Earnings: MSFT Cloud Watch; Tough Quarter Expected For CVX

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Includes: CVX, MSFT
by: JJ Kinahan

Summary

Analysts reporting to Thomson Reuters expect MSFT earnings to come in dead flat versus the year earlier comparable.

Short-term options traders expect a potential 5.5% move in either direction for MSFT stock around its earnings release.

CVX shares have climbed some 19% since bottoming in late August. Still, the stock sits at levels last seen in mid-2010.

Earnings from two blue-chip stocks in totally different industries could give investors another snapshot of a global economy that's showing a few cracks. Tech giant Microsoft (NASDAQ:MSFT) and the oil patch's Chevron (NYSE:CVX) are among the stocks wrapping up a heavy quarterly earnings roundup this week.

Industry analysts talk a lot about the "transition story" of MSFT away from its roots. Some say that strategic maneuvering into cloud computing has helped MSFT to counter weakening sales in personal computing-its long-time biggest seller. Global personal computer shipments fell 10.6% year over year in calendar Q4, according to research firm IDC.

But industry analysts are also concerned about the expense of MSFT's transition and the impact on profitability.

Head in the Cloud?

It was growth in its cloud-computing platform, coupled with strong Windows 10 adoption, that boosted MSFT's better-than-expected results a quarter earlier. That begs the question, can MSFT muscle out another surprise to the upside when it releases its fiscal Q2 results post-close today? Analysts reporting to Thomson Reuters expect MSFT earnings to come in dead flat versus the year earlier comparable, at $0.71 a share. Revenue, meanwhile, is projected to decline 4.6%, to $25.27 billion.

The stock is on the defensive heading into earnings (figure 1). And as with other technology stocks during this earnings season, MSFT implied volatility is on the high side at the 77th percentile. Short-term options traders expect a potential 5.5% move in either direction for this stock around its earnings release, according to our indicator. Notable buyer volume has emerged in the weekly 53 and 55 call options; there's also buying in the January 45 put options.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and 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.

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Figure 1: Pre-Earnings Churn. Through 2015, Microsoft (MSFT) shares advanced 16%. They got a big 40% bump after touching a 52-week low during the blow to the broader markets in late August. Shares are down 6% since the beginning of the year. Chart source: TD Ameritrade's thinkorswim platform. Data source: Dow Jones Global Indices. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Can't Shake Low Oil Prices (Yet)

CVX's results, due out ahead of the market's open Friday, could be another sober reminder of what crashing oil prices are doing to energy giants throughout the world. More important may be who is doing what to survive crude prices at 12-year lows below $30 a barrel.

CVX already has taken a scalpel to costs, slashing thousands of jobs, and curtailing projects and programs already in the works. Industry analysts on the post-earnings conference call will likely be listening for what measures the company is taking to preserve profits. CVX has, so far, protected its dividend through this collapse, and investors hope to hear the company will continue to do so.

Analysts reporting to Thomson Reuters have a consensus profit projection at $0.46 on top-line sales of $28.7 billion. That's a 46% plunge in earnings on a 38% drop in revenue from the same period a year ago.

For investors looking for the slightest bit of good news, CVX shares have climbed some 19% since bottoming in late August (figure 2). Still, the stock sits at levels last seen in mid-2010.

Short-term options traders expect a potential 2.5% move in either direction for this stock around its earnings release, according our indicator. Implied volatility sits at the 74th percentile. That places notable options trading at predictable points: the Jan 85 call option line and Jan 78 put option line.

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Figure 2: Tough Times. Chevron (CVX) shares gave up 21% in 2015 and are down 7.4% since the beginning of the year. Chart source: TD Ameritrade's thinkorswim platform. Data source: Dow Jones Indices. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.

Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before investing.

Disclosure: I am/we are long MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.