The NCAA March Madness may have officially ended, but a new kind of madness is about to begin. The first quarter earnings season kicked off this week with Alcoa (AA) reporting earnings on 4/8. This earnings season will be as, or more revealing, than any in recent memory with regards to the direction the market moves next. Since the last earnings season, we have had the potential effects of the payroll tax hike, sequester and job furloughs, along with economic and geopolitical drama such as that seen in Cyprus and North Korea respectively. Taken together, the results provided by various companies will provide valuable insight into the outlook for the economy and where the market might head next. Continue reading for companies reporting earnings this week and what to watch for in each report and the potential read through into the broader economy that each of these companies will tell us.
Titan Machinery (TITN)
Titan reports earnings on Wednesday, April 10th before the market opens. This agricultural and construction equipment dealer is prone to see significant volatility post earnings. With the downbeat outlook provided by Caterpillar (CAT) recently, Titan is down almost 20% from a high of $32 per share in February as it currently trades at about $26. However, Titan is pretty much a pure play on the United States, whereas Caterpillar has more exposure to the economic troubles in Europe as well as the mixed outlook coming from the Asia Pacific region.
Titan is still very much a growth story in the sector as its revenue has exploded from $425M in 2008 to about $1.6B in 2012. The company continues to grow organically and through acquisitions by snapping up small equipment dealerships around the country. The company currently trades at about 12x its forward earnings estimates of $2.19 per share (per Yahoo! Finance). The company has a solid balance sheet with ample cash to offset the debt being used to finance its growth.
I think this stock is likely to jump on an earnings report that is not as ugly as the price action recently would lead you to believe. For those wanting exposure to this company, I would recommend buying the stock outright and selling the June $25 calls for $2.70 against the stock being owned. At a current price of roughly $26 a share, you have downside protection to $23.30 in the event the stock were to sell off after earnings. The 52- week low for the stock is $19.07 a share. On the flip side, if the stock takes off after earnings you will most likely have your shares called away or be able to repurchase the call options for a solid gain. Were the stock to remain higher than $25 a share prior to the expiration of the June options the return on this trade would be about 7%. This return would be earned in just over 2 months and would equate to an annualized return of 42%.
Bed Bath & Beyond (BBBY)
Bed Bath & Beyond reports earnings after the market close this Wednesday, April 10th. Consensus estimates from Yahoo! Finance call for revenue of $3.39B and earnings per share of $1.68. The last three earnings reports from the company have spurred significant sell-offs as the results and forward guidance have been softer than the market anticipated. The chart below shows a concerning pattern that is again playing out ahead of the upcoming quarterly earnings. Going back to the FY2013 Q1 earnings release in June of 2012 a similar pattern has played out over the last 3 earnings releases. A major sell-off post earnings followed by the stock climbing into the next earnings release, only to rinse and repeat the sell-off. Heading into FY2013 Q4 earnings the stock has performed exactly as it had leading up to the last 3 earnings reports. The stock has rallied over 15% since in the last 45 days and trades at about $64 a share.
The key items to look at in this earnings report will be as follows:
- Has the company's gross margin % stabilized? A big fear from analysts and investors alike is that the company will have to sacrifice profitability in order to fend off Amazon (AMZN) and other competitors.
- What does revenue growth for the current quarter and the guidance say about the housing recovery? Industry peers in the home furnishings sector have generally reported good results, such as Williams-Sonoma (WSM) recently. Bed Bath & Beyond recently has moved up on expectations that it should see the benefits as well from the perceived housing recovery.
- Same-store sales guidance will also be key. If the company guides for same-stores sales % growth of under 3%, this should be a warning sign to investors.
- How does the company intend to utilize its cash balance? The company ended the last quarter with close to $800M in cash on the balance sheet. That number should grow to close to $1B after the crucial holiday quarter. It currently pays no dividend and surprised at least some analysts who were calling for the company to issue a special dividend at the end of 2012 prior to the dividend tax rate increasing. It will be a bullish sign if the company continues to buy back shares in a significant manner
My outlook on the earnings. I am bullish on the long-term story for Bed Bath & Beyond and the growth opportunities it can tap. However, the price action concerns me as it is eerily similar to the price action preceding the last few quarters of disappointing earnings. As I would not mind owning Bed Bath & Beyond long term, I am selling the August $55 put options for a premium of $1.25. This will yield 2.3% if the stock is above $55 when the options expire. The annual yield for this trade is about 6.8%.
JPMorgan Chase (JPM)
JPMorgan reports earnings this Friday, April 12th before the market opens. As one of the largest U.S. banks with global operations, the results of JPMorgan provide more than just an outlook into the prospects of the banking industry. Additionally, Jamie Dimon the company chairman and CEO, is not one to mince words and will most likely give an even keeled assessment of what is actually happening domestically and abroad with regard to the economic recovery. Key themes to watch for in the JPMorgan earnings release:
- Loan growth. I actually believe the mortgage originations are not even worth focusing on at this point. There is too much noise in the housing market between record low interest rates, government refinance programs, and a general bounce off of the bottom for mortgage lending to provide any true insight into the economic recovery. The real item to focus on will be commercial lending growth. Are companies ramping up their borrowing to grow their businesses. If this number disappoints, it will be an ominous read through into the economic outlook.
- Composition of earnings. Is the bank growing earnings from cost cutting, lowering loan loss reserves, and through other unsustainable levers? Alternatively, are earnings showing organic growth through increased lending and increased capital markets activity?
- Jamie Dimon. Does Mr. Dimon continue to sound the all clear on the economy? On the other hand, does he take a more cautious tone in light of the recent events in Cyprus and the risk of the entire European Union seeing any spillover effect. He also may opine on the impact of the Federal Reserve's QE program, in addition to monetary policies recently enacted by the Bank of Japan. The correlation to the results for JPMorgan simply has to do with how companies perceive the unprecedented monetary action by central banks around the world and whether or not it is actually spurring growth.
Quite frankly I would advise sitting this one out with regards to investing in JPMorgan before earnings if you do not already have a position. There is a reason that a big bank such as JPMorgan is trading at less than 9x forward earnings estimates with a dividend yield currently over 3%. There are too many unknowns, with regards to bank regulations and the interconnected global economy, to fully understand the risk associated with owning a big bank such as JPMorgan. This could end up being a great investment, but my investing belief is that if the unknowns outweigh the knowns, stay away.