Up to this point, earnings reports have only slowly trickled out and haven't taken center stage. That is about to change this week, however, as there are many market-moving reports on the docket.
For the few companies that have already issued earnings, the results have not been pretty with many companies missing expectations and/or issuing downside guidance. The debt crisis and deepening recession that is plaguing several European countries is pressuring companies' top-lines, and the operational efficiencies that many companies have benefited from over the past few years have largely been played out.
With these headwinds in mind, growth expectations and estimates have been ratcheted down in recent weeks. Remarkably, the stock market has held up quite well. Since the beginning of June, the SPDR S&P 500 (NYSE: SPY) has gained about 6%. The resiliency of the market will likely face a stiff test this week as corporate earnings are unlikely to impress, and with the ever-present problems in Europe in the background.
In today's article, we'll take a look at some highly-anticipated earnings reports that are set to be released on Wednesday, July 18.
Singing the Blues
Since hitting all-time (split-adjusted) highs in April, shares of [[IBM]] have been sliding lower as the company heads towards its Q2 report. After tumbling some 12% from those highs, the stock is trading near its long-term support level of $186.12, according to our real-time trading reports. But, in order to see a bump higher off that support level, IBM will once again need to beat the EPS estimate of $3.44 with revenue at least coming in line with expectations. Also, investors and traders will be looking for reaffirmation of its FY12 EPS guidance of "at least $15/share."
IBM has a recent track record of topping its bottom line estimates (has beat the last four quarters) but its topline has consistently disappointed. On a growth basis, it's a similar story. Big blue has been able to keep profits heading higher, with EPS expected to grow 11% this quarter, but meaningful revenue growth has been non-existent. After increasing by a paltry 0.4% in Q1, revenue is projected to decline by 1% this quarter.
Through a mix of strong execution, share buybacks, & mix changes, IBM has been able to keep earnings heading in the right direction. However, over the longer term, revenue growth needs to be the primary driver as those levers play out - a point we may now be reaching with IBM.
Will YUM Serve Up Another Beat?
From October 2011 through April 2012, Yum Brands (NYSE, YUM) was red-hot, surging by more than 50% during this period. The operator of KFC, Pizza Hut, and Taco Bells was on a roll, consistently issuing upside reports coupled with strong growth as it aggressively expanded in China. But, this heavy exposure to China has some concerned now as we head into its Q2 report. The stock has come under pressure of late with its long-term support level of $62.87 not far below.
Over the past four quarters, YUM has topped both the EPS and revenue estimates in each quarter. To keep that streak alive, it will need to report EPS above $0.70 and sales north of $3.1 billion. An inline quarter would equate to year/year growth of 21% and 11%, respectively.
As we noted above, the key for YUM is its growth and performance in China. Last quarter, same-store sales grew at a healthy 14% in China and new-store development in the country hit a first-quarter record with 168 new restaurants. Management described its China business as "firing on all cylinders." With the economy slowing in China, same-store sales growth estimates have been coming down lately. In fact, a single-digit number could be forthcoming. As China continues to slow, it will be interesting to see if YUM will begin to pump the breaks on its expansion there.
EBay Has Found a Bid
Although the stock has come under pressure in July, EBay (NASDAQ: EBAY) has been a relatively strong stock this year, up 32% year-to-date. Its growth has been surprisingly strong this year. Last quarter, its EPS grew by 17% while revenue was up 29%. For its Q2, the Street is anticipating EPS of $0.55 and revenue of $3.36 billion, representing growth of 15% and 22%. Its solid performance has been largely driven by its PayPal business due to growing adoption of the service on EBay, as well as on other merchant platforms. Its traditional Marketplace business is also doing well as gross merchandise volume was up 12% last quarter to $16 billion.
From a broader viewpoint, in one way, EBAY can be looked at as a counter-cyclical play. For instance, people tend to look for new avenues to generate cash when wages are stagnant. One way to do so is to sell items through EBAY.