4 key earnings reports Thursday

Nike leads a pack of companies that could give investors clues about the consumer mindset and the state of manufacturing.

By Stock Traders Daily Jun 27, 2012 2:51PM

Image: Pie Chart (© Christine Balderas/Photodisc/Getty Images)By Stock Traders Daily

 

It's not quite earnings season yet, but that doesn't mean that the earnings calendar is void of any important events. Thursday will bring a few key reports, including one from Nike (NKE). Additionally, a prominent steel producer will likely give us a look into how the manufacturing sector is faring.

 

With global economic and corporate growth slowing, and with companies facing perhaps as many risks and uncertainties since the Great Recession, the second-quarter earnings season may be yet another hurdle for the stock market.


It is fair to say that expectations have come down quite a bit over the past few weeks, but the primary risk resides in management guidance. Have estimates for the second half of 2012 and beyond come down enough to match what will likely be cautious guidance? We will soon find out, but investors and traders should keep in mind that, traditionally, analysts have been hesitant to react to a slowing economy.

 

Just buy it?

The earnings report that may get the most attention this week is Nike, which is slated to release its fiscal fourth-quarter numbers after the market closes Thursday. As one of the world's premier sports apparel and equipment brands, its results will serve as an indication of the state of the consumer. Because of this, NKE’s results have the potential to be a market-moving event.

 

NKE shares enjoyed an impressive rally beginning last September, as the stock went from the mid-$70s to $110. However, the month of June has been unkind to NKE, as the stock broke below $100 on a number of cautious sell-side analyst notes. The primary causes for concern: slowing revenue growth, currency headwinds and potential inventory concerns.

 

The good news is, Nike has a history of beating estimates. In fact, over the past four quarters, the company has topped revenue and EPS expectations. To do that again, EPS will need to be up better than 10% year/year to surpass the $1.37 estimate, and revenue will need to have increased by more than 12.5% to beat the $6.5 billion consensus.

 

With the stock's recent slide, some downside risk has been taken off the table. Therefore, should Nike’s string of beats come to an end here, the stock could still hold up well. The caveat, though, is that if it issues guidance well below expectations, the stock -- as well as shares of its peers -- could come under pressure.

 

A red-hot discounter

As a group, dollar and discount retailers have been incredibly strong over the past few years. This is another sign of the times, so to speak, with more people looking to trim monthly budgets as wages have been stagnant and unemployment rates still high.


One of those companies that has benefited from this trend is Family Dollar (FDO), which operates more than 7,000 stores in 45 states. Shares of FDO have been on a tear since early 2010, up roughly 130% since then.


Heading into its print, the stock has displayed some impressive relative strength, signaling that investors remain upbeat and confident regarding the upcoming results. For the quarter, analysts are expecting EPS of $1.07 on revenue of $2.37 billion, equating to growth of 18% and 10%, respectively.


The company's recent earnings performance has been fairly spotty, however. While it topped its fiscal second-quarter EPS estimates by two cents, it fell short on the revenue expectations. Prior to that, it reported an in-line first-quarter EPS number while again missing on revenue.

 

In addition to this inconsistency, FDO's valuation is getting lofty, trading with price-to-earnings ratio of about 21. All in all, though, the current environment remains quite favorable for FDO and we would expect bullish commentary in that regard on its conference call.

 

On target

Another counter-cyclical play is gun maker Smith & Wesson (SWHC). The company's shares have soared by about 130% since late 2011, strength mostly attributable to a couple key factors.


First, gun sales have been escalating ahead of the November presidential elections, because the belief is that if President Obama wins, he will focus on implementing tougher gun ownership laws. Second, companies with exposure to security products tend to perform well during tough and uncertain economic times.


These tailwinds have certainly boosted SWHC's business. For its third quarter, EPS swung to a profit of 7 cents from a loss of 8 cents a year earlier, with sales up 24% to $98.1 million. EPS and revenue were better than expected.


In May, the company issued fourth-quarter revenue guidance of $129 million, far ahead of the $119.8 million consensus. What also really stood out, though, was its comment that its firearm order backlog increased by 135% year to year. This provides the company with outstanding visibility, paving the way for solid guidance for the second half this year.

 

Weighing in on metal

Schnitzer Steel (SCHN), which operates metals recycling, auto parts and steel manufacturing businesses, is set to report results before the open Thursday. Analysts are expecting EPS of 32 cents on revenue of $886.7 million. Sentiment on steel and metal producers is decidedly bearish right now due to the slowing global economy.

 

One of the larger steel producers, Nucor Corp., issued downside guidance on June 13, citing weak construction markets and a poor pricing environment. This news impacted other steel producers, such as SCHN, which saw its stock move sharply lower. Shares have found some support at the $23 to $25 level at the moment, but a further drop to multi-year lows around $20 can't be ruled out, should the company provide very weak guidance.

 

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