Decelerating’ Input Costs Prompt Promises of 2H Margin Expansion
• Inventory: Executives Face the Music on Oversupply; Destocking and “Crimped” Order Rates Impact Top-lines, though Many Chalk it Up to Stabilizing Supply Chains rather than Shifts in Demand
• Legislation Impacts: Heightened Government Spending from All Angles Sparks Long-term Confidence
• China & Europe: Fingers Crossed Surrounding Demand Tailwinds from China’s Reopening, though Europe Sees Pronounced Souring

Materials sector results have staggered into the new year, with most subsectors reporting YoY declines in earnings alongside notable negative top-line results vs. Street estimates. Destocking reared its head in Q4, and sales were affected by customer inventory management – a result of the oversupply linked to massive preordering during a difficult supply chain environment in 2022.

However, several anticipate current order trends to be “transitory,” and not a reflection of the overall demand environment. While cost inflation continues to cut through margins, many cite an improving logistics environment coupled with anticipated raw material deflation throughout the year. In the meantime, executives point to operational efficiencies and carryover price increases as methods to weather the drop in volume.

Views on China remain cautiously optimistic amidst reopening measures and the end of celebrations surrounding the Chinese New Year. Europe, on the other hand, is reportedly experiencing a sharp decline in demand, and senior leaders are forecasting a tenuous environment through Q1.

In the U.S., legislative tailwinds have provided a boost, in principle, to the long-term outlook of the sector. That said, many concede most of the benefits touted by Washington are due to be realized through the back half of 2023 and into 2024.

For 2023 guidance, an equal proportion (25%) Narrowed or Widened their revenue range relative to last year with the same number newly initiating guidance. Meanwhile, most EPS spreads were Maintained (38%) relative to last year, though 7% more did not issue guidance this year compared to our all-company benchmark (11%).