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Are you on top of earnings season?

17 August 2016 in Trading Ideas

Key Takeaways

  • A good earnings season is related to beating expectations and a skilled investor must anticipate company expectations.
  • 69 percent of companies in the S&P 500 that have reported Q2 earnings, beat estimates.
  • Sectors with positive earnings growth include Consumer Discretionary, Telecom services, Utilities and Health Care.

You can easily add to your knowledge as an investor by paying close attention to corporate announcements during each earnings season. Earnings announcements typically include mandated disclosures and give insight into a company’s performance. Strategic announcements may also be helpful as they may forecast a company’s future. After all, many companies are valued based on the present value of their future discounted cash flows. A shift in strategy can result in huge valuation changes.

Frequently a company’s stock price may react to earnings announcements, particularly if the company’s actual results differ from analysts’ consensus estimates.

Below is a list of helpful steps active investors can take during earnings season.

  • Monitor how far in advance a company announces its earnings date. Longer lead times can mean better results.
  • Read through consensus estimates and formulate your own opinions. Earnings seasons is about expectations and is relative to historical performance. If a company has a history of beating expectations, but only meets expectations, investors may be disappointed. The opposite may be true if a company has a history of missing expectations but unexpectedly meets expectations, investors might cheer.
  • Watch for bad news such as one-off amortization charges and inventory write-offs. Sometimes companies can “kitchen sink” their earnings to get all the bad things out of the way to reset expectations lower. Lower expectations mean an easier ability to beat numbers in the future. Market overreactions can provide an opportunity to buy low.
  • Pay attention to sector results. Analyze how a company’s earnings compare to its competitors.
  • Analyze a company’s financial statements and pay attention to the fine print.

Key metrics for Q2 2016

First, how did U.S. companies fare in Q2 2016? As of August 5th, 86 percent of the companies in the S&P 500 had finished reporting quarterly earnings. Sixty-nine percent had earnings per share (EPS) above estimates. That’s two percent above the 5-year average of 67 percent.

Thus far, however, the S&P 500’s blended year-over-year earnings are negative 3.5 percent (blended refers to the combination of actual results for companies that have reported and the estimates for those that have yet to report). First quarter was -6.7 percent and Q3 is estimated to be -1.7 percent.

As a result, analysts have been adjusting their calendar year (CY) 2016 estimated earnings growth rate for the S&P 500. Six months ago, the outlook for 2016 was much brighter. CY 2016’s earnings for the S&P 500 were estimated to be in positive territory at 5.9 percent growth. By the end of March, however, estimates were revised downwards to a growth rate of just 1.3 percent and then to 0.1 percent by June 30. As of Friday, August 5th, estimates went negative to -0.3 percent.

This downwards earnings trend poses quite a peculiar situation given the stock market is near all-time highs.

Earnings growth 08 to 16Source: Factset

The trouble, however, isn’t brewing across every sector. Four sectors had positive earnings growth in Q2 and are leading CY 2016 earnings growth: Consumer discretionary, Telecom services, Utilities and Health Care.

Meanwhile, the Energy, Materials, Financials, Industrials, IT and Consumer Staples sectors are reporting year-over-year earnings declines. The Energy sector is clearly lagging.

Earnings growth CY 2016Source: Factset

Recent earnings announcements of interest

No two earnings seasons are the same and there’s always the chance of unexpected news. Here’s a recap of U.S. stocks that recently announced earnings for Q2 that you might have missed.[1]

Chesapeake Energy Corporation [CHK]
Market Cap: $3.74 billion
Consensus EPS Forecast $-0.11
Actual EPS $-0.14

Chesapeake’s Q2 earnings were worse than expected but the company showed some improvements due to cost cuts. The company has spent the last two years making cuts and announced plans to sell more than $2 billion in assets this year. Overall production is forecasted to be reduced five percent next year.[2]

Tyson Foods [TSN]
Market Cap: $27.29 billion
Consensus EPS $1.07
Actual $1.21

Tyson beat EPS estimates, posted better than expected revenue of $9.4 billion and reported strong sales thanks to its chicken segment, prepared foods and lower costs for livestock and feed. The company announced it expects domestic protein production to increase from 2 to 3 percent in fiscal 2017.[3] Tyson is facing new animal abuse allegations, however, and announced plans to retrain poultry works on August 10th as it braces for the animal rights group Compassion Over Killing to release undercover video footage.[4]

