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Earnings: Dow Stalwarts Johnson & Johnson and IBM Report Tomorrow

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April 17, 2017
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Earnings season is in full swing this week and several Dow stalwarts report Q1 results. On Tuesday, International Business Machines (IBM) and pharma giant Johnson & Johnson (JNJ) report before market open. IBM is up just over 2% year-to-date, or YTD, compared to the S&P 500’s (SPX) 4% increase YTD. While that might only be minor short-term underperformance, IBM trailed the SPX by a wide margin over the last five years, declining 16.4% versus almost a 70% increase in the SPX. JNJ shares have climbed almost 9% YTD, starting 2017 strong after a beating the SPX’s performance by a little over 3% in 2016.

IBM Earnings

Some analysts have drawn comparisons between Oracle (ORCL) and IBM’s efforts to transition from legacy technology businesses with declining revenues to cloud-based products and services. In the fourth quarter, cloud revenue increased 33% to $4.2 billion while total revenue declined 1% to $21.8 billion—quarterly revenues at the tech giant have declined year-over-year for the last 19 quarters. Last quarter, management raised its full-year 2017 earnings guidance to non-GAAP EPS of at least $13.80, up slightly from 2016 EPS of $13.59.

IBM is expected to report earnings-per-share, or EPS, of $2.34 on revenue of $18.49 billion, according to consensus third-party analyst estimates. Earnings estimates haven’t been this low since Q1 2016 and the stock has been range-bound since the start of the year, trading between about $165 and $185.   

Options traders have priced in a potential 2.8% 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 175 and 180 strike prices while puts have been active at the 170 strike. The implied volatility sits at the 49th 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.epresent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

IBM YTD Performance versus SPX

FIGURE 1: IBM UNDERPERFORMING.

IBM shares have underperformed the SPX (purple line) by about 3% so far in 2017. 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.

Johnson & Johnson Earnings

In January, JNJ agreed to acquire Swiss biotech company Actelion Pharmaceuticals in an all-cash deal for $30 billion, subject to regulatory approvals. The acquisition would add approved and late-stage compounds to JNJ’s drug portfolio; and will potentially add more than $2 billion in sales with expectations it’ll be accretive to earnings by $0.35 to $0.40 per share in the first year, according to management.                    

In recent earnings, the company highlighted the negative effects of currency exchange rates on margins, which reduced Q4 2016 sales by 0.6%. Some analysts have been concerned that JNJ potentially faces greater foreign currency exchange risks because roughly half of its revenues are generated overseas.

Heading into Q1 earnings, JNJ isn’t far from its 52-week high of $129 it hit in the middle of March. Last quarter, management said its oncology and immunology drugs were the primary contributors to growth in its pharmaceuticals division, the company’s largest of three divisions (figure 2 below). JNJ is expected to report $1.77 EPS on revenue of $18.01 billion, according to consensus third-party analyst estimates.

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 on the thinkorswim® platform. In short-term options activity leading up to earnings, calls and puts have been active at the 120 and 125 strike prices, both at the monthly April 21 expiration. The implied volatility sits at the 76th percentile.

JNJ company profile shown on the thinkorswim platform by TD Ameritrade

FIGURE 2: JNJ COMPANY PROFILE.

JNJ’s Pharmaceuticals and Medical Devices & Diagnostics divisions generate a majority of the company’s revenues. This Company Profile on the Fundamentals tab on the thinkorswim® platform allows TD Ameritrade clients to analyze potential revenue drivers of a stock. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Netflix (NFLX) is reporting after the bell and many analysts expect the company’s subscriber growth will slow down from last quarter’s record increase. For financial earnings coverage, check out my earnings preview of what might be expected when Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) report this week.

Good Trading,
JJ
@TDAJJKinahan

NC
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