With 95% of the companies in the S&P 500 reporting earnings for the quarter, the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) revenue growth rate for the first quarter is 10.7%. If 10.7% is the actual growth rate for the quarter, it will mark the highest year-over-year revenue growth reported by the index since Q3 2011 (12.5%). Given the uneven global economic recovery from COVID-19, did S&P 500 companies with higher international revenue exposure underperform S&P 500 companies with more domestic revenue exposure in terms of revenue growth for Q1 2021?
The answer is no. FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index) was used to answer this question. For this analysis, the index was divided into two groups: companies that generate more than 50% of sales inside the U.S. (more domestic exposure) and companies that generate more than 50% of sales outside the U.S. (more international exposure). Aggregate revenue growth rates were then calculated based on these two groups.
For companies that generate more than 50% of revenues inside the U.S., the blended revenue growth rate is 8.9%. For companies that generate more than 50% of revenues outside the U.S., the blended revenue growth rate is 16.2%. What is driving the sharp difference in revenue growth between S&P 500 companies with more international revenue exposure and more domestic revenue exposure?
At the sector level, there was broad-based outperformance by companies with more international revenue exposure, led by the Information Technology and Communication Services sectors. In seven of the 11 sectors, the companies with more than 50% international revenue exposure had higher revenue growth rates than the companies with more than 50% domestic revenue exposure. The Information Technology and Communication Services sectors were the largest contributors to the 16.2% revenue growth rate for S&P 500 companies with more than 50% international revenue exposure. The Information Technology sector has the highest international revenue exposure of all 11 sectors at 57%, while the Communication Services sector is tied with the Energy sector for the fourth-highest international revenue exposure of all 11 sectors at 42%. If these two sectors were excluded, the revenue growth rate for companies with more than 50% international revenue exposure would fall to 7.0% from 16.2%.
At the super-region level, companies with more revenue exposure to the Asia Pacific region outperformed companies with more revenue exposure to Europe. Companies with more than 50% international revenue exposure that also had more than 25% revenue exposure to the Asia Pacific region had revenue growth of 21.6%. On the other hand, companies with more than 50% international revenue exposure that also had more than 25% revenue exposure to Europe had revenue growth of 11.8%.
Apple is an example of a company with more than 50% international revenue exposure that witnessed higher revenue growth in the Asia Pacific region compared to Europe in Q1 2021. Apple reported revenue growth of 78% in the Asia Pacific region (combining revenues from Greater China, Japan, and the Rest of Asia Pacific) and revenue growth of 56% in Europe for the quarter.
Smaller Differences in Earnings Growth
It is interesting to note that there was a much smaller difference in earnings growth rates for S&P 500 companies with more than 50% international revenue exposure (53.7%) and more than 50% domestic revenue exposure (51.2%). This smaller difference was mainly due to the Financials sector. The Financials sector was the largest contributor to the 51.2% earnings growth rate for S&P 500 companies with more than 50% domestic revenue exposure. The Financials sector has the third-highest U.S. revenue exposure of all 11 sectors at 77%. If this sector were excluded, the earnings growth rate for companies with more than 50% domestic revenue exposure would drop to 30.3% from 51.2%.
Within the Financials sector, the Banks industry was the largest contributor to earnings growth for the sector. The Banks industry reported earnings growth of 258% but revenue growth of only 3%. This sharp difference between earnings and revenue growth was mainly due to companies in this industry reporting substantial year-over-year decreases in provisions for loan losses, which had no impact on revenue growth but significantly boosted earnings growth. For more details, please see this recent Insight article.
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Mr. John Butters is Vice President and Senior Earnings Analyst at FactSet. His weekly research report, “Earnings Insight,” provides analysis and commentary on trends in corporate earnings data for the S&P 500 including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, The Financial Times, The New York Times, MarketWatch, and Yahoo! Finance. Mr. Butters has over 15 years of experience in the financial services industry. Prior to FactSet in January 2011, he worked for more than 10 years at Thomson Reuters (Thomson Financial), most recently as Director of U.S. Earnings Research (2007-2010).
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