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Earnings Preview: Dow Components JNJ and IBM Report on October 17

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October 13, 2017
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Coming up early next week, two Dow components take the stage to report third-quarter results. Health care giant Johnson & Johnson (JNJ) reports earnings before market open and IBM (IBM) opens the books after market close on Tuesday, October 17. 

Johnson & Johnson Earnings and Options Trading Activity

JNJ is up 18.12% year-to-date and most of those gains were from the first half of the year. Since mid-June, the stock had been bouncing between a range of $129 to $136. The stock hit a new all-time high in intraday trading yesterday ahead of its third-quarter earnings report next week.

Two areas analysts might be looking for additional clarity on the earnings call is the impact of Hurricane Maria on the company’s manufacturing facilities in Puerto Rico and how everything is progressing with the $30 billion Actelion acquisition that closed in the second quarter. Also, any updates on the company’s pipeline and clinical trial progress are likely to be of interest. Its psoriasis treatment Tremfya was approved in July 2017 and CFRA analysts see the drug reaching $1.6 billion in sales in 2022.

The same morning that JNJ reports earnings, a second Senate hearing on drug pricing takes place. Pharmaceutical companies have been more volatile in the past around meetings on the subject. In efforts to improve transparency regarding its own drug pricing practices as many companies have come under scrutiny, JNJ started issuing a report providing more details about its prices. In 2016, the list prices for its U.S. product portfolio increased an average of 8.5% year-over-year, while its net prices, after discounts and rebates, increased 3.5%.

Looking back at the second quarter of 2017, the company reported that revenue increased 1.9% year-over-year to $18.8 billion and adjusted earnings per share increased 5.2% to $1.83 per share. Revenue in its largest division, worldwide pharmaceutical sales, decreased 0.2%, while worldwide medical device sales and worldwide consumer sales increased 4.9% and 1.7% respectively. Foreign currency exchange rates negatively impacted revenue by 1% in the second quarter.

For the third quarter, JNJ is expected to report adjusted earnings of $1.80 per share, up from $1.68 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected to increase to $19.28 billion, up 8.2% year-over-year. JNJ has beat earnings expectations in the last eight quarters, although on the revenue side it has been less consistent, missing expectations in the past three.

Around JNJ’s upcoming earnings release, options traders have priced in about a 2.4% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the October 20 monthly expiration, both calls and puts have seen the highest concentration of activity at the 135 and 136 strike prices. As of this morning, the implied volatility is 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.

Chart showing the 6 month performance of Johnson & Johnson's stock

FIGURE 1: STUCK IN A RANGE?

Johnson & Johnson (JNJ) is up 18.12% year-to-date, with a large portion of those gains in the first half of the year. Since mid-June, the stock has been trading between a range of $129 and $136. The stock just hit a new all-time high of $137.52 in intraday trading on October 12 and closed at $136.83. 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.

IBM Earnings and Options Trading Activity

Big Blue has been in a rough stretch for a bit now as it has faced declining revenue in its legacy businesses. In an effort to drive future growth, management has focused on the segments it refers to as its strategic imperatives. The tough trend has continued in 2017 with shares down 12.06% year-to-date as of October 12, versus a 12.98% increase in the S&P 500 (SPX).

In the second quarter of 2017, IBM reported a 5% year-over-year decline in revenue, which made it the 21st consecutive quarter the company reported a drop in sales. On the bottom line, the company reported adjusted earnings of $2.97 per share, up 2 cents from the prior-year period.

Last quarter, the company reported revenue declines across all of its business segments. At the same time, however, the parts of the business IBM has said it considers its strategic imperatives grew 5% year-over-year to $8.8 billion and cloud revenue increased 15% year-over-year to $3.9 billion. The company breaks those figures out, but still groups them within its different business segments that have experienced overall revenue declines. Growth in the company’s strategic imperatives will continue to be key in curtailing declining revenue, according to CFRA analysts.

When IBM reports third-quarter results, it’s expected to report earnings of $3.28 per share, pretty much flat to last year, according to third-party consensus analyst estimates. Analysts are expecting revenue to fall again this quarter, projecting a 2.9% year-over-year decrease to $18.67 billion. 

Options traders have priced in about a 3.6% potential share price move in either direction around IBM’s upcoming earnings release, according to the Market Maker Move indicator. In short-term trading at the October 20 monthly expiration, calls have been active at the 150 and 155 strike prices. Options trading has been much heavier on the put side and the 140 and 145 strikes have been the most active. As of this morning, the implied volatility sits at the 56th percentile.

Chart showing IBM's Business Divisions

FIGURE 2: IBM COMPANY DIVISIONS.

IBM’s Cognitive Solutions segment is a large component of the company and key revenue driver of the stock. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platform. 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.

Looking Ahead

Earnings season is getting into full swing over the next several weeks. At the beginning of next week, Netflix (NFLX) takes the stage after market close on Monday, October 16, and investment banks Goldman Sachs (GS) and Morgan Stanley (MS) report results before market open on Tuesday, October 17. If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

New Economic Data Tab

There's a new Economic Data tab on the thinkorswim® trading platform by TD Ameritrade. Log in to the platform  > Analyze > Economic Data.

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