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Earnings Preview: Expectations Subdued In Light Earnings Week

|Includes: DAL, JPM, KB Home (KBH)

The earnings schedule remains relatively light this week. The heart of earnings season remains a couple weeks away, leaving just a few big names releasing their quarterly results over the next several days.

Beyond the light schedule, though, there is also a general lack of anticipation for this week's major reports. Two of the biggest names this week - JP Morgan (NYSE:JPM) and Delta Air Lines (NYSE:DAL) - have had little ramp up in implied volatility. Meanwhile, KB Homes (NYSE:KBH), one of the few sizable companies with notable increase in IV in anticipation of its earnings release, has a recent history of underperforming its pre-earnings stock movement expectations.

To see all of Market Chameleon's expected earnings announcements, visit our Earnings Calendar:

KB Homes ($KBH)

January 11, After the Market Close

The options market is currently pricing in a nearly 8% move for home builder KB Homes for the expiration that includes its upcoming quarterly report. Meanwhile, Implied Volatility has risen to multi-month highs in anticipation of Wednesday's earnings release. However, in recent quarters, similar predictions haven't come to pass, with the stock only moving modestly in response to its most recent earnings reports.

The company is expected to earn $0.37 per share in the quarter, down from $0.43 per share last year. Revenue is expected to rise to $1.14 billion. This would be up 16% from last year's mark of $985.78 million.

Implied Volatility for KBH has been drifting higher in recent weeks. It has moved from around 28 in late November to a mark of 45.6 on Friday. This marked its highest level since late March.

The ATM Straddle premium for KBH for the January 20 expiration is currently sitting at $1.28, or 7.9%.

The options market has been predicting sizable earnings moves for KBH in the last three quarters and each time the actual move has been significantly lower than projected. Last quarter, for instance, a 10.3% move was expected ahead of the release and the stock moved 2% in response to the results.

For the past 4 quarters as a whole, the average absolute earnings return was 6.325%, compared to an expectation of 9.675%.

Delta Air Lines ($DAL)

January 12, Before the Market Open

Like JP Morgan, Delta Air Lines is a high-profile company that is reporting this week, but which has seen little activity in IV ahead of the report.

In fact, Implied Volatility for DAL has been in a range since July. It is currently around the middle of this trading band, at about 32.8. The ATM Straddle premium for DAL for the January 13expiration is currently sitting at $2.04, or 4.1%.

As with both KBH and JPM, DAL's absolute stock price movement has underperformed option market predictions in recent quarters. In fact, the post-earnings move has been below the expected move in each of the last seven quarters and in nine of the last 10. The only exception was January of 2015, when the stock moved 7.3% following its earnings report, compared with an expected move of just 0.2%.

For the past 4 quarters, DAL had an average absolute earnings return of 2.425% versus an average expected move of 4.575%

In its last quarterly report, Delta revealed a decline in third-quarter profit and revenues. Results were hurt by a technology outage, which affected its operations. Volatile fuel prices also cut into its bottom line. The company also provided a weak projection for the fourth quarter.

For the third quarter, net income fell 4% to $1.259 billion from last year's $1.315 billion. Earnings per share, however, improved due to a lower share count, rising to $1.69 from the previous year's $1.65.

For the fourth quarter, Delta projected passenger unit revenue would be down 3% to 5% from last year.

JP Morgan Chase ($JPM)

January 13, Before the Market Open

Wall Street bank JP Morgan is one of the biggest names reporting earnings this week. However, few fireworks are expected from the quarterly results, with Implied Volatility for the stock holding in a range at subdued levels.

JP Morgan is expected to earn $1.42 per share for the most recent quarter. This would be up about 7.6% from last year's mark of $1.32 per share. Revenue is expected to be basically flat, rising less than 1 percent to $23.87 billion. Last year the company had revenue of $23.75 billion.

JP Morgan's results will include some special provisions this quarter. The company has revealed that its results will be impacted by costs related to its new Sapphire Reserve credit card. The company said there will be an impact of $200 to $300 million dollars due to customer acquisition costs related to the new product.

A recent settlement will also impact results in the quarter. JP Morgan agreed to a settlement of more than $264 million related to charges that it had hired children of Chinese leaders to obtain business in the country.

For the third quarter, JP Morgan's net income dropped 8% to $6.29 billion. A higher provision for credit losses cut into the company's bottom line. Earnings per share declined to $1.58. However, this beat the $1.39 per share that analysts were predicting.

Implied Volatility for JPM has been range-bound for the past couple months. IV was 22.8 at the end of last week. The ATM Straddle premium for the January 13 expiration is currently sitting at $2.42, or 2.8%.

Earnings-inspired movement in JP Morgan's stock have underperformed expectations in recent quarters. The average absolute earnings returns for the last 4 quarters has been 1.875%, with a range of 0.3% to 4.2%. The expected move for the time frame was an average of 2.775%.

Shares of JP Morgan began a rally in early November that lasted through much of December. The advance took shares from a price of $67.76 on November 4 to a 52-week high of $87.76. It closed Friday at $86.12.


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