Image credit: Pixabay
There are a number of reasons why companies issue pre-announced earnings. Investor relations professionals like me anticipate such, as a perfect corporate action. Some others take advantage of pre-announcements so they can mitigate risks such as when equity values start to slide as a result of the unfavorable earnings release. Then, they resort to exit investment strategy.
Skeptical analysts tend to view that pre-announcements are manipulative in nature. So, investors will just tend to rely on market sentiment.
Here are four stocks to watch out during the earnings release days. These companies have the potential (usually in all their pre-announcements) for upward earnings revisions to drive its shares to the upside.
Phillips 66 (NYSE:PSX)
Goldman Sachs (NYSE:GS) sees a 40% upside potential over PSX in the next 12 months. They expect share performance will reverse from its steep underperformance experienced during the second half of 2018. They recognized its shares as having proven to be an "earnings execution leader" after seven consecutive quarters of underperformance.
The company is well positioned to take advantage of wide crude differentials in the near term. They will also enjoy the midstream growth over the medium-term and lower crude prices at its marketing business this year.
The last twelve months saw a significant improvement with new project completions in midstream/chemicals, large share repurchases, and sector-leading earnings performance. As compared to last year, equity shares were down by 11% (versus S&P 500 -7%). However, the company's refining and marketing performance are strong which lifted up its earnings potential. There is also a strong potential for its investors to focus on the upside earnings potential from PSX's relaxed sulfur limits. (Buy PSX with almost 40% upside to 4Q18 consensus EPS. Goldman Sachs)
Source: Company data, IHS
I believe the outlook for investor returns appears to be promising. The company repeatedly emphasized in its analyst meetings that there will be no change in its debt reduction or investment plans for 2019.
Excess cash of approximately $400 million per year in cash flow from operations (CFO) would be returned to investors. PSX generated $1.0 billion in cash flow from operations with roughly 80% of CFO returned to shareholders in 2018. It constitutes $465 million of share buybacks, which exceeded their previous guidance of $2 billion.
PSX generated more than $100 million of free cash flow in 2018. I believe the company's capacity to yield cash flow has ample cover for its capital expenditures and dividends. I expect that any incremental cash flow will further support a share buyback.
I also believe that PSX should also benefit from a strong growth pipeline in the midstream segment. Volume growth will offset weaker margins that resulted in its chemicals segment. This business segment boasts of a refining portfolio that is well positioned to take advantage of good crude differentials and strong diesel margins. It also has a promise of robust capital returns to shareholders. (Company data based on Investor Presentation Update 2019)
Cboe Global (NYSE:CBOE)
CBOE's fourth-quarter results last year were better than expected given the improved transaction fees while operating expenses are well controlled. Hence, GS sees 31% upside potential to CBOE shares and it is Buy rated over the next 12 months. They believe expectations of investor for VIX growth have already been rebased.
Momentum in SPX options (average daily volume is up 27% in 2018) is still underappreciated despite the large demand for institutional hedging and share gains against other listed products. Analysts likewise noted a cyclical upturn in equity volatility indicating the stock's 2019 estimated P/E of 19X registered the lowest since 2013. (Growth initiatives remain in focus; takeaways from management meeting. Goldman Sachs)
Deutsche Bank (NYSE:DB) is also very encouraged by the sequential RPC improvement across most asset classes (aside from VIX futures). They believe that this is supportive for CBOE where larger transaction fees have been driven by gains in market share rather than higher industry volumes. (Improved RPC & Expense Control Key Positives. Deutsche Bank).
Given the investor optimism in CBOE stock, I believe that the company can still anticipate a stiff competition in the multi-listed or index options that would diminish its market share and price point. In addition, a probable exit of short volatility VIX traders from futures market pose as market risk, which could weigh on VIX futures volumes.
GS analysts anticipate a 28% upside potential of CI shares in the next 12 months. Last year, the company significantly gained from stocks in the commercial risk market. The company is already gaining from its regional and local expansion plans. It already enjoys critical mass. They already set a target of $600 million in annual synergies, which will be sourced from improved cost structure (mostly from administrative expense items) of Aetna (NYSE:AET) and Anthem (NYSE:ANTM).
Source: Deutsche Bank, Company data
Furthermore, CI has formed synergies with Express Scripts Holding Company (NASDAQ:ESRX). According to Jason Spilkin of Credo Capital:
both Cigna and Express Scripts are two of the most highly profitable, cash-generative businesses in the sector, with among the best long-term track records. Both businesses provide a necessary service and do it well, as evidenced by long-term market share gains and customer retention rates."
