Weekly Preview: Earnings to Watch This Week (AA, JPM, WBA, WFC)
Although stocks ended Friday lower, the impressive rebound seen from earlier in the week suggests investors are still optimistic about risk assets despite recent concerns about global economic growth amid the Delta variant. And it’s not hard to understand why. With interest rates still at record lows, stocks are still the surest way to counter rising inflation.
But with the third quarter earnings season kicking off this coming week, there’s still the question of whether revenue and earnings growth expectations are well placed. On Friday, labor data showed the U.S. economy created far fewer jobs than had been expected in September, raising the question of whether the Fed can follow through with its tapering plans if it’s not supported by employment gains. The central bank has sought to scale back (or unwind) its easy money policies before the end of the year.
On Friday the Dow Jones Industrial Average declined 8.69 points, or 0.03%, to close at 34,746.25. Tech giant such as Apple (AAPL), Salesforce (CRM), Microsoft (MSFT) and Intel (INTC) gave back some of the gains they produced in the previous session. The S&P 500 gave up 8.42 points, or 0.19%, to end the session at 4,391.34, while the tech-heavy Nasdaq Composite lost 0.51%, or 74.48 points to finish at 14,579.54.
Nasdaq has shown some weakness over the past two weeks amid the steepening yield curve as bonds sold off, which has pressured the FAANGs, namely Facebook (FB), Apple and Amazon (AMZN). Even after the recent market selloff, stocks aren’t cheap when compared to the S&P 500’s historical metrics such as price-to-sales and price-to-earnings. In part, this is because on Thursday, the Dow rose 338 points, or 0.98%, to 34,755, the S&P 500 increased 36 points, or 0.83%, to 4,400, and the Nasdaq Composite gained 152 points, or 1.05%, to 14,654.
For the week, the Dow gained 1.2%, its largest percent gain in almost four months. The S&P 500 rose 0.8% and the Nasdaq gained 0.1%. It appears investors’ focus has turned to the third quarter earnings season. As such, it will take impressive revenue and earnings beats to keep the momentum going. The market will get some confirmation once companies start issuing guidance, presumably outlooks that will be far more optimistic than they were a year ago. Here are this week’s names to keep an eye on.
JPMorgan Chase (JPM) - Reports before the open, Wednesday, Oct. 13
Wall Street expects JPMorgan to earn $2.97 per share on revenue of $29.72 billion. This compares to the year-ago quarter when earnings came to $3.09 per share on revenue of $29.15 billion.
What to watch: Without question, JPMorgan has established a well-deserved reputation as being the best-executing bank not only among its peer group, but one of the best-run banks in the world. Driven by its ongoing investments in areas like technology, marketing, the bank’s share price has outperformed its competitors over the past six months and twelve months. And given its organic expansion initiatives to develop new branches/loan offices, these growth trends are poised to continue. But with the stock trading more than 25% higher than pre-pandemic levels, all of this good news I’ve just listed are known by the market evidenced by 34% year to date rise in JPMorgan stock, compared to 17% rise in the S&P 500 index. What additional catalysts, whether near term or long term, will drive JPM stock higher, particularly in the low-interest rate environment? That is the answer the market will listen for on Wednesday.
Alcoa (AA) - Reports after the close, Thursday, Oct. 14
Wall Street expects Alcoa to earn $1.79 per share on revenue of $2.93 billion. This compares to the year-ago quarter when it posted a loss of $1.17 per share on revenue of $2.23 billion.
What to watch: Shares of the aluminum giant have been one of the bright spots in the materials sector, rising almost 50% over the past six months and is now up 104% year to date, crushing the 28% rise in the SPDR S&P Metals & Mining ETF (XME). The rise in metal stocks have been driven by optimism surrounding the Biden administration’s infrastructure spending plan aimed at repairing the country’s airports, roads and bridges, among other projects. How much of that money will come to Alcoa? Aluminum is used in a broad range of industrial and consumer end markets. And the commodity is enjoying a strong run as the global economy swings back into motion. As a result, Alcoa last quarter posted its twelfth consecutive quarterly profit beat, thanks to improving aluminum business. Q2 revenue rose 32% year over year to $2.83 billion, beating expectations by about 9%. On a segmental basis, both alumina and aluminum posted strong revenue growth, with the latter rising 43% year over year to $2.1 billion. While there appears to be support for higher aluminum prices, the company on Thursday must speak positively about the demand/supply outlook for the next several quarters to keep Alcoa stock in high demand as it has been.
Walgreens (WBA) - Reports before the open, Thursday, Oct. 14
Wall Street expects Walgreens to earn $1.02 per share on revenue of $33.28 billion. This compares to the year-ago quarter when earnings came to 91 cents per share on $34.75 billion in revenue.
What to watch: Shares of Walgreens have been under pressure of late, falling some 14% over the past six months, including a 6% decline in thirty days. Despite its scale and global reach, the company’s gross margins have been on a steady decline from just under 30% a decade ago to 20% over the trailing 12 months. This headwind is driven by, among other things, ongoing reimbursement pressures related to generic drugs and the growth in negotiating leverage that PBMs (pharmacy benefit managers) have over retail pharmacies. Nevertheless, the pharmacy chain has administered over nine million COVID tests and over 25 million vaccines to date with 95% of its locations are administering shots. What’s more, the company’s revenue showed considerable strength in the most-recent quarter, rising 12% year over year to t $34 billion, topping Street estimates by $560 million. Operating more than 9,000 retail locations across America, Puerto Rico and the U.S. Virgin Islands, Walgreens shares are poised to bounce back and the company stands to benefit immensely from the increasing customer traffic which is likely to lead not only to higher sales, but also stronger profit margins.
Wells Fargo (WFC) - Reports before the open, Thursday, Oct. 14
Wall Street expects Wells Fargo to earn 99 cents per share on revenue of $18.4 billion. This compares to the year-ago quarter when earnings were 42 cents per share on revenue of $17.97 billion.
What to watch: Bank stocks have outperformed the broader S&P 500 Index in the third quarter, driven by rising interest rates. Among the group, Wells Fargo stock has been a hot commodity, rising some 20% over the past six months, including 10% gains in thirty days. With the stock now up 58% year to date, besting the 17% rise in the S&P 500 index, the market appears more willing to look beyond the bank’s legacy issues and focusing on long-term sustainability. While there are still plenty of challenges for Wells Fargo, including the fact that it has to balance much-needed cost cuts with revenue/business growth, the bank has demonstrated meaning operational improvements. As it stands, Wells Fargo's return now appears more realistic compared with other large banks. Not only has Wells Fargo’s charge-offs and core provisioning improved over the past few quarters, metrics such as adjusted expenses are also trending in the right direction, helping to deliver beat on the bottom lines. On Thursday the bank’s results will answer the question as to whether a successful transition from regulatory remediation and turnaround to core growth is sustainable in the near term.
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