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Earnings Preview: What Might Be Expected From EBAY and VZ in Q1

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April 19, 2017
EBAY Online Auction Gavel
iStockphoto.com/ArtemSam

Earnings have been pretty positive so far in Q1 2017 with many of the major banks beating analyst expectations. There’s still a lot of companies left to report, but 76% of the companies in the S&P 500 (SPX) that had reported earnings as of April 13 have beat the mean analyst EPS estimate while only 59% have beat mean analyst sales estimates, according to FactSet. Next up in first-quarter results, eBay Inc. (EBAY) reports after market close today and telecom giant Verizon Communications (VZ) reports before market open on Thursday.

eBay Inc. (EBAY): Margins and Competition in Focus

EBAY has been in the midst of a transformation effort to adapt to a changing ecommerce landscape. The company “faces large competitive threats from Amazon, new startups and companies, such as Alphabet’s Google or Facebook, that begin to add buy button features,” according to RBC Capital Markets Analyst Mark Mahaney.

In a recent company blog post, CEO Devin Wenig wrote “for the past 18 months, we’ve been working on an ambitious replatforming of eBay by leveraging new technology to redefine what online shopping means today,” and that “online commerce has matured in the last few years to the point where consumers expect fast and free shipping in defined delivery windows”. EBAY recently announced guaranteed delivery in three days or less on 20 million items, acknowledging customer preferences AMZN has become known for. 

Earlier this month, EBAY announced it is selling its Indian business to Flipkart, a leading ecommerce company in India, and will also invest $500 million for an equity stake in the company. . EBAY’s cash investment was part of a larger $1.4 billion equity financing round that included Tencent Holdings (TCEHY) and Microsoft (MSFT) as investors. The transaction isn’t expected to have a material impact on management’s previous guidance, according to a company press release, for 2017 revenue between $9.3 billion and $9.5 billion, and GAAP earnings per diluted share from continuing operations ranging from $1.20 to $1.40.

For the first quarter, EBAY is expected to report earnings per share, or EPS, of $0.48 on revenue of $2.2 billion, according to consensus third-party analyst estimates. “Despite consistent growth in sales over the last four quarters, eBay has been struggling with declining operating margins and declining free cash flows over the same period,” according to Trefis. Analyst James Cakmak with Monness, Crespi, Hardt & Co. expects higher spending at EBAY and outsized growth in Stubhub, a lower-margin subsidiary, to weigh on profit. 

Heading into earnings, EBAY is close to its 52-week high of $34.74 it hit on April 5. Options traders have priced in a potential 6.3% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. At the monthly April 21 expiration, short-term options trading for calls has been active at the 34.5 and 35 strike prices while puts have been active at the 32 strike. The implied volatility sits at the 77th percentile.

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.

Estimated Ecommerce Retail Sales in US

FIGURE 1: ECOMMERCE SALES GROWTH.

EBAY’s sales growth has lagged estimated total quarterly ecommerce sales growth, which recently topped $100 billion. TD Ameritrade clients can access approximately 400,000 data points on the thinkorswim® platformSource: Federal Reserve's FRED database. For illustrative purposes only. Past performance does not guarantee future results.

Verizon Communications (VZ): Yahoo Acquisition and Revenue in Focus

VZ has said it expects its $4.48 billion Yahoo (YHOO) acquisition to close sometime in the second-quarter of 2017. On Thursday’s earnings call, management could comment on how that’s progressing. Some investors might want to hear that everything is going as planned after the two already amended terms of the agreement in February due to undisclosed data breaches at Yahoo. Verizon has indicated that once the deal closes, Verizon plans to combine Yahoo and AOL to form Oath—a new business unit the company has released few details about.

In an unexpected move, Verizon started offering an unlimited data plan in February, possibly in response to unlimited offers from competitors AT&T Inc. (T), Sprint Corp. (S) and T-Mobile US Inc. (TMUS). Over the past year, the major carriers have unveiled new, lower-priced unlimited plans with the intention of attracting customers and decreasing churn (customer defection rates).

Many analysts are expecting a tough quarter for the telecom services sector. FactSet projects it’ll be the only sector in the SPX to report a year-over-year decline in revenues. According to consensus third-party analyst estimates, Verizon is expected to report $0.98 EPS on revenue of $30.52 billion—about a 7.5% drop in EPS and 5.1% decline in revenue compared to Q1 2016.

Options traders have priced in just under a potential 1.5% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. In short-term options activity leading up to earnings, calls have been active at the 50 strike price and puts have been active at the 48 and 49 strikes, both at the monthly April 21 expiration. The implied volatility sits at the 49th percentile. The stock has been relatively flat since dropping after last quarter’s earnings, and could potentially see support at $46 and resistance at $52. 

Verizon Stock Performance Compared to SPX, TMUS, S, T

FIGURE 2: LAGGING PERFORMANCE.

VZ has underperformed the SPX (gray line) in 2017 as well as its peers: TMUS (purple line), S (teal line), and T (red line). The percentages on the right side of the chart show YTD stock performance. 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.

Next up is the oldest Dow component, General Electric (GE), reporting before open April 21. The following week, there’s a packed calendar: Alphabet (GOOGL), Amazon (AMZN), Caterpillar (CAT), ExxonMobil (XOM) and Lockheed Martin (LMT) are just a few of the companies reporting.

 Good Trading,
JJ
@TDAJJKinahan