Weekly Preview: Earnings to Watch This Week (C, DAL, JPM, WFC)
The fourth quarter earnings season kicks off this coming week. Based on 2022’s first week of trading it seems "cautious optimism” is the tenor for stocks and other risk assets. After an initial surge to start to the new trading week, stocks ended mostly mixed on the heels of monthly employment report that offered little conviction that a sustained market rally can be supported.
While the jobs report, which missed estimates, did offer some optimism that the Fed might be less hawkish than anticipated, it also sparked a degree of pessimism. The fact that the U.S. economy added 199,000 jobs in December, well below the forecast for 422,000 suggests that omicron's impact was underestimated. By contrast, the bad news could pressure the Federal Reserve to slow down the tapering, if not reduce the number of interest rate hikes the Fed had planned.
On Friday, stocks ended slightly higher, reversing early gains. But the reversal and the resiliency of the market remains an encouraging sign of things to come. The Dow closed lower by 4.61 points, or 0.01%, to close at 36,231.66. The S&P 500 index gave up 19.02 points, or 0.41%, to close at 4,677.03, while the tech-heavy Nasdaq Composite Index lost 144.96 points, or 0.96%, to end at 14,935.90.
For the week, the Dow traded roughly flat, outperforming both the S&P 500, which fell about 1.7%, and the Nasdaq Composite, which lost 4.3%. Still, the fact that all three major averages posted declines against a weak jobs report is not surprising. But it wasn’t all bad news. Indeed, the headline number of the jobs report missed the mark by a significant margin. But the number still resulted in a meaningful drop in the unemployment rate to 3.9% from 4.2%. What’s more, the fact that average hourly earnings rose 19 cents or 0.6% to $31.31 is also encouraging.
This data points suggest that the economy is still strong, despite the rising inflation. At the same time, it is just bad enough to keep the Fed from further tightening monetary policy. All told, the market — still near all-time highs — has shown a level of resilience that has been unimaginable. Analysts aren’t ready to proclaim stocks are cheap.
But with Q4 earnings season upon us, investor can quickly forget the downbeat jobs data with upbeat 2022 guidance. Here are the names to keep an eye on this week.
Delta Airlines (DAL) - Reports before the open, Thursday, Jan. 13
Wall Street expects Delta to earn 12 cents per share on revenue of $9.14 billion. This compares to the year-ago quarter when the loss came to $2.53 per share on $3.97 billion in revenue.
What to watch: Delta stock has been one of the better performers of the transportation sector, rising some 5% over the past thirty days, compared to a 2.3% gain in the S&P 500 index. These gains have been driven by a combination of factors. Perhaps the biggest factor was an upgrade from Neutral to Buy coming from analysts at Bank of America, who assigned a $48 price target, up from $46, citing among other things, Delta’s strong balance sheet and the limited share dilution potential. The analysts also praised Delta’s capacity discipline relative to its peers, along with its cheaper valuation. For Delta, which ended 2021 on a positive note, the market appears willing to apply a relative premium to the stock, anticipating any increase capacity can help the airline recapture its pre-Covid EPS level of $7 per share. How realistic that figure is remains to be seen. As such, on Thursday the market will want to see continues fundamental improvements and upbeat guidance before determining the next direction for the stock.
JPMorgan Chase (JPM) - Reports before the open, Friday, Jan. 14
Wall Street expects JPMorgan to earn $2.98 per share on revenue of $29.8 billion. This compares to the year-ago quarter when earnings came to $3.79 per share on revenue of $30.16 billion.
What to watch: After a stellar 2021, during which the stock rose some 27%, investors are eager to learn what JPMorgan can do for an encore. High double-digit returns from banks is unexpected during periods of low interest rates. But JPMorgan, which offers a nice mix of earnings growth, income and value, has enjoyed a well-deserved reputation as being the best-executing bank among its peer group. Duplicating, and possibly exceeding that performance in 2022, won’t be as difficult as it might appear, especially when the Fed is on your side. As with other money-center banks, 2022 will present multiple tailwinds, including the likelihood of potentially three interest rate increased which should boost JPMorgan’s net interest margins. What’s more, the bank’s ongoing investments in areas like technology, marketing, and its organic expansion initiatives to develop new branches/loan offices, will help drive earnings per share above pre-Covid levels. Despite these attractive features, JPMorgan stock is trading at a very reasonable forward multiple of about 10 which is half of what the S&P 500 trades for. Combined with its 2.50% yield, which has grown at an average of almost 8% over the last five years, the stock presents an attractive mix of value and income.
Wells Fargo (WFC) - Reports before the open, Friday, Jan. 14
Wall Street expects Wells Fargo to earn $1.09 per share on revenue of $18.69 billion. This compares to the year-ago quarter when earnings were 64 cents per share on revenue of $17.93 billion.
What to watch: Bank stocks have outperformed the broader S&P 500 Index in the first few trading weeks of the new year, driven by the prospect of rising interest rates. Among the group, Wells Fargo stock has been a hot commodity, rising some 10% over the past thirty days and 23% over the past six months. With the stock now up 12% year to date, besting the 1.5% decline in the S&P 500 index, the market appears more willing to look beyond Wells Fargo’s legacy issues and focusing on long-term sustainability. While there are still plenty of challenges, 2022 is poised to be a pivotal year. Among other tailwinds, the bank should benefit from potentially three interest rate increases in 2022, which should boost its net interest margins and help drive earnings per share above pre-Covid levels. Having firmed up its balance sheet and efficiency ratios, the bank is expected to buyback close to $20 billion worth of stock in the next twelve months. On Friday the bank’s results will answer the question as to whether a successful transition from regulatory remediation is complete, and if the bank can finally put all its legacy issues in the rearview mirror.
Citigroup (C) - Reports before the open, Friday, Jan. 14
Wall Street expects Citigroup to earn $1.71 per share on revenue of $16.98 billion. This compares to the year-ago quarter when earning were $2.08 per share on revenue of $16.5 billion.
What to watch: Commercial bank stocks including Citigroup have seen a strong rebound amid the recent rise in U.S. Treasury yields. Whether or not this surge continues remains to be seen. But it's important to note that the recent uptick in yields comes at a time when the market expects the Federal Reserve to raise interest rates on as many as three occasions. Combined with the idea of less accommodative monetary policy and a tightening cycle, bank stocks are poised to outperform the broader market during the first half of the year. In the case of Citigroup, the bank has tons of ground to make up when compared to its peers. The bank has been pressured by regulators to resolve issues related to internal controls regarding compliance, data, and risk management, including being levied a $400 million fine and a cease-and-desist order. But as the fourth-largest bank in the U.S., there is still an attractive business here. What’s more, the bank currently trades at roughly 80% of its tangible book value. That combined with an attractive dividend yield of 3.1%, along with a potential boost in the share buybacks, makes Citi a stock to own in 2022.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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