Earnings season in full swing

Earning season is upon us, and these companies deserve a review.

By Stock Traders Daily Apr 17, 2012 3:47PM
Image: Ascending graph and red pencil (© Adam Gault/OJO Images/Getty Images)The pace of first-quarter earnings reports is set to accelerate this week, as several high profile companies issue results.

With global economic data starting to show some cracks, and with macro concerns driving the action in the stock market recently, investors and traders are happily welcoming the rush of corporate reports. Strong corporate earnings can be the antidote for anxiety over the health of the global economy.


There has been quite a bit of talk that first-quarter earnings would look weak. However, analysts had been ratcheting their estimates down over the past few months, and higher commodity prices likely weren’t a major factor in the quarter (gas prices weren't an issue until March). Finally, optimism was high following the bail-out of Greece. So, it appears the odds are in companies' favor in terms of topping estimates, and so far, the few companies that have reported have proven that to be true.


The more prominent concern is what forward guidance and management commentary will look like. Earnings growth rates have been coming down steadily since companies have squeezed out as much operational efficiencies as they can. And with higher commodity prices, a China slowdown, and Europe's continued spiral, it's difficult to imagine guidance that exhibits strong revenue and profit growth. We will get our first good look at forward guidance this week.

Here some important reports scheduled for Wednesday:


Craving YUM

YUM Brands

(YUM), the operator and franchiser of fast-food chains KFC, Taco Bell, and Pizza Hut, has been on an incredible run. Since the beginning of October, the stock has surged by 50% and is now trading near all-time highs.

The primary catalyst has been strong earnings reports and top- and bottom-line growth rates, driven mostly by continuing expansion in China. Last quarter, YUM beat on both revenue and earnings, with same-store sales in China up an astounding 21% due to higher transaction volumes.


There has been some concern that China's slowing economy would become a headwind to YUM's growth, but that has not come to fruition up to this point. For this quarter, analysts are expecting per-share earnings of 72 cents on revenue of $2.7 billion. In addition to those headline numbers, investors will be looking for YUM's expectations for new store openings in China this year. In 2011, it opened 656 new locations there.


Given YUM's prolonged rally, it will need to again provide an upside report, while also providing some comforting commentary on China since concerns for a "hard landing" have escalated. With the stock near all-time highs, there really is no resistance to speak of, but traders will want to access our trading report on YUM to see all the key support levels.


Virtually on Fire

Two words that have captured investors' attention of late are "virtualization" and "cloud." VMware (VMW) happens to have exposure to both of these trends, which is one reason why VMW has been such a hot stock, up 36% this year. VMW has been in the news recently, announcing that its CFO would be departing. However, it also announced that day that its first-quarter guidance would "broadly meet or slightly exceed" the guidance range provided on Jan. 23 of revenue of $1.015 billion to $1.04 billion.


This guidance should take some of the mystery out of its first-quarter results, so attention will likely turn to its guidance. For the current quarter, the Street is forecasting per-share earnings and revