As the holidays come upon us, we should be thankful to have a national economy that is moving in the right direction. Sure, it's incredibly slow and the downside risks are high, but at least America is faring better than the United Kingdom, the European Union (EU), and China. America growing better than China is arguable, but with Chinese real estate prices shrinking, there are similarities to America in the late 2000s. This week will be funky due to the Thursday holiday, but investors have plenty of reasons to pay close attention to their holdings.
Four of the scheduled events are earnings reports that will shift the public equities market dependent upon each respective company's results and guidance. Also, the four companies are sector and/or industry leaders, therefore, investors with holdings within the same sector and/or industry will want to pay close attention. Lastly, and arguably, the most important event is the Wednesday, November 23 deadline to pass a budget plan along with a Monday the 21st deadline to propose a budget plan. It should be an interesting week for investors.
On Monday after the market closes investors and traders will be eying Brocade (BRCD) and Hewlett-Packard's (HPQ) earnings report. Both companies will present fiscal fourth quarter earnings after the regular trading session closes on November 21. This will make Tuesday's session more interesting.
Long term Brocade shareholders have no doubt gone through a frustrating last five years. The share price has more or less decreased over this time frame hitting nearly sequential lower lows and lower highs, excluding the late 2008- early 2009 plunge. However, if this drop is negated this trend would be nearly perfect. Unfortunately, I cannot say Brocade will become a successful turnaround story because the company's switching business is becoming obsolete.
I say this because Brocade's Ethernet business accounts for roughly 38% of the company's total revenue during the fiscal third quarter and this business become backlogged and outdated moving forward. Also, Brocade's storage unit decreased 6% year over year and 16% quarter over quarter which indicates the company is losing out in the storage market.
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The good news is Brocade's share price has dropped to a level that makes Brocade's valuation equally low which means Brocade may deliver results that lead to positive share price movement. Analysts are expecting Brocade to report revenue around $527.38 million and EPS at $0.10. Both would be a slight increase from the previous quarter. However, the expectations are lower than last year's fourth quarter reported results. This is due to Brocade guiding lower than analysts had expected prior to the company's third quarter earnings report.
Of the many stocks that will be affected by Brocade's earnings, investors will need to be weary if they own stocks such as EMC, NetApp (NTAP), Riverbed (RVBD), Juniper (JNPR), CommVault (CVLT), Seagate (STX), as well as other closely related stocks in the data storage devices or network and communication devices industries. This is why Brocade's earnings have the potential to shift the broader market. If Brocade delivers a surprise one way or the other, investors will see the broader market react accordingly.
While Brocade's results may not shift the broader index if the company reports in line with consensus, Hewlett-Packard's results will shift the market. One could write a lengthy book about the drama that has surrounded HP since the company's third quarter earnings report. Investors have seen one CEO leave and ridiculous proposals to spin off the company's most well known business, but in the end it appears HP will move forward with all divisions intact under Meg Whitman.
One of the most difficult aspects when analyzing HP is that it may be a while before HP's share price stabilizes due to the news and rumors surrounding the company. Not to mention HP will report earnings following several companies that have already reported dire results from Europe and the U.K. And with HP's exposure to Europe, investors might be looking down a barrel loaded with trouble.
Nevertheless, analysts are looking for HP to report revenue of $32.05 billion and EPS of $1.13. If HP reports in line this will be an insignificant quarter over quarter increase. Investors will also want to know if the Autonomy purchase is making up for its large price tag. But the most important aspect of the report and conference call will be HP's guidance and business plans. Investors will be looking for HP to deliver a sound operating plan to silence the rumors and questions.
It should be expected HP will present investors with a gilded report. This is why investors will need to look at the facts and determine whether what HP is saying is feasible and if the direction the company is going is the right direction. I am expecting some sort of plan to cut back on employees in Europe similar to what GM is likely to propose. Also, since two thirds of HP's total revenue comes from Europe, Middle East, and Africa, the severity of conflicts and possible recessions/defaults in these regions will weigh heavily on the company's margins.
Dozens of technology stocks will be affected by HP's earnings. More specifically, companies involved with producing processors, storage devices, and PCs will easily be sold off on a weak outlook. Therefore, investors will need to protect their portfolio prior to Monday evening. HP may in fact present a strong forecast that causes the broader index and other technology stocks to soar, but this is unlikely and it is better to prepare for the worst case scenario during the volatile economic situation.
A third reason the public equities market will shift is because the healthcare giant Medtronic (MDT) reports second quarter earnings before the market opens on Tuesday, November 22. Long term shareholders have gone through the same pain as Brocade shareholders because Medtronic's share price has continuously trended downwards hitting lower lows and lower highs over the past five years.
This will be a long term trend for the healthcare industry because the sheer quantity and quality of competition within the healthcare sector is growing. Perhaps the healthcare sector is headed for consolidation? Nevertheless, Medtronic does not focus on treatments in the form of medicine. Medtronic focuses on creating medical devices to treat and prevent chronic diseases, defects, and pain for several organs and/or organ systems.