Mr. Spilkin further added:
"I believe the deal is a great one for Cigna, offering accelerated mid-teens EPS accretion in year one - excluding any contribution from the loss of the Anthem contract loss, which hitherto comprised around one-third of ESRX's profit. Thereafter continued cost synergies kick in and there is a fertile cross-selling opportunity - offering more growth together, than on their own. Indeed, the highest (P/E) rated large-cap insurer, United Health is a hybrid Insurer/PBM. United Health's PBM (Optum) organic growth has been complemented by acquisitions - most recently of Catamaran in 2015, which made them a top three player." ("Cigna Corp. Can Gain 80%: Fund Manager." Barron's)
I believe that the company's deal with ESRX is without a doubt achievable. CI expects $550-600 million of annual run-rate savings from the ESRX by the year 2021.
I also believe that CI has a strong capacity for financial flexibility. Based on financials gathered, the company expects to make debt repayments of $8.0-10 billion in the coming two years and the consolidated company should generate free cash flow in excess of that level.
If this occurs, debt-to-capital would fall below 40%. However, the amount of short-term debt maturing is meaningful and an unexpected event, integration problems, or worse than expected performance could pressure liquidity.
As of end-2018, Cigna's adjusted debt-to-capital ratio will be approximately 51.0%, up from 31.0% as of June 30, 2018, and debt-to-EBITDA increases to 3.4x from 1.3x. According to Moody's, the deal should modestly improve CI's strong risk-based capital level. However, Moody's estimates that goodwill and intangibles as a percentage of shareholder's equity have increased robustly, thus adversely impacting the quality of capital.
The total senior unsecured debt of approximately $41 billion includes $20 billion issued by subsidiary Halfmoon Parent, Inc. (now known as Cigna Corporation), legacy Cigna Corporation (now known as Cigna Holding Company) debt of approximately $5.3 billion and legacy ESI debt of approximately $12.8 billion. Moody's Investor Service (Moody's downgrades Cigna's long-term ratings senior unsecured debt to Baa2. Moody's Investor Service)
Juniper Networks (NYSE:JNPR)
JNPR targets an operating margin of 22% after 2021 versus the 18% booked in 2018 (Factset consensus estimate). Meanwhile, DB calculated that JNPR would need to achieve gross margins at the high-end of its target range of 58% to 62% in order to attain their targeted margin.
Conversely, DB also noted that JNPR would need to cut down operating expenses to achieve the midpoint of the targeted range which is 60%. JNPR's long-term business model already seems to reflect already the potential for cuts in operating costs.
Earlier, JNPR anticipated a 29% decline in its shares which deserved a "sell" rating over the next 12 months based from the recommendation of a GS analyst. The company announced revenue guidance which was considered to be "underwhelming" by analysts. This is because JNPR also expects its top-line to increase by low-single digits from 2018 to 2021 due to the following fundamental factors:
- Routing business is expected to fall by 4% to flat CAGR
- Switching segment is expected to rise minimally by 5% to 9% CAGR
- Services will mildly improve from 1% to 5% CAGR
Source: Company data.
Overall, the outlook of the business performance will generate an aggregate growth of 0% to 4% CAGR. But this growth figure will be lower than expected, with reference to the 3% CAGR consensus analyst expectation. (Key Takes: DB Tech Talk with JNPR CTO. Deutsche Bank)
Source: Company data.
On top of its satisfactory earnings outlook, I believe the company is also endowed with a sound balance sheet. Based on the data of MarketBeat, JNPR has a debt-to-equity ratio of 0.37X, a current ratio of 2.49:1 and a quick ratio of 2.49X. The company has a 12 month low of $23.61 and a 12 month high of $30.80. Market capitalization is adequate at $9.50 billion, a PE ratio of 19.78X, a price-to-earnings-growth ratio of 2.82 and a beta of 0.84.
Overall, I fundamentally believe that it has been a concrete fact that stocks tend to trade up during its own earnings days. Thus, pre-announcements serve to remind investors that they should not feel jittery during earnings events.
The four stocks mentioned here spark relief rallies during periods of market stress. It has also been proven that positive earnings translate to positive equity market movements during pre-announcements. Investors tend to purchase shares of companies that have just reported, and then sell their positions from other companies, in order to fund the trade rather than investing fresh funds from the sidelines.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: If you found this article to be informative and would like to hear more about my investment research, please consider hitting the "Follow" button above.