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Earnings: Investors Await Results from IBM, NFLX, and More

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July 18, 2016
Investors eagerly await Dow Jones Industrials earning reports.

This is a busy week for earnings with 10 out of 30 companies in the Dow Jones Industrials ready to report quarterly results. First up this week are IBM (IBM), Netflix (NFLX), and Yahoo (YHOO) after the bell on Monday, and Johnson & Johnson (JNJ) Tuesday Morning. 

Big Blue’s Big Repositioning

IBM has seen earnings decline over the last few years as it has struggled to reposition with a host of strategic imperatives. Can the company turn the corner and what might management say when Big Blue reports Q2 results after the bell Monday? 

Analysts are forecasting IBM might report its 17th straight quarterly drop in sales and profits. But analysts also expect to see improvement from the strategic imperatives, which is a move into higher margin businesses such as analytics, cloud, mobile, security, and social.  

In the last quarter, IBM said those revenues climbed 14% year over year to $7 billion, and were generating $29.8 billion in revenues in the trailing 12 months.

Analysts also expect IBM to talk about currency impact on the conference call. Currency fluctuations have hit IBM, like other major multinationals, amid strength in the U.S. dollar.

For the quarter, analysts reporting to Thomson Reuters are estimating profits at $2.88 a share, down 33% from the year-ago period, amid a 3.8% drop in sales to $20.03 billion. 

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 by TD Ameritrade.  

Ahead of earnings, trading was active in the 152.5-strike puts, while trading in calls was active at the 160 and 162 strikes. The implied volatility is at the 47th 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: BIG BLUE BOUNCES BACK.

IBM shares were trending downward until February, when the stock slipped into a tight range. Since late June, IBM is higher by about 11%. 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. 

Streaming Glory Days

As NFLX basks in the glory of the 54 Emmy nominations it received last week, it’s also up against a new competitor: Amazon (AMZN) Prime’s Instant Video is rolling out in Europe. Can NFLX compete? Analysts say they will be listening for guidance from NFLX on this new competition and its latest subscriber numbers when the online streaming giant reports results after the market’s close Monday. 

At least one analyst isn’t worried. "While we don't think that Amazon will attract many current Netflix customers, we think it’s foolish to assume that new customers will favor Netflix over Amazon every time,"?Wedbush Securities?analyst Michael Pachter said in a recent report.

What might NFLX executives have to say about that? Analysts say NFLX is also facing margin compression as it pushes through fresh programming to take on AMZN and Hulu. And then there’s the subscriber business. NFLX estimated that its U.S. base, the company’s most lucrative, rose by just 500,000 compared with the 900,000 a year earlier. 

For the quarter, analysts are expecting a profit of $0.02 a share, down from $0.06 a share a year ago. Sales are forecast to grow by 28% to $2.17 billion. As a side note, NFLX has outpaced estimates in eight of the last 11 quarters.  

Short-term options traders have priced in a potential share-price move of more than 10% in either direction around the earnings release, according to the Market Maker Move indicator.  

Options traders have been active in the 95-strike puts while also trading the 105-strike calls. The implied volatility is at the 32nd percentile. 

FIGURE 2: NFLX TRADING IN A WIDE RANGE.

Since peaking in December, NFLX shares have slipped into a wide trading range between $85 and about $100. 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. 

What’s Up with YHOO Sale?

Investors are interested in YHOO’s operating results, but it’s the sale process that will take center stage when the search engine behemoth reports results after the bell Monday, analysts say. 

That makes these results a more complex story than most other quarterly earnings. Even if results outpace analyst expectations, will investors care if there’s not news about the sale? And what do they want to know: Is the sale still on? Who is the buyer? What is the sale price? What assets will be sold? What are the terms of the sale? How soon will it happen? 

At Thomson Reuters, analysts are projecting earnings at $0.09 a share, below the year ago profit of $0.43 a share. Revenues are expected to drop 20% to $839.3 million. 

Given all that, short-term options traders have priced in a potential share price move of just under 3.5% in either direction around the earnings release, according to the Market Maker Move indicator.  

Options trading has been active at the 36-strike puts and the 40-strike calls. YHOO’s implied volatility is at the 34th percentile.

FIGURE 3: YHOO ON HOLD AHEAD OF EARNINGS.

Shares of YHOO have been chopping around in a tight trading range for the last three months between about $35.50 and $38.00. 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. 

JNJ’s Pharma Play

Strong U.S. demand for JNJ’s pharmaceutical products drove higher sales in the first quarter and a better-than-expected profit. 

About 45% of JNJ’s $70 billion in sales last year came from the pharma unit, maker of Imodium, Xarelto, and Levaquin, among many others. The strength of its pharma sales have helped power JNJ stock higher by better than 20% this year to reach new highs.

Analysts reporting to Thomson Reuters are looking for earnings of $1.68 a share, down from $1.71 a share in the year-ago period. Revenues are forecast at $17.98 billion. JNJ has turned in better-than-expected results since Q3 2012.  

Like other multinationals, JNJ might be exposed to currency fluctuations, driven by a strong dollar. But analysts say they want to know how currency risk stemming from Brexit might impact Q2 results. In Q1, JNJ rang up $3.85 billion in sales from Europe, representing about 22% of its total sales. 

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.  

There’s been some options trading at the Aug 115-strike puts and the 125-strike calls. The implied volatility is at the 14th percentile.

FIGURE 4: JNJ TRADES TO NEW HIGHS.

JNJ shares are trading near all-time highs after rising 20% so far this 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. 

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