Q2 Earnings Season: What to Expect from the Big Names

Second Quarter earnings season will get in to full swing this week with reports from the biggest technology names as well as a couple of big financials. I thought I would briefly look at each one to assess what we should expect to hear from them when they report.

Johnson & Johnson (JNJ):
J&J’s Required Business Performance implies a revenue decline of 1.9% over the next twelve months. This is the level of performance the company’s management must produce to support the current stock price of $56.93. This works out to a RBP Probability of 65.5%, indicating that it has a 65.5% chance of meeting this Required Business Performance. This is on par with that of the Pharma & Biotech sector and slightly higher than the Pharmaceuticals subsector median RBP Probability of 62%. In other words, it is basically a flip of the coin as to whether J&J will deliver on its Required Business performance when it reports quarterly results on Tuesday.

Intel Corp (INTC):
Also reporting on Tuesday is Intel. The stock has been punished lately, but this punishment has been justified. Even the current price of $16.04 implies a sales decline of almost 8% in the coming year. But of course, sales have been declining for some time, so it is still somewhat unlikely the company will be able to deliver this performance. Its current RBP Probability is 50.2%, well below the sector and subsector median RBP Probabilities. It is worth noting also that rival AMD, which will report a week later, has a similarly low RBP Probability. (See INTC’s RBP Snapshot)

Google Inc (GOOG):
Both Google’s operating performance and stock price have held up well throughout the crisis. Its current stock price of $414 implies revenue growth of 4.1% in the next year, which should be easily obtainable given the company’s recent history of revenue growth which is much stronger than this. Indeed, the RBP Probability of Google is 92.7%, making it very likely the company will deliver results on Thursday sufficient to justify its current stock price. Google is, quite simply, one of the strongest of large companies in terms of RBP Probability. (See GOOG’s RBP Snapshot)

Int’l Business Machines Co (IBM):
The performance implied by IBM’s stock price is very low. But then again the company has been struggling for several years, even though its stock price has risen back to early-2008 levels. While the company need only generate sales 5.7% less than it did a year ago, it stands only a 74.6% chance of doing so. For the twelve months, sales in fact declined nearly 20% year-over-year.

JP Morgan Chase & Co (JPM):
Perhaps investors have flocked into JPM stock simply because it is one of the few financials to have actually survived this mess. But its stock price is far too high given the troubles both within the company and in the industry. Despite tremendous drops in retail revenue, investment banking revenue and card services revenue over the past year, the current price of JPM stock implies not only that these revenue drivers will grow by 5.4% in the upcoming year, but that they will continue to grow in to the foreseeable future. This is very unlikely. JP Morgan’s RBP Probability is a mere 26% and we can expect to see disappointing results when it reports on Thursday.

General Electric (GE):
In contrast to JPM, GE appears to have much a better chance of meeting its Required Business Performance. The stock has been weighed down by concerns over GE Capital, yet this division currently comprises only 35% of revenue and strength in the other divisions will make meeting the company’s RBP likely. The current unbelievably low stock price of $10.78 implies nearly negative 9% earnings growth. It should be easy for GE to deliver on this very low standard when it reports on Friday. The current RBP Probability of GE is 89.6%.