Earnings: What Do Microsoft, GE And McDonald's Have In Common? Dow Components With Different Takes On Economy

| About: Microsoft Corporation (MSFT)

Summary

Three major Dow Jones Industrial Average components will report earnings today and tomorrow: Microsoft, General Electric, and McDonald's.

MSFT’s quarterly results have been on a rocky road as these new revenue streams have replaced older ones amid an ongoing decline in global PC sales.

GE is walking into its Q3 earnings release with an albatross around its proverbial neck as it strives to return its core business to its industrial roots.

MCD shares have plunged some 15% since hitting a 52-week crest in mid-May.

As the economy sputters ahead, three major Dow Jones Industrial Average components, each touching consumers and businesses through different means, will report earnings today and tomorrow. What will the numbers say about these important components of gross domestic product?

Microsoft (NASDAQ:MSFT) is up first, reporting its fiscal Q1 earnings after the bell Thursday. On Friday, before the market opens, General Electric (NYSE:GE) and McDonald's (NYSE:MCD) will share their Q3 results.

Is Microsoft's Restructuring Done Yet?

Like many other legacy tech companies, MSFT has spent most of the last two years transforming its core business from a PC software company to a cloud-first firm, using its Azure cloud for applications and data backup, and pushing Office 365, its new online, subscription-plan office suite, as a replacement for its legacy software, which sat on users' hard drives. Wall Street has viewed that as a pricey initiative, judging by capital expenditures, but the cloud-based operating systems and apps are now available across MSFT's product line.

MSFT's quarterly results have been on a rocky road as these new revenue streams have replaced older ones amid an ongoing decline in global PC sales, according to its financial reports. Analysts are looking for flat results compared with what was reported for the same period a year ago. They say they will be keeping an eye on line-item growth in the "productivity and business processes," as well as the "intelligent cloud" segments as declines continue in the "more personal computing" segment.

What will they be listening to on the conference call? Analysts say they would like more information on new and expanded partnerships, such as those recently announced between U.S. government agencies and Azure's cloud-computing platform, or MSFT's ongoing efforts with automakers to extend the reach of Office and its productivity software into cars.

Those reporting to Thomson Reuters are projecting a per-share profit of $0.68, a penny ahead of the last year's, and top-line sales nearly dead even at $21.7 billion.

The stock hit a 52-week high in late August, and has mostly traded in a narrow range since. Short-term options traders have priced in a potential share price move of just over 4% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim platform from TD Ameritrade.

Short-term options trading of late also has been tight with buyers of the 59-strike calls and 55-strike puts. The implied volatility sits in the middle at the 51st percentile. (Please remember past performance is no guarantee of future results.)

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.

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Figure 1: MORE LOITERING? Shares of MSFT hit a 52-week high of $58.70 in late August and have bounced in a $1.00 trading range since. Will Q1's results give it some oomph? Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

General Electric's Struggle Back to Industrials

By Wall Street's reckoning, GE is walking into its Q3 earnings release with an albatross, or two, or three, around its proverbial neck as it strives to return its core business to its industrial roots. Since April 2015, the blue chip has shed some $193 billion worth of business as part of its massive GE Capital exit plan.

While Wall Street had mostly applauded the move at that time, sentiments appear to have changed since then, and particularly after its less-than-stellar Q2 results. Its stock is down nearly 7% since the beginning of the year and some 12% since Q2 results were released, putting it at the bottom of the barrel of Dow Jones Industrials (DJIA) components. Some analysts say they're worried that Q2's weak quarterly profit and revenue might have extended into Q3.

As part of its efforts to shift gears into GE Power and GE Aviation, as well as GE Healthcare and GE Digital, the industrial giant is nearly out of the finance business entirely. But its new focus hasn't panned out too well, analysts say, mostly because of global economic woes. Industrial orders in Q2, a key measure of future demand for products like jet engines, power turbines and oil-production equipment, tumbled 16% in the Q2. Plus, the company acknowledged then that its oil and gas, and transportation businesses were in "tough cycles" that continue to drag down overall bottom-line performance.

Despite Chief Executive Jeffrey Immelt's acknowledgement on the Q2 conference call that GE faced a "slow growth and volatile environment," he promised then that better results were ahead because the company "was positioned for strong organic growth in the second half."

Still, some analysts reporting to Thomson Reuters have pulled down profit projections, while others have downgraded the stock and/or lowered stock-price estimates. Collectively and on average, they're pegging a per-share profit of $0.30, down from original estimates of $0.36 a share, on sales of $29.6 billion. That's a penny above the year-ago earnings on revenues that are slightly higher.

GE shares hit a 52-week high of $33.15 in mid-July and have been mostly falling since, staying in the $29.00 range for most of the past month. Short-term options traders aren't expecting any big surprises and have priced in a potential 1.75% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator.

Buyers are lining up on the 30-strike call line while put buyers are seen at the 29-strike. The implied volatility sits at the relatively low 14th percentile.

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Figure 22: DOG OF THE DOW. Since tapping a 52-week high in mid-July, GE shares have given back some 12%, putting the longest-tenured blue-chip stock at the bottom of the Dow's share-price barrel. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

The Not-So-Golden Arches?

The golden arches of MCD may not shine as brightly these days as the burger behemoth faces a wide range of tailwinds amid its struggle to make the fast-food chain relevant again to consumers.

MCD is implementing a number of new strategies that range from serving all-day breakfast, a move that immediately jacked up sales and the share price, to taking a healthier and more nutritious approach to foods-such as using free-range eggs and real butter in its products while removing preservatives. At the same time, it's shaking up the ranks of top management as a number of MCD veteran executives, long known for having "ketchup in their blood," will be retiring by the end of the year.

And, like its rivals in both fast-food and casual dining, MCD is seeing sales drop as more people eat at home, which analysts speculate is because grocery-store costs are falling. How bad is it? Overall, the sector saw a decline in its key growth measure, same-store sales, by 1.1% in September and traffic by 3.5%, according to analysts. In Q2, MCD reported that its same-stores sales had slowed to a gain of 1.8%, which was notably lower than the 5.4% gain in Q1 and the 5.7% increase in Q4 before that-the first two quarters that all-day breakfast was on the menu. Has the novelty of a 2pm breakfast sandwich worn off?

At Thomson Reuters, analysts are expecting same-stores sales to rise 1.2%, with at least one analyst's estimate considerably lower at 0.2%. Revenues are projected to fall to $6.28 billion from $6.62 billion a year ago. Earnings are estimated to edge higher to $1.49 a share from $1.40 a year ago.

Shares are down 5.8% year to date against the S&P 500 index gains of 4.7%. Short-term options traders have priced in a potential 2.5% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator.

There were a number of sellers of the 112-strike calls this week with buyers active at the 114-strike level. On the put side, buyers were active at the 110-strike. The implied volatility is at the 36th percentile.

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Figure 3: LONG WAY DOWN. MCD shares have plunged some 15% since hitting a 52-week crest in mid-May, and are now trading at levels not seen since November 2015. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.