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Earnings Preview: IBM, JNJ and LMT Report Q2 Results Tomorrow

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July 17, 2017
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Earnings season is getting into full swing this week with several sector giants reporting Q2 results. On Tuesday, International Business Machines (IBM), pharma giant Johnson & Johnson (JNJ), and defense bellwether Lockheed Martin (LMT) report second-quarter earnings before market open. 

IBM Earnings

In the last quarter, IBM beat earnings expectations, but missed revenue estimates partially due to delayed closing on some of its major cloud deals, including its $1.7 billion deal with U.K. bank Lloyd’s that closed this quarter. 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.

For Q2, IBM is expected to report earnings of $2.73 per share, down from $2.95 per share in Q2 2016, on revenue of $19.46 billion, according to consensus third-party analyst estimates. For the past 20 quarters, the company has posted consecutive quarterly revenue declines, a trend that analysts expect to continue this quarter based on estimates.

Options traders have priced in a 3.8% 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 21 monthly expiration, calls have been active at the 155 and 160 strike prices while puts have been active at the 150 strike. The implied volatility sits at the 67th 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.

IBM YTD Stock Performance Through Q2 2017 Earnings

FIGURE 1: IBM UNDERPERFORMING.

IBM shares have underperformed the S&P Technology Select Sector Index (purple line) by a significant amount so far in 2017. 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

Johnson & Johnson’s $30 billion acquisition of Swiss biotech company Actelion Pharmaceuticals that was announced in January is expected to close soon. In last quarter’s earnings release, CEO Alex Gorsky said the pending acquisition “provides a unique opportunity for us to expand our portfolio with leading, differentiated in-market medicines and promising late-stage products.”

Management has said it expects the acquisition 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. In addition to that pending acquisition, the company completed several smaller acquisitions during the quarter including Abbott Medical Optics, a wholly-owned subsidiary of Abbott Labs (ABT), for approximately $4.3 billion.

For Q2 results, Johnson & Johnson is expected to report earnings of $1.79 per share, up from $1.74 in Q2 2016, on revenue of $18.90 billion, according to third-party consensus analyst estimates. While earnings have consistently beat estimates, revenues have come up short in recent quarters.

Heading into Q2 earnings, JNJ isn’t far from its 52-week high of $137 it hit towards the end of June. Options traders have priced in just over a 2% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator. In short-term options activity at the July 21 monthly expiration, calls have been active at the 135 strike price while puts have been active at the 131 and 132 strikes. The implied volatility sits at the 55th percentile.

Company Profile of Johnson & Johnson Stock

FIGURE 2: JNJ COMPANY PROFILE.

Johnson & Johnson’s Pharmaceuticals division generates 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.

Lockheed Martin Earnings

Defense companies are a little unique in the fact that they rely almost entirely on governments. Industry bellwether Lockheed Martin got a nice bump in May when the Department of Defense released a larger fiscal 2018 budget and the U.S. signed an arms agreement with Saudi Arabia.

Following the agreement, Lockheed Martin, Raytheon (RTN), and Boeing (BA) all announced deals as part of the trade agreements. “U.S. officials said the defense deals—which include proposed sales and final approvals for sales that have been in the works for many years—were potentially worth $109 billion,” according to the Wall Street Journal.

For Q2 results, Lockheed Martin is expected to report earnings of $3.09 per share, down from $3.32 per share in Q2 2016, on revenue of $12.47 billion. The company beat earnings expectations in the last four quarters, but some analysts are expecting the company’s pension obligations to weigh on upcoming results.

Options traders have priced in just under 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 21 monthly expiration, calls have been active at the 290 strike price while puts have been active at the 277.5 and 285 strikes. The implied volatility sits at the 50th percentile.

Lockheed Martin YTD Stock Performance Through Q2 2017 Earnings

FIGURE 3: DEFENSE BUDGET BUMP.

In mid-May, Lockheed Martin’s stock got a nice bump when the U.S. signed an arms agreement with Saudi Arabia and the Department of Defense released its fiscal 2018 budget plans, which were $52 billion above the defense budget cap in the Budget and Control Act (BCA) of 2011. 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

Later in the week, a couple of other sector giants, Microsoft (MSFT) and General Electric (GE), report their Q2 earnings. The following week, Alphabet (GOOG, GOOGL) kicks off a heavy week with major companies across sectors reporting.

Good Trading,
JJ
@TDAJJKinahan

NC
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