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Dow Components JNJ and IBM Are on the Earnings Docket This Week

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April 16, 2018
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Two Dow components, Johnson & Johnson (JNJ) and IBM (IBM), are among the many companies slated to report earnings this week. JNJ reports before market open on Tuesday, Apr. 17 and IBM reports after the close the same day.

Johnson & Johnson Earnings and Options Activity

In recent quarters, JNJ’s growth has been driven by its pharmaceutical division, while medical sales and consumer sales have been growing at a slower pace.

In Q4 2017, JNJ reported 17.6% year-over-year revenue growth in its pharmaceutical division, for a total of $9.7 billion. Within pharmaceuticals, the oncology division grew the fastest and sales topped the $2 billion mark, up 39.5% compared to the prior-year quarter. JNJ’s June 2017 acquisition of Actelion also helped boost results, adding $610 million in sales in the pharmaceutical division. For Q1 2018, analysts are again widely expecting the pharmaceutical segment to be the primary driver of growth for the company.

The medical devices segment, JNJ’s second largest by revenue, increased 8.3% year-over-year to $7 billion in Q4 2017, boosted by growth in its cardiovascular, surgery and vision care businesses. The consumer segment, JNJ’s smallest by revenue, increased 3.1% year-over-year to $3.5 billion. For Q1 2018, many analysts are expecting mid-single-digit growth in the medical devices segment, while the growth is expected to remain sluggish in the consumer segment.

When JNJ releases results Tuesday morning, it is expected to report adjusted EPS of $2.01, up from $1.83 in the prior-year quarter, on revenue of $19.4 billion, according to third-party consensus estimates. Revenue is projected to increase 9% year-over-year.

Johnson & Johnson stock chart

JNJ IN 2018.

By early February, JNJ had pulled back sharply from its all-time high of $148.32 it hit at the start of the year. After recovering from a low of $122.15, JNJ has been trading in a narrower range between $125 and $135 since early February. The bottom chart shows the stock’s implied volatility, which is elevated ahead of the report, but it is still below where it was during the market selloff in early February. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Options traders have priced in about a 2% stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 59th percentile as of this morning.

In short-term trading at the Apr. 20 monthly expiration, calls have been active at the 133 and 135 strike prices, while trading in puts has been concentrated at the 130 strike. At the May 18 monthly expiration, most of the activity has been right around the money, with the 130 and 135 strikes active on the call side and the 125 and 130 strikes active on the put side.

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 Earnings and Options Activity

Like many of the legacy tech companies, Big Blue has been focused on transitioning away from its older business lines and emphasizing cloud computing, data analytics, mobile technologies and security, which are all part of its “Strategic Imperatives”.

In Q4 2017, IBM’s Strategic Imperatives grew 17% year-over-year to $11.1 billion, accounting for just shy of half of its $22.5 billion total revenue, which was up 4% year-over-year. The company’s recent launch of its new Z14 mainframe, as well as growth in its Strategic Imperatives, specifically its cloud division which grew 30% year-over-year to $5.5 billion, helped the company break a streak of 22 quarters of sales declines or no growth.

Despite beating earnings and revenue estimates when it last reported, gross margin and operating margins came in below what analysts were expecting and IBM’s 2018 earnings guidance was also below expectations.

For Q1 2018, IBM is expected to report adjusted EPS of $2.39, in line with $2.38 in the prior-year quarter, on revenue of $18.7 billion, according to third-party consensus estimates. Revenue is projected to increase 3% year over year.

Options traders have priced in about a 3.7% stock move in either direction around IBM’s upcoming earnings release, according to the Market Maker Move indicator. IBM’s implied volatility was on the higher end this morning at the 77th percentile.


IBM stock chart ahead of Q1 2018 earnings

IBM SINCE START OF 2018.

IBM is up slightly on the year, outpacing the S&P 500 (SPX). Going back to the start of 2017 though, IBM is still down about 5.5%, underperforming the SPX’s 18% increase over the same time period by a wide margin. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

In short-term trading at the Apr. 20 monthly expiration, there hasn’t been a whole lot of activity that stands out. On the call side, the 157.5 and 160 strike prices have been more active, while there’s been a smattering of activity at strikes around the money on the put side.

Open interest is quite a bit higher on the call side at the Apr. 20 expiration. The 160-strike call had the highest open interest with 18,355 contracts open at the end of Friday’s session, compared to 13,843 contracts open at the 155-strike put, the highest for puts.

Looking further out at the May 18 monthly expiration, the 170-strike call, a little ways out of the money, has seen higher volume in recent trading. On the put side, there’s been a smaller amount of activity at some of the strikes right around the money.

What’s Coming Up

The pace of reports continues to pick up this week and next week brings a tech-heavy stretch of results. Among the many companies releasing results, these are some of the notable reports from the tech sector:

  • Google-parent Alphabet (GOOGL, GOOG) reports after the close Monday, Apr. 23
  • Twitter (TWTR) reports before market open Wednesday, Apr. 25 and Facebook (FB) reports after the close the same day
  • Microsoft (MSFT), Intel (INTC) and Amazon (AMZN) report after the close Thursday, Apr. 26

In addition to all the tech companies, Verizon (VZ), AT&T (T), Ford (F), General Motors (GM), Caterpillar (CAT), Boeing (BA), Chevron (CVX) and ExxonMobil (XOM) are some of the other major companies on tap next week. For a look at what else is going on, make sure to check out today’s market update if you have time.

Good Trading,
JJ
@TDAJJKinahan

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