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Investors aren't expecting to see any profit growth during the just-kicked-off earnings season. Some companies, though, might deliver something even worse than no growth: whopping losses.
There are eight companies in the Standard & Poor's 500 index, including integrated energy explorers ConocoPhillips and Hess as well as tax-preparation firm H&R Block that are expected to have lost $100 million or more during the third-quarter, according to a USA TODAY analysis of data from S&P Global Market Intelligence. These are the largest losses expected from any companies in the benchmark index. Adjusted earnings forecasts, which exclude one-time non-operating gains and losses that analysts don't put into their estimates, were used.
Investors are braced for a pretty disappointing earnings season. Adjusted earnings are expected to be down roughly 1% from the same period a year ago for the S&P 500, says S&P Global. That would make it the fifth-straight quarter of falling profit. The ongoing profit recession has been a challenge for investors since it makes stocks more expensive relative to profit. Just this month, Savita Sabramanian, equity strategist at Bank of America, warned stocks on average are trading for "extreme" valuations not seen in 15 years and approaching levels prior to the tech-stock bubble in the early 2000s.
There's no question where the profit pain is coming from: energy. Companies in the energy sector are expected to post 69% lower profit during the third quarter, S&P Global says. Seven of the eight companies expected to lose $100 million or more during the quarter are in the energy sector. These "are big losses, but not as big as last quarter," says Blake Fernandez, energy analyst at Scotia Howard Weil.
Energy profits will be crimped as oil prices remained stubbornly low during the third quarter. The average daily closing price of a barrel of West Texas Intermediate oil was $44.94 during the third quarter, down 3.5% from the average daily closing price in the third quarter of 2015.
Massive losses from giant energy companies explain this outsized profit implosion. There's no better example than ConocoPhillips, which is expected to lose an adjusted 61 cents a share in the third quarter which translates into a $750.2 million loss. That loss is even more painful as it's even deeper than the 38 cents a share loss in the same period last year. ConocoPhillips is expected to be profitable again in 2017. "Its hard to turn a big ship," Fernandez says. If oil prices can rise to the mid $50s or early $60s a barrel, that would help the industry regain profits, he says. Hess, a New York-based energy company, is expected to post the next largest loss to the tune of $381.8 million suffering from the same industry forces.
Outside the energy sector, H&R Block is expected to post a loss of $147 million during the period. As a tax preparer, H&R Block makes all its annual profit in the quarter ended in April. Yet its expected loss in the third quarter of 2016 of 67 cents a share is deeper than the loss of 51 cents a share it lost in the same period a year ago. "This is a very seasonal business," says Jeff Silber, analyst at BMO Capital Markets.
These are just estimates at this point. Investors will hope actual results come in better than feared, says Michael Farr, CEO of investment company Farr, Miller & Washington. "We think earnings season will be more of the same with companies beating estimates that have been talked down over the last quarter."
Biggest Expected 3Q Losses
S&P 500 companies analysts forecast will post the largest losses during the quarter
Company, Symbol, Expected Q3 2016 loss ($ million), expected Q3 2016 loss (per share)
ConocoPhillips, COP, -$750.2, -$0.61
Hess, HES, -$381.8, -$1.22
Anadarko Petroleum, APC, -$318.7, -$0.57
Baker Hughes, BHI, -$188.2, -$0.44
EOG Resources, EOG, -$175.6, -$0.32
Marathon Oil, MRO, -$150.6, -$0.18
H&R Block, HRB, -$146.7, -$0.67
National Oilwell Varco, NOV, -$105.9, -$0.28
Source: S&P Global Market Intelligence, USA TODAY