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Earnings: Has CMG Turned the Corner on Food-Safety Concerns?

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July 21, 2016
Market earnings report of General Electric, AT&T, and Chipotle.

Another diverse set of companies are scheduled to report earnings Thursday, with results coming out from AT&T (T) and Chipotle (CMG), after the close, and General Electric (GE) Friday morning.

What Happened to U-Verse?

There’s a lot going on at T, between the sizable stock leap, the hefty $49 billion acquisition of DirectTV, the new video service it wants to launch, and, as the Wall Street Journal puts it, the focus on “protecting its massive, yet declining subscriber base of 74.3 million mainstream connections, rather than chasing customers who are tempted by cheaper offers from smaller rivals.” It’s an issue investors have seen across other technology-service companies.

You may have noticed the dearth of U-Verse commercials recently as T turns toward promoting DirectTV. As a result, some analysts see losses ahead. T has plans to introduce an Internet-based video service that replaces the traditional set-top cable box. What are the details on this new technology in terms of timing, pricing, and programming?

Analysts reporting to Thomson Reuters are forecasting a per-share profit of $0.72, up from the year-ago profit of $0.69 a share. Analysts are forecasting revenue of $40.66 billion, higher than last year’s $33 billion. That, however, didn’t include its $49 billion acquisition of DirecTV, which closed in late July 2015.

Short-term options traders have priced in a potential 1.7% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform by TD Ameritrade.

Ahead of earnings, options trading was active in the Aug monthly 42- and 43-strike calls. The implied volatility is at the 11th percentile. (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.

FIGURE 1: CONSOLIDATING AFTER TRENDING HIGHER.

Shares of T staged a significant rally through early July. Since then, the stock has been consolidating between $42 and $43. 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.

Is Confidence Returning at CMG?

It’s been a tough time for CMG, given the fallout from food-safety issues that have challenged the company for the better part of the last year as a handful of employees and customers fell ill from the norovirus and e coli. What analysts say they want to know is how the burrito maven is working its way out of the those issues and returning to stock peaks. Are there more food giveaways and discounts ahead?

Same-store sales and the stock price have dropped as consumers have said in recent surveys that they’re “much less likely” to eat at CMG because of these food-safety issues. That’s a tough hurdle, no matter how good the food is, and has proved challenging as CMG attempts to restore customer trust. An uncomfortable number of survey respondents say they have found other venues for Mexican food, which analysts worry could be permanent replacements. Store sales have dropped some 30%.

Given that, Thomson Reuters’ analysts are forecasting a drop of per-share profits to $0.91, compared with the year-ago profits of $4.45 a share. Revenues are projected to fall to $1.05 billion from $1.20 billion a year ago.

Short-term options traders have priced in a potential share-price move of 6.5% in either direction around the earnings release, according to the Market Maker Move indicator.

Open interest is light, likely because of CMG’s high stock price, but there was activity in the Aug 450 calls. The implied volatility is at the 60th percentile.

FIGURE 2: CMG STRUGGLES ON FOOD-SAFETY CONCERNS.

Food-safety issues have pushed CMG stock lower by some 46% year over year. 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.

GE Guides Investors to Expect Big Quarter

If all goes as well as analysts project, GE may turn in its best quarter in more than five years. The diversified industrial conglomerate has been transitioning itself to become a digital industrial business, integrating technology into its manufacturing. After five straight quarters of earnings declines through Q4 2015, GE reported a 5% increase in Q1.

Q2 promises to be much better, according to analysts who project a 48% jump in earnings to $0.46 a share. Revenues are forecast to rise 8% to $31.77 billion, the best sales gain in years, according to analysts. They’ll be listening for how industrial orders are faring amid a stronger dollar and in the early post-Brexit economy.

Short-term options traders have priced in a potential 2% share price move in either direction around the earnings release, according to the Market Maker Move indicator.

Ahead of earnings, traders were active in the weekly 33.5-strike and the Aug 33- and 34-strike calls. The implied volatility is at the 1st percentile.

FIGURE 3: GE SHARES MOVING HIGHER.

GE shares traded in a tight range throughout most of the year, but have advanced nearly 12% since Brexit-related sell-off in late June. 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.