Weekly Preview: Earnings to Watch This Week 10-8-23 (C, DAL, PEP, WFC)

A stronger-than-expected jobs report for September, which kept the unemployment rate at 3.8%, sparked a rally in stocks on Friday, igniting some optimism of a possible reversal in fortunes for a market that has been beaten up amid the prospects of rising interest rates.

For several months, investors had been in a see-saw battle in assessing of how to digest labor news. While jobs data trends have been relatively strong, the gains were seen as reasons to compel the Federal Reserve to maintain its hawkish stance with monetary policy. That was not the case on Friday as stocks surged on renewed optimism for a strong third quarter earnings season.

According to the Department of Labor, 336,000 new jobs were created in September, which was significantly higher than Dow Jones consensus estimate for growth of 170,000. What’s more, it marked a meaningful increase from August's jobs total of 187,000. Despite the strong increase, hourly wages still rose less than expected last month. The news was enough to help stocks — which initially fell Friday with the Dow falling as much as 272 points — to post a stunning gain into the close.

The Dow Jones Industrial Average gained 288.01 points, or 0.87%, to close at 33,407.58. Apple (AAPL), Microsoft (MSFT), IBM (IBM), Nike (NKE), Salesforce (CRM) and several other blue-chip names powered the Dow to surge by more than 400 points at the height of the rally. The S&P 500 added 50.31 points or 1.18% to close at 4,308.50. Thanks to the technology sector, which gained 1.94% on Friday, the tech-heavy Nasdaq Composite rose 1.60%, adding 211.51 to close at 13,431.34.

For the week, the S&P 500 was up 0.48%, breaking a four-week losing streak. The Nasdaq also ended higher for the week, climbing 1.60%, while the Dow closed down 0.30% for the week. What drove the rally is still unclear, but it seems to be the softer wage number in the jobs report that will likely be a key data point for the Fed to reconsider whether pausing further rate hikes could be appropriate. The pullback in treasury yields from the day’s highs could be another reason for the bullishness.

Regardless of the reason, the entire market had reached significantly oversold levels since the the start of June with the S&P 500 losing more than 8% off its high at one point. With the third quarter earnings season imminent, the market is looking for more catalysts to keep this rally going. Staying invested and riding the rate-hike cycle might appear hard to do, but focusing on big-cap stocks with strong balance sheets that have pulled back to more attractive levels will pay off. Here are the stocks I’ll be watching this week.

PepsiCo (PEP) - Reports before the open, Tuesday, Oct. 10

Wall Street expects PepsiCo to deliver EPS of $2.15 per share on revenue of $23.43 billion. This compares to the year-ago quarter when earnings were $1.97 per share on $21.97 billion in revenue.

What to watch: Macroeconomic factors such as high inflation and rising costs of labor have been key headwinds that have impacted Pepsi’s profit margins. Although there are still plenty of reasons to remain optimistic about Pepsi’s revenue and earnings prospects in the next 12 to 18 months, near-term business conditions have impacted the stock. The shares have fallen 11% year to date, trailing the 12.5% rise in the S&P 500 index. The declines include 5.2% and 8% pullbacks in the respective one week and one month, both trailing the S&P 500 index.

But things aren’t as bad as they appear. Thanks to well-known brands such as Gatorade and Frito Lay, Pepsi’s net revenue and core EPS surged higher by double digits through the first half of this year, during which net revenue surged 10.3% year over year to $40.2 billion. This strong revenue growth was achieved by some well-time price increases across various products, which helped drive a 16% growth in net revenue for the first half. Essentially, the snack and beverage giant has found ways to offset inflationary effects. Meanwhile, the company’s investments in new brands and adapting to new trends have also begun to pay dividends. On Tuesday investors will want to see whether Pepsi will maintain this level of execution and confidence to get the stock moving in the right direction.

Delta Air Lines (DAL) - Reports before the open, Thursday, Oct. 12

Wall Street expects Delta to earn $1.94 per share on revenue of $14.54 billion. This compares to the year-ago quarter when earnings came to $1.51 per share on $12.87 billion in revenue.

