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Earnings: IBM, NFLX, GS and JNJ

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April 18, 2016
earnings-preview-ibm-nflx-gs-jnj

Earnings season is in full swing this week. Monday starts with Q1 results from International Business Machines (IBM) and Netflix (NFLX), after the markets close, and back to the banks with Goldman Sachs (GS) and also pharma giant Johnson & Johnson (JNJ), ahead of the bell Tuesday.

IBM: What’s Up with Watson?

You may have noticed celebrities chatting in commercials with Watson, IBM’s talking-technology program made famous in 2011 when it (he?) soundly beat two human Jeopardy-winning machines. Bob Dylan, Carrie Fisher and Serena Williams are among those sharing with and learning from Watson in IBM’s pitch to “dispel the dystopian view of artificial intelligence,” according to the company. The ads are also plugging what has become a key piece of Big Blue’s multiyear transformation into a cognitive solutions and cloud-platform company. IBM is pushing Watson as the AI go-to for everything from teaching to healthcare.

When IBM turns in its results after the bell Monday, investors will get a deeper look into the results of IBM’s “strategic imperatives.” During the last quarter’s conference call executives promised greater transparency on those initiatives. But more clarity won’t hide the fact that IBM’s top and bottom lines are on track to mark the 16th straight quarter of declines. Analysts reporting to Thomson Reuters are pegging a per-share profit of $2.09, down 28%, on revenues of $18.26 billion, better than 6% below the year-ago sales.

Short-term options traders have priced in a potential 4.5% share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform from TD Ameritrade.

Going into earnings the 155-strike calls were trading quite a bit last week as were the 146-strike puts. The implied volatility is at the 60th percentile, more elevated than we’ve seen throughout the rest of the market. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time. 

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FIGURE 1: IBM CRAWLS BACK.

In early February, shares plunged to a low not seen in more than six years. Since then, shares have regained nearly 30% in value, but are still down better than 4% from the 52-week high. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

How Many NFLX Subscribers Now?

So what’s the number? That’s the big question many analysts have been debating about NFLX since Chief Executive Reed Hastings’s surprise announcement at the Consumer Electronics Show in January. NFLX projected it would sign up 4.35 million international net subscribes in Q1. Did it?

If you look at NFLX’s track record of sailing past its own expectations, there could be a lot of upside to that projection. But, as one analyst noted, it would have to be a pretty hefty number to surprise investors who are getting used to being surprised.

Also at issue among analysts is a $2-a-month price hike subscribers will see sometime in May. Will subscribers quit over that? The jury—and analysts—are still out. Until the session begins, analysts reporting to Thomson Reuters are projecting earnings of $0.03 cents a share on a 25% projected jump in revenues to $1.97 billion.

Short-term options traders have priced in a potential 8.5% share price move in either direction around the earnings release, according to the Market Maker Move indicator.

Going into earnings the 115-strike calls were trading as were the 105-strike puts, which were very active. The implied volatility is at the 56th percentile compared against its historical 15th percentile level.

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FIGURE 2: NFLX’S ROCKY ROAD.

Shares have been on a roller coaster for more than a year. But since sinking in early February, shares have rebounded by nearly 35%. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

GS’S Tough Quarter

The ups and downs of the banking industry have been well documented in recent sessions, and we’ll see more of it when GS opens its books before the bell Tuesday.

Considering GS relies mostly on trading and underwriting to drive its revenues, the weak environment for both have many analysts expecting a big drop in both earnings and revenues. Profit per share is expected to dive nearly 59% to $2.45 a share from $5.94 a share in the year-ago period. Revenues are projected to plunge nearly 36% to $6.8 billion from $10.6 billion a year ago. Analysts will be listening for what lies ahead plus how well its cost-cutting measures have gone. Will there be more?

Short-term options traders have priced in a potential 3% share price move in either direction around the earnings release, according to the Market Maker Move indicator.

Going into earnings the 162.5- and the 165-strike calls were trading as were the 155-strike puts. The implied volatility is at the 29th percentile, in line with what we’ve seen from other big banks. 

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FIGURE 3: GS INCHES OUT OF A BOTTOM.

Shares bounced to low levels they have not seen in three years in mid February. Since then, shares have recovered by nearly 13%. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

How Healthy Is JNJ’s Pharma Business?

JNJ’s pharmaceutical business will be top of mind when the health-care giant turns in its results and talks about what’s ahead, analysts say. The company has a cabinet full of medicines and drugs to treat a number of chronic and acute diseases like cancer, cardiovascular issues and leukemia. How well are JNJ’s drugs performing against competitors? How strong are sales on new drugs? And what about those losing patent protection?

And what about that restructuring plan announced earlier this year? JNJ said cutting as much as 6% of its medical-devices division could trim $800 million to $1 billion in costs by the end of 2018. Some analysts have suggested that JNJ needs to go further to unlock value.

Many analysts say they also want to hear what JNJ’s plans are for the $38.5 billion cash trove that was on its Q4 books. Are there mergers and acquisitions ahead? What about more collaborations with early-stage or small drug developers?

Short-term options traders have priced in a potential 2.25% share price move in either direction around the earnings release, according to the Market Maker Move indicator.

JNJ is not a big fish in the options pool but there’s been some trading going into earnings at the 110-strike calls and the 108-strike puts. The implied volatility is at the 16th percentile, which is following the trends seen during this earnings season.

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FIGURE 4: JNJ’S STOCK TURNAROUND.

Shares hit bottom in September and have been in recovery mode ever since, albeit with a couple bumps along the way. Shares are up better than 21%. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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