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Earnings: What’s Driving TSLA, F; BMY Stalls; and is TWTR for Sale?

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October 26, 2016
Investors discuss market profitability of automakers

Marketing professionals know that you sell the sizzle, not the steak. Last week, Tesla Motors (TSLA) fired up the grill with news it would add self-driving hardware to all of its cars. Today after the close, we get to see what’s cooking as the company reports Q3 earnings. And speaking of automakers, Ford Motor Company (F) is among the firms releasing earnings before the bell Thursday. After a record sales year in 2015, what will F and its fellow legacy auto companies do for an encore? Some say a sales plateau may be as good as it gets.

Bristol-Myers Squibb (BMY) has been in need of a hangover remedy after failed tests of Opdivo for use in lung cancer patients sent the stock reeling. Sales remain robust, however, and BMY will release a fresh snapshot tomorrow before the bell. Also Thursday morning, Twitter (TWTR) will offer up some fresh user statistics, and hopefully answer some questions about ongoing initiatives such as live streaming, plus takeover rumors and whether “part-time CEO” Jack Dorsey will ever come on board full time.

A Rough Road for TSLA

This is not likely to be an easy quarter for investors to digest, according to analysts who have pulled down expectations over the last two months. TSLA said earlier this month that it was changing its reporting to “no longer include non-GAAP revenue and related financial metrics resulting from vehicles leased through our banking partners or that include resale value guarantees. We will, however, continue to provide additional supplemental information to investors to provide insights into our business.”

Financial metrics follow generally accepted accounting principles (GAAP), and when companies use non-GAAP measures, they do so to provide more information that they think better reflects the company’s operations. In this case, it is recognizing lease revenues rather than total vehicle value, according to an Oppenheimer analyst, who estimates that it will pull down total revenues by as much as $460 million for the quarter. The high percentage of deferred revenue also “materially changes” earnings per share, he added. As a result, analysts’ expectations are now all over the place.

It’s unclear why TSLA made the change, but it may be related to a Securities and Exchange Commission update in May on how it interprets the rules on non-GAAP financial measures. TSLA is juggling a number of other things as well, from the ramping up of production to fulfill the pre-orders of the Model X SUV, to the Giga factory’s production of the lithium ion batteries that power its cars, to the completion of the Solar City acquisition.

Plus, on Friday TSLA is holding a press conference at which analysts say they expect it to unveil a solar-panel system that includes a battery pack to power homes and charge electric cars.

With so much on TSLA’s plate, what will investors want to know? Analysts say among the more important issues is TSLA’s production rate. The company says it delivered almost 26,000 cars over the past two quarters, with 5,000 still in transit before Q3 ended. That’s likely to up the quarter’s sales results, analysts say, but it’s the pace for Q4 that may be of interest. TSLA has said it would up the production rate by as much as 80% for the full year, but is that still on track? And what about all those pre-orders for the Model 3? Will TSLA be able to meet those?

At Thomson Reuters, the average projected revenue among reporting analysts is $2.34 billion, though Oppenheimer forecasts $1.87 billion. On the earnings front, analysts are looking for a loss of $0.59 a share on a GAAP basis. Adjusted earnings per share, however, run the gamut from a $0.04 loss to flat to a gain of $0.03. Either way, it is expected to fare better than last year’s adjusted loss of $0.58 share.

Short-term options traders have priced in a potential share price move of 5.5% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform from TD Ameritrade.

On the call side, buyers are seen at the 215-strike price while put buyers have been present at the 180- and 200-strikes. The implied volatility is at the 22nd 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. 

TSLA Chart, 12m, 2015-16

FIGURE 1: ROUGH RIDING.

Shares of TSLA have backtracked more than 15.5% year to date compared with the 7.1% gain on the S&P 500 (SPX). Shares have bounced around their 200-day moving average for much of the last two weeks. 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 Will Drive F Results?

F, like its legacy carmaker rivals, is up against record sales a year ago and Wall Street fears that auto sales have plateaued after a string of yearly gains. Though forecasts have dimmed for Q3, F darkened them further by lowering expectations in early September, when it announced a $640 million charge against earnings to cover the costs of an expanded vehicle recall tied to faulty side-door latches.

General Motors (GM) wasn’t expected to rev up quarterly earnings either, but turned in record Q3 earnings yesterday with partial thanks to hot sales of trucks. Did F and its flagship F-150 truck line see some of that as well?

