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Earnings Preview: CAT, LLY and GM Report Q2 Results Tomorrow

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July 24, 2017
Caterpillar Trucks in a Row
istockphoto.com/vm

The earnings parade continues this week with some of the biggest companies across sectors reporting. Next up this week, heavy equipment maker Caterpillar (CAT), pharma giant Eli Lilly (LLY) and automaker General Motors (GM) report second-quarter earnings on July 25 before market open.

Caterpillar Earnings and Trading Activity

Caterpillar had hit a tough stretch due to a prolonged downturn in construction, energy and mining, three areas of business the company is heavily exposed to. As parts of those areas continue to recover, particularly in China, Caterpillar’s first-quarter results benefitted, and the trend appears to be continuing based on the company’s recently reported 7% increase in global machine sales.

As the global slowdown hit Caterpillar, it took  a number of steps to improve profits including cost-cutting initiatives that were announced in late-2015. Some of those steps to control costs were layoffs, and the decision to close or consolidate more than 30 factories since it announced the plans. The company has also announced a significant amount of management changes in recent quarters.

For the second quarter, Caterpillar is expected to report earnings of $1.26 per share, up from $1.09 in Q2 2016, on revenue of $10.9 billion according to third-party consensus analyst estimates which also expect revenue to be the highest since Q4 2015, when the company reported $11 billion for the top line.

Options traders have priced in around a 3% potential 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 trading leading up to the earnings release at the July 28 expiration, calls have been active at the 108 and 110 strike prices while puts have been active at the 105 strike. The implied volatility sits at the 61st 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.

Caterpillar company profile shown on thinkorswim platform

FIGURE 1: CATERPILLAR COMPANY PROFILE.

Caterpillar has faced a challenging couple of years due to slow global economic growth, and downturns in construction and commodities, two areas the company is heavily exposed to. The Company Profile tool 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.

Eli Lilly & Co. Earnings and Trading Activity

A big question among analysts and investors in pharma companies is how they will continue to grow their pipelines and maintain exclusive medications. That same question applies to Eli Lilly as sales of some of its once blockbuster drugs (Alimta, Cymbalta, and Zyprexa) have continued to decline after their patents expired. Some of the company’s newer products have helped maintain top-line growth, according to CFRA analysts, but pharmaceutical competition is fierce with many companies constantly trying to develop newer, more effective compounds.

To that end, many of the large manufacturers have acquired companies or co-developed drugs to fuel their drug pipeline. This morning, Eli Lilly announced a deal with Nektar Theraeputics (NKTR) to co-develop its immunological therapy NKTR-358, which is being developed to treat certain autoimmune conditions. These types of deals are relatively common, with large companies offering milestone payments, and help covering the high costs to develop and commercialize new drugs in exchange for the smaller company’s research and exclusive agreements.

Looking at Q2 expectations, Eli Lilly is forecasted to report earnings of $1.04 per share, up from $0.86 in Q2 2016, on revenue of $5.6 billion according to third-party consensus analyst estimates. That’s the highest revenue forecast for the company in the past eight quarters.

Options traders have priced in around a 2% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator. In short-term options trading leading up to the earnings release at the July 28 expiration, calls have been active at the 85 strike, right at the money, while puts have been active at the 83 strike. The implied volatility sits at the 10th percentile, on the lower end of the range. 

Eli Lilly (LLY) stock ytd performance up to earnings charted on thinkorswim platform

FIGURE 2: A CHOPPY YEAR.

After a strong start to the year, Eli Lilly’s (LLY) stock gave up almost all of its gains for the year by mid-June. The stock has rallied since then and is getting closer to its 52-week high of $86.72 with a 14.12% year-to-date return. 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.

General Motors Earnings and Trading Activity

GM has been in focus a little more lately due to its ongoing battle between company management and hedge fund manager David Einhorn, who had proposed splitting the stock into two classes of shares to boost the company’s value. That proposal was shot down by shareholders at the company’s annual meeting in June.

Now that the battle is over, management appears to be focused on its plans to continue cutting costs through steps it had previously announced including layoffs and restructuring international operations. In addition to those steps, the company is also in the process of selling its Opel business to French automaker Peugeot.  

For its second-quarter results, GM is expected to report earnings of $1.72 per share, down from $1.86 in Q2 2016, on revenue of $40.25 billion according to third-party consensus analyst estimates. The company has beat top- and bottom-line estimates in the past six quarters.

Options traders have priced in around a 2.5% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator. In short-term options trading leading up to the earnings release at the July 28 expiration, calls have been active at the 36 and 36.5 strike prices while puts have been active at the 35.5 and 36 strikes. The implied volatility is at the 30th percentile. 

General Motors (GM) stock ytd performance up to q2 earnings charted on thinkorswim plaftorm

FIGURE 3: AUTOMAKER GM UNDERPERFORMING.

General Motors (GM) shares declined for much of the first half of the year, but have rebounded a bit in recent months. The stock is up about 2% year-to-date compared to the S&P 500’s (SPX) 9.4% return. 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.

Looking Ahead

We could see some heightened volatility this week as some of the largest companies in the world continue to report earnings. On top of all the earnings reports coming out, we also have the Fed’s July meeting starting up on Tuesday. With Fed Chair Yellen’s recent Congressional testimony, there likely won’t be a whole lot of additional information released at this month’s meeting.

Good Trading,
JJ
@TDAJJKinahan

NC
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