Medtronic has the potential to shift the broader indexes for two reasons: 1) because Medtronic is in direct competition with Johnson & Johnson (JNJ) which is one of the largest healthcare companies in the world, and 2) Medtronic will discuss the current situation of the healthcare market with particular attention to hospital spending. This will in turn affect other major healthcare companies because it will allow investors to see if hospitals are spending more on generic drugs and/or treatments.
Analysts are expecting Medtronic to report revenue at $4.07 billion and EPS at $0.82. This will be a slight quarter over quarter increase and it will set the company up to surpass the previous fiscal fourth quarter results. While revenue is important for Medtronic, the most important aspect of the earnings report will be operating income, expenses, and margins because Medtronic spends a substantial amount on research and development in order to develop new medical devices.
This may appear to be an isolated case, but roughly 45-50% of Medtronic's revenue comes from outside the United States. Thereforeת with slowing worldwide economies, specifically Europe, analysts will ask about the possible effects this will have on the company's revenue. I may sound like a broken record, but the truth is, contrary to Dick Bove, companies exposed to Europe are likely to face severe downside movements.
With that said, Medtronic's forecast will also directly effect other healthcare giants that have substantial exposure to Europe; such as GlaxoSmithKline (GSK) and AstraZeneca (AZN). On the other hand, there is a slight chance Medtronic will deliver a stronger than expected outlook regarding the healthcare market which will cause the major players in the healthcare sector to pop in sympathy.
The final market shifting earnings report will come from Deere and Company (DE). Deere will be reporting fourth quarter earnings prior to the opening of Wednesday's trading session. Because this will be the day before Thanksgiving, investors should expect light volume for most stocks. But Deere and Deere's competitors (Caterpillar (CAT), Joy Global (JOYG), and AGCO) will see heavier volume due to the earnings release. Luckily, Deere reports in the morning, which means day traders can make their moves early and then prepare for Thanksgiving.
Nevertheless, these farming and construction machinery companies have the potential to push the broader indexes higher or lower on Wednesday because of the direct correlation the industry carries with the worldwide economy. This correlation is simple: If machinery companies are receiving plenty of orders (higher revenue) it can be assumed the world is building infrastructure which indicates the world economy is growing because particular regions and businesses have the extra capital to spend on infrastructure or buildings, respectively.
Analysts are expecting Deere to report revenue at $7.87 billion and EPS at $1.43. This quarter will not be one of Deere's stronger quarters which is expected because as the weather cools down Deere's performance weakens. On the other hand, however, Deere has a relatively good chance to report a surprisingly strong quarter because commodity prices were fairly high during Deere's fiscal fourth quarter. Therefore, farmers should have been able to buy new equipment because their profit margins were higher. Unfortunately, commodities have more or less plunged recently which may cause Deere to guide conservatively.
A cautious or negative forecast would be close to the worst case scenario for the U.S. markets because with several economies throughout the world struggling, the last thing machinery companies need is news that the current quarter may possibly be weaker than expected. Therefore, for investors' sake let's hope this does not happen, but it is better to be prepared for the worst case scenario.
The final event will be the hopeful passage of a budget bill on Wednesday. The budget bill can directly affect dozens of companies. If, for instance, military spending is slashed, which will happen, then companies such as Raytheon (RTN) and Boeing (BA) will take a beating. Similarly, if perhaps green initiatives spending is cut, we will see solar companies such as First Solar (FSLR) and JA Solar (JASO) and natural gas companies such as Whiting (WLL) and Devon Energy (DVN) sell off. However, until an exact budget is passed, investors will not know exactly, if at all, how much to decrease each company's respective valuation.
At least two other scenarios also exist that may not specifically affect any particular stock, but the broader indexes and the majority of stocks within the indexes. The first is a budget plan that does not accommodate the budget problems correctly which will lead to continued deficit increases, which in turn bring America one step closer to a default or a credit downgrade. The second reason is a budget bill that does not get passed in time. We can assume a bill will be passed on time because the alternative has been widely criticized by Republicans and Democrats alike.
No matter which way you slice this pie, the end results will directly affect the U.S. and possibly worldwide markets. Most investors are expecting the worst, therefore, any intelligent budget bill will give the U.S. markets a reason to pop.
Thanksgiving week is usually a time for investors to relax with their families and be thankful to have a job and possibly excess capital to spend on Black Friday and over the weekend. But this week has several events that investors will need to pay attention to or their portfolio could take a beating. Keep in mind there is nothing wrong with being cautious.
Another important note to make is Europe. Since Europe does not have any scheduled events this week, except for Spain's elections on Sunday, it is difficult to predict how Europe's soap opera will affect America. But as I reiterated several times, Europe's weakness will be a critical player in the four major earnings reports this week.