What to watch: Airline stocks have been one of the strongest sectors so far in 2023, outperforming the broader S&P 500 index. Although Delta Air Lines have been one of the beneficiaries of a robust global travel demand, Delta stock has lost some of its momentum over the past month, shedding more than 11%. What’s more, since the company’s last earnings report, the shares have shed almost 24% of their value. But there’s still tons of value here, given Delta’s strong footing in both the domestic and international air travel markets.

Earlier this week, Bank of America analyst Andrew Didora reiterated his Buy rating on the stock with the $40 price target. Saying he does not expect any significant surprises in the upcoming earnings results, Didora called Delta a well-run airline with industry-leading operations. As a strong differentiator to competing airlines, the analysts noted Delta’s strong free cash flow potential the next few years. Ahead of the Q3 earnings report, some of the key points investors should focus on include management’s commentary around softness in booking pricing, and any changes to capacity growth amid rising fuel costs. However, Delta is still expected to benefit from revenue increases from both domestic and international travel, where it has reported a gradual recovery, especially in Latin America and Transatlantic routes. As such, Delta remains one of the better bargains in transportation stocks.

Citigroup (C) - Reports before the open, Friday, Oct. 13

Wall Street expects Citigroup to earn $1.19 per share on revenue of $19.26 billion. This compares to the year-ago quarter when earnings were $1.63 per share on revenue of $18.25 billion.

What to watch: Commercial bank stocks such as Citigroup did not fare as well as investors expected in the first nine months of the year, particularly amid a period of rising interest rates. Banks often benefit from increasing interest rates which increases the net interest margins and their overall profits. However, that was not the case for Citigroup, which has seen its stock fall more than 11% over the past six months, while the S&P 500 index has risen 5%. The stock has fallen 10.65%, while the S&P 500 index has risen 11.8%. The shares are severely discounted compared to the underlying value on its balance sheet. The bank boasts $209.42 billion in total equity, which equates to book value of $97.87, while tangible book value stands at $85.34.

With the shares currently hovering around $40, that means the stock trades at a roughly 56% discount to book value, while paying a dividend yield of close to 5%. What’s more, Citigroup has demonstrated a concisely strong loan-to-deposit ratio, while buying back large chunk of stock over the past decade. Heading into the third quarter, investors will be looking for progress in these key areas as well as updates on the impacts of the rising rate environment which investors fear may lead to increased defaults.

Wells Fargo (WFC) - Reports before the open, Friday, Oct. 13

Wall Street expects Wells Fargo to earn $1.22 per share on revenue of $20.16 billion. This compares to the year-ago quarter when earnings were 85 cents per share on revenue of $18.77 billion.

What to watch: Wells Fargo stock has been trading sideways since the start of the year. The shares are down 4% year to date, trailing the 12% rise of the S&P 500 index. Over the past year, the stock has fallen 8.5%, while the S&P 500 index has returned more than 13%. Investors are looking for near-term catalysts to get the stock price moving higher. However, Wells Fargo is one of many bank stocks that have lagged the broader U.S. stock market this year. This is due, in part, to the degree of pessimism investors have had regarding not only the direction of the economy, but also the banking industry as a whole on the heels of multiple failures of U.S. regional banks.

But Wells Fargo has some attractive qualities that is worth waiting for. The bank is not only fundamentally strong from a balance sheet perspective, it is well-positioned to expand its business over the long term and offers an attractive dividend yield of 3.62%. The bank showed improve financial performance in the latest quarter, achieving not only double-digit revenue growth, but also management’s ability to navigate through inflationary headwinds by focusing on ways to lower expenses, and realize more efficiency to boost the bottom line. That said, given Wells Fargo’s massive portfolio of large consumer products such as mortgages, credit cards, and personal loans, the bank still needs the economy to thrive to maintain its strong balance sheet which will allow the bank to execute its buybacks and pay dividends to shareholders. On Friday the bank will nonetheless need a top- and bottom-line beat and confident guidance to affirm this bullish thesis.