Q3 Earnings Season, More Uncertain Than Expected

Record High Expected but Market Shock if Below Forecast
Samsung and LG Electronics Fall Short of Projections
Most Earnings to Be Outlined by Next Week

[Asia Economy Reporter Song Hwajeong] As the third-quarter earnings season begins, despite expectations that corporate earnings in the third quarter will reach record highs, concerns outweigh optimism. This is because if earnings fall short of expectations amid increased market volatility, negative impacts are inevitable.

According to Yuanta Securities on the 21st, the third-quarter operating profit forecast for 200 Universe (analyzed companies) stocks is 61.5 trillion KRW, which is more than 15% higher than the previous record set in the second quarter (53.5 trillion KRW). Following strong performances in the first and second quarters, the third-quarter forecast has continued to rise. The current forecast is about 18.5% higher compared to the beginning of the year.

However, in the past two weeks, the third-quarter forecast has been revised downward by about 2 trillion KRW. Researcher Kim Kwanghyun of Yuanta Securities explained, "While the earnings of Samsung Electronics and LG Electronics falling short of forecasts had an impact, notable downward revisions were seen in the chemical, securities, and electrical sectors," adding, "Concerns about earnings falling short of forecasts are outweighing expectations about the earnings level."

Samsung Electronics, which announced its earnings earlier, recorded a third-quarter revenue of 73 trillion KRW, a record high, and an operating profit of 15.8 trillion KRW, the second highest after the third quarter of 2018 (17.6 trillion KRW). However, Samsung Electronics' earnings fell short of market expectations. The revenue forecast was 73.3 trillion KRW, and operating profit was 16.2 trillion KRW. LG Electronics also missed earnings expectations. LG Electronics posted third-quarter revenue of 18.8 trillion KRW and operating profit of 5.407 billion KRW. While revenue exceeded the forecast (18.1 trillion KRW), operating profit, expected to surpass 1 trillion KRW, fell short of expectations. On the other hand, POSCO recorded consolidated revenue of 20.6 trillion KRW and operating profit of 3.11 trillion KRW, both exceeding forecasts (revenue 18.5 trillion KRW, operating profit 2.8 trillion KRW).

According to financial information provider FnGuide, among companies that announced third-quarter earnings and have consensus estimates, 8 companies exist, with 4 exceeding consensus and 4 falling short. Researcher Kim said, "Many companies are scheduled to announce earnings from this weekend through next week, and after next week, the outline of third-quarter earnings will become clearer."

The possibility that the number of companies failing to meet earnings expectations will increase cannot be ruled out. Researcher Jung Daun of Ebest Investment & Securities analyzed, "Using relatively recent (1-month) estimates tends to be more accurate than the general consensus (3-month average estimates). Comparing by company, 114 companies have 1-month average consensus exceeding the 3-month average consensus, while 143 companies fall short, indicating more companies are below expectations."

The gap between the sum of quarterly forecasts and the annual forecast is also widening. Although the first and second-quarter results are finalized, the gap between the annual forecast and the third and fourth-quarter earnings is appearing. Researcher Kim explained, "Since the annual forecast, which has relatively more estimates, is more reliable, it is necessary to consider whether the third and fourth-quarter forecasts are overestimated."

Especially with increased market volatility in the third quarter, earnings are more important. If earnings fall short of expectations, the impact will inevitably be greater. Researcher Kim said, "The earnings growth rate in the second quarter was lower than in the first quarter, and it will be difficult for the third quarter to surpass the second. The overall earnings cycle of the stock market is already declining; if earnings meet forecasts, it would be fortunate, but if not, it will cause a greater shock to the market."