Investors likely want to know more about F’s plans to step up investments in what it calls “emerging opportunities” in driverless vehicles, shared mobility and electric cars. What’s behind the recent purchase of the shuttle startup Chariot and F’s larger presence in Silicon Valley? Also, F’s decision to cut U.S. production, a move that could impact Q4 results, is likely at the forefront of investor questions, as well as its outlook for U.S. sales into 2017.

Thomson Reuters polls have analysts, on average, projecting revenues to decline to $33.1 billion from $35.8 billion a year ago and for profit to plunge 56% to $0.20 a share.

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.

Buyers of puts have been most active at the 11.5-strike while calls have seen buyers at the 12 strike. The implied volatility is at the 21st percentile.  

F Chart, 12m, 2015-16

FIGURE 2: SLAMMING THE BRAKES ON SHARES.

F shares have performed poorly year to date, off some 25%, and down more than 16% over 12 months—well behind the SPX gains. 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.

BMY Billion-Dollar Drugs

BMY continues to reel from its stock plunge after it revealed that its cancer drug Opdivo failed to meet some lung-cancer testing goals, but its success in treating other types of cancer have helped Opdivo sales remain robust. In fact, BMY raised its year-end earnings guidance when it released Q2 results, citing sales of Opdivo and blood thinner Eliquis.

The company reported that Opdivo’s worldwide sales had exceeded $1.5 billion in the first half of this year, on an annualized run rate toward $3 billion—well above the $942 million in sales Opdivo rang up for all of last year.

Some analysts note that Eliquis, which had total sales of $1.86 billion last year, may become the No. 1 anticoagulant globally. Orencia, its rheumatoid arthritis drug, is no slouch either, with $1.88 billion in sales last year that analysts expect will continue to boost topline sales.

Analysts reporting to Thomson Reuters project profits to surge some 71% to $0.65 a share from $0.39 a year ago. Revenues are expected to come in at $4.8 billion, up from $4.1 billion a year ago.

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.

Call activity is seen at the money at the 50-strike while puts have seen volume at the 49.5 strike. The implied volatility is at a relatively high 55th percentile.  

BMY Chart, 6m, May-Ocy 2016

FIGURE 3: A PAINFUL PILL TO SWALLOW.

BMY shares got pounded in the ongoing aftermath of failed testing for its immuno-oncology drug Opdivo, though sales continue to grow. On Monday, shares hit a 52-week low, off more than 36% from the 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.

Is TWTR for Sale or Not?

TWTR shares jumped late last month amid speculation that it might get bought by a big-name suitor, but when no one came forward, shares fell. Then came news reports that TWTR would lay off about 300 people as the social-media site still struggles to monetize its wide reach.

Word surfaced late Tuesday that Walt Disney Co. (DIS) was again among potential bidders, according to published reports. That may have helped boost the shares in post-market trading, but they’re still far below their price a year ago. Ahead of the report, shares have settled into a range between $17.25 and $18.25.

What will analysts be looking for when TWTR reports earnings before the bell Thursday? According to reports, they will be watching the size of the user base, which came in at 313 million monthly active users in Q2. They expect those numbers to have grown in Q3 when TWTR started streaming live NFL games, and large media events like the Olympics and the presidential elections may have driven new users to the social-media site. If not, what will happen in 2017, in the absence of such big events?

Then there’s the question of whether Jack Dorsey, TWTR’s chief executive who is also the CEO of Square Inc. (SQ), should keep one job or the other. Dorsey has continued to defend his dual roles.

James Cakmak, an analyst at Monness, Crespi, Hardt, had this to say about the matter: "We believe it is imperative for Mr. Dorsey to come on board full-time given his sway as a founder, and if he's not willing to do so, then we argue Twitter needs to find someone else who will.”

At Thomson Reuters, analysts are forecasting earnings to dip a penny to $0.09 a share from the same period a year ago, on a 6.5% gain in sales to $606 million. TWTR has beaten earnings estimates for the last seven quarters.

Short-term options traders have priced in a potential 11% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator.

Buyers of calls have been most active at the 18- and 20-strikes, and put activity has concentrated at the 17- and 15-strikes. The implied volatility is at the 42nd percentile.  

TWTR Chart, 12m, 2015-16

FIGURE 4: NOTHING TO TWEET ABOUT.

TWTR shares have zigged and zagged since speculation of a buyout arose in August, and are off 46% over the 12 months, and 24% since the start of 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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