Avoid an 'Earnings Shock' in Q4 This Year

Declining Earnings of Listed Companies Since Q1 This Year... Need to Separate the Wheat from the Chaff
Period with High Expense Processing, Difficult to Secure Earnings
High Forecast for Q4 This Year, Difficult to Achieve

[Asia Economy Reporter Hwang Junho] A warning has been issued for an earnings shock in the fourth quarter of this year. Since the first quarter, the performance of listed companies has been continuously declining, and the fourth quarter is seasonally a period with many expense postings, making it expected that securing earnings will be more difficult. It is pointed out that this is a time when wisdom is needed to avoid falling leaves and distinguish the good from the bad.

On the 17th, Yuanta Securities reported that the total operating profit of the stock market based on 200 stocks in the third quarter was 60.7 trillion won, falling short of the end-September forecast of 63.8 trillion won. The forecast achievement rate was 95.1%, and the earnings surprise ratio was 46.0%, both lower than in the first and second quarters.

Excluding the large-cap Samsung Electronics and SK Hynix, this trend becomes even more apparent. The forecast achievement rate for the 200 stocks gradually cooled down from 110.2% in the first quarter to 103.0% in the second quarter and 93.4% in the third quarter, indicating a cooling atmosphere in the earnings season. The annual growth rate of operating profit for the third quarter was also recorded at 45.9%, significantly down from 123.1% in the first quarter and 81.8% in the second quarter.

Given this trend, the possibility of an expanded earnings shock in the fourth quarter is high. As of this day, the forecast for the fourth quarter is about 54 trillion won. However, the highest profit ever recorded for the fourth quarter was 39 trillion won in the fourth quarter of 2017. At that time, the forecast was 46 trillion won, with an achievement rate of about 85%.

Since the third quarter of this year, the forecast for next year has also been revised downward. The forecast for next year has been cut by about 12.5 trillion won over six weeks since the end of September. In the fourth quarter of last year, due to the base effect of COVID-19, the actual performance reached about 90.5% of the forecast, but this is considered an exceptional case. At that time, although about 10% of companies recorded an 'earnings shock,' the overall atmosphere was strongly felt as an 'earnings surprise,' which acted as a catalyst for the stock market rise at the beginning of this year. However, since the forecast for next year is being revised downward now, such an exceptional situation is unlikely to occur.

Additionally, the fact that temporary expenses occur every fourth quarter is also a burden. Unexpected provisions or bonus payments have caused the fourth quarter performance to fall short of forecasts every year.

Kim Kwanghyun, a researcher at Yuanta Securities, analyzed, "Since it is the time before the fourth quarter, more attention is needed on stocks with high reliability in their forecasts," adding, "Meritz Securities, Meritz Fire & Marine Insurance, Samsung Engineering, which have exceeded forecasts for seven consecutive quarters, have recorded earnings surprises for six consecutive quarters." On the other hand, he said, "There is no reason to hold stocks that recorded earnings shocks, and especially those with consecutive earnings shocks should not be bought," judging that "14 stocks with accumulated losses over three quarters and 22 stocks with earnings shocks for three consecutive quarters are stocks that should not be held."

Yoo Myunggan, a researcher at Mirae Asset Securities, explained, "The fourth quarter has always been a period when performance fell short of expectations," and added, "It is necessary to watch sectors such as software and construction/architecture, where profit forecasts have recently been revised upward."

This content was produced with the assistance of AI translation services.