Last year’s plunge in corporate earnings sets a low bar for this year

That’s Wall Street talk for quarterly earnings reports that benefit from comparison to lousy numbers a year earlier. Starting next month, companies will report first-quarter profits that are likely to look really good by comparison to the numbers they posted last April.

The first quarter of 2020 was the first financial reporting period affected by COVID-19. Sales and profits at many companies started plummeting in mid-March as public officials curtailed commerce in a bid to slow viral transmission.

The full impact hit in the April-to-June quarter, when earnings per share fell by about a third on average at companies in the S&P 500.

Painful as it was back then, last year’s plunge sets a very low bar for this year’s earnings reports. Merely approaching pre-pandemic levels would likely generate double-digit percentage EPS growth at a lot of companies. Analysts predict 22.6 percent first-quarter earnings growth for the S&P 500, according to FactSet.

Big jumps in EPS tend to trigger similar surges in stock prices, which typically are based on a multiple of per-share earnings. Even if multiples don’t expand, as they often do during recoveries, stocks likely would track earnings increases in the short term.

A few local examples illustrate the trampoline effect of recovery from a deep downturn. Medical products maker Abbott Laboratories capitalized on surging demand for coronavirus tests last year, but its other business lines  suffered as hospitals stopped many non-COVID-related procedures. Adjusted earnings per share fell 18 percent in the first quarter and 60 percent in the second, Bloomberg data shows. Analysts expect a big rebound, with EPS rising 24 percent in the first quarter of 2021 and 300 percent in the second. If Abbott delivers the expected $5.05 EPS figure for the year and maintains its current P/E ratio of 47, its stock price could double.

Burger chain McDonald’s took a similar hit early last year, enduring a 10 percent first-quarter earnings decline, and a second-quarter plunge of 62 percent. With restaurant restrictions dropping around the country, and McDonald’s drive-throughs running full tilt, earnings are expected to rise 16 percent in the first quarter of 2021, followed by a 161 percent second-quarter leap, and a 25 percent rise for the full year. At its current multiple of 37, McDonald’s stock could rise 35 percent if it hits the numbers.

Heavy equipment manufacturer Caterpillar suffered when coronavirus hammered global trade. Earnings fell 45 percent in the first quarter and 60 percent in the second. Analysts predict increases of 13 percent and 67 percent for the first and second quarters, powering Cat to a projected 27 percent earnings jump for the full year. Based on its current multiple, Cat stock could rise 29 percent if it meets those expectations, even though the full-year EPS target is 28 percent below 2019 earnings.

Gobsmacking gains give CEOs cover, but they could be short-lived and deceptive. Strong growth in comparison to a period of unprecedented economic disruption doesn’t necessarily shed much light on a company’s post-pandemic prospects.

The long-term effects of coronavirus on many industries aren’t clear yet. Red-hot growth could soon cool as companies encounter new realities. Before long, share prices will start to reflect the impact of those changes.

In any case, stock values are based on future expectations more than current results. Much of the anticipated 2021 rebound is already priced in, lifting share valuations to dizzying levels. Investors will punish companies that miss their EPS targets, as well as those that hit the mark but betray any hint of worry about future performance.

Sure, a couple of boffo quarters will spread good cheer in C-suites. But CEOs should resist the temptation to bask in the glow. Elation could quickly turn to anxiety for leaders who allow short-term success to obscure future challenges.

Last year’s easy comps will soon be distant memories. And this year’s blowout quarters will become next year’s tough comps.

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