Twilio Inc. [TWLO]
Market Cap: $3.54 billion
Consensus EPS Forecast $-0.14
Actual EPS $-0.08

With fewer companies going public, especially those in the technology sector, Twilio made headlines when it went public in June and soared 91 percent higher its first day of trading. The company beat both earnings and revenue estimates for Q2 and announced its customer accounts increased by about 45 percent year-over-year. Twilio’s stock price has nearly tripled since its June IPO price of $15.[5] Twilio’s IPO should give incremental confidence for other private tech companies to go public.

Upcoming earnings announcements to watch

Although you might already be looking towards Q3, many companies are in the queue to report their Q2 2016 earnings. Here are some notable stocks to put on your watch list and scheduled to announce in the upcoming week.[6]

Cisco Systems, Inc. [CSCO]
Market Cap: $155.17 billion
Consensus EPS Forecast: $0.55
Earnings announcement date: August 17

Cisco is heading into its earnings announcement in rally mode after a July breakout that brought the stock to eight-year highs. The company continues to lead the network hardware and management niche, which isn’t the most profitable of specialties, but the company provides about 60 percent of Ethernet switches worldwide and boasts a 3.35 percent annual dividend yield.[7]

Gap, Inc. [GPS]
Market Cap: $9.56 billion
Consensus EPS Forecast: $0.59
Earnings announcement date: August 18

Gap’s sales for the second quarter fell year-over-year as the company has been struggling with slow traffic and currency headwinds. The company is hoping to better position itself for the long-term by channelizing its resources, continuing to streamline its operations, making changes to its product portfolio and matching the increasingly fast pace of the apparel industry. Gap will announce its Q2 earnings after the market close on August 18.[8]

Wal-Mart Stores, Inc. [WMT]
Market Cap: $230.48 billion
Consensus EPS Forecast: $1.02
Earnings announcement date: August 18

In June, Wal-Mart shocked many customers when it eliminated price-matching at 500 stores. The company recently added another 300 stores to the list but has not openly disclosed the locations, causing customer complaints and confusion. In other recent news, Wal-Mart announced plans to acquire Amazon competitor Jet.com for $3.3 billion. It’s unclear whether or not Jet.com will lose its sales-tax advantage over Amazon once the acquisition is closed. Jet.com currently only collects sales tax in the seven states where it has a physical presence (Kansas, Nebraska, Nevada, New Jersey, New York, Ohio and Utah) but might be forced to collect nationwide after the acquisition since Wal-Mart has a physical presence in every state.[9]

Focusing attention on earnings announcements of the stocks you own and watching for shifts can help you become a more strategic investor.

Finally, make note of the overall S&P 500 earnings trend. Acceleration in downward earnings revisions may be a signal to reduce risk, particularly if the S&P 500 is marching to new highs.

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[1] Zach Investment Research, “Earnings Calendar,” Nasdaq, August 11, 2016.

[2] Saintvilus, Richard, “Chesapeake Energy’s outlook brightens a bit (CHK),” Investopedia, August 9, 2016.

[3] Lovelace, Berkeley, “Shares of Tyson Foods pop after it posts strong sales across all categories,” CNBC, August 8, 2016.

[4] Madhani, Aamer, “Facing animal abuse allegations, Tyson Foods to retrain poultry workers,” USA Today, August 10, 2016.

[5] Mannes, John, “Twilio beats expectations with revenue of $64.5M in solid Q2 earnings,” TechCrunch, August 8, 2016.

[6] Zach Investment Research, “Earnings Calendar,” Nasdaq, August 11, 2016.

[7] Farley, Alan, “Cisco Systems set to challenge 2007 resistance,” Investopedia, August 9, 2016.

[8] Zacks Equity Research, “Will Gap’s Q2 sales beat help it tops earnings too?” Yahoo Finance, August 11, 2016.

[9] Winkler, Rolfe, Sarah Nassauer, “Wal-Mart deal could jeopardize Jet.com’s sales-tax advantage,” The Wall Street Journal, August 10, 2016.