Uninspiring Earnings Lie Ahead

Includes: CMG, MSFT, UNP, WDC
by: Stock Traders Daily

Stock Traders Daily has produced detailed trading reports for the companies in this article prior to their release of earnings. Regardless of the miss-meet-beat that happens when compared to analyst estimates, these reports can help investors manage risk and realize reward, but we also should know the expectations going into these releases.

So far, corporate earnings reports have been trickling out at a moderate pace, with a majority of them coming from the financial sector. That is set to change in dramatic fashion as we head towards mid-week.

The key reports that have come from the financial sector have been better-than-expected. Heading into this earnings season, there was a wide-spread belief that earnings growth may come in negative this time around, but, the financials may prevent that dubious feat from occurring.

However, excluding financials, this quarter's results will look quite uninspiring. Over the past several weeks, we have seen plenty of companies - particularly from the technology and transportation industries - lower their guidance. The question is, will it matter if companies miss their mark? After all, the S&P 500 is still up ~2.5% since early September, even in the face of lowered guidance from bellwethers such as Intel (NASDAQ:INTC) and FedEx (NYSE:FDX).

In today's article, we'll provide earnings previews for a few widely-followed companies that are set to issue results on Thursday, October 18.

Mr. Softy Takes Center Stage

One of the most highly-anticipated reports after the bell on Thursday will be Microsoft Corporation (NASDAQ:MSFT). Its results will give investors a good look into the health of the global enterprise IT market, unlike rival Apple, which is much more consumer-centric. For the quarter, analysts are expecting MSFT to report EPS of $0.60 on revenue of $16.48 billion.

For MSFT, it's a good-news, bad-news situation. On the positive side, it is currently in its product upgrade cycle, including its Windows 8 launch at the end of October, and the release of its Office 2013 product. However, MSFT is facing a stiff headwind in declining PC sales. Gartner Research recently estimated that PC sales slipped by more than 8% in Q3.

Of course, one of the most frequent knocks against MSFT is that it has been consistently behind the curve in terms of innovation. Looking ahead, though, it will look to prove some skeptics wrong when it releases its "Surface" tablet in Q4. This isn't just a foray into the table market either, as it is expecting to produce 3-5 million of them.

Gone in a "Flash"

Flash memory manufacturer SanDisk Corporation (NASDAQ:SNDK) will be releasing its Q3 results after the market close on October 18. The Street is forecasting EPS of $0.34 on revenue of $1.22 billion, equating to whopping year/year declines of 72% and 14%.

As has been widely discussed, semiconductor and memory companies have been under a lot of pressure this year due to the slowdown in the PC supply chain as tablets and other devices continue to take share. What has been working in SNDK's favor, though, is that it has exposure to various mobile devices. This, combined with a reasonable valuation (currently trading with a forward P/E of ~14x), and persistent takeover rumors, have helped shares of SNDK significantly outperform its group.

Heading into its report, the stock has lost a little steam, but did react well by rebounding off its $42 support level. Upside resistance is in sight, though, residing in the $46.50-$47 area.

Burrito Beat Down

It has been a brutal three month stretch for Mexican quick-serve chain Chipotle Mexican Grill, Inc. (NYSE:CMG). The stock has been clobbered by the tune of a 30% drop since mid-June. The main culprit, not surprisingly, has been rising food costs. Some may recall that during its last quarterly conference call, it cautioned that the drought was destroying grain crops, which will put increasing pressure on food prices and margins. It also commented that same store sales growth was showing some signs of deceleration. Not a good combination, obviously.

Then, to add insult to injury, David Einhorn recently indicated that CMG was on his short list due to increasing competition from Taco Bell. Now, this thesis has certainly generated a fair amount of skepticism, and rightfully so in my opinion, but the over-riding point that competition is cutting into its comps looks legitimate based on its slowing growth trends.

With all that said, CMG is looking fairly attractive on a technical basis. Shares have stabilized and held the $290-$300 support zone. Also, these negative fundamentals are likely already priced into the stock. If CMG can top its $2.30 and $702.7 million expectations, the stock could have a nice pop.

UNP Delivering the Goods

The signs of an economic slowdown have been evident in the lowered guidance/poor results from key transport companies such as Norfolk Southern, JB Hunt and FedEx. Also, the Association of American Railroads reported mixed, at best, figures for rail data on October 11 stating that U.S. railroads originated 283K carloads, down 6.3% year/year. But, don't tell this to Union Pacific Corporation (NYSE:UNP) as that stock just continues to chug higher.

Before the market opens on October 18, UNP is set to report its Q3 results with the Street forecasting EPS of $2.18 on revenue of $5.38 billion. Not surprisingly, EPS estimates have been sliding lower over the past month. Thirty days ago, consensus stood at $2.23.

Working in UNP's favor is its consistent history of topping analysts' expectations. Over the past four quarters, it has topped EPS estimates by an average of $0.13/share.

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

Business relationship disclosure: By Dennis Hobein, Stock Traders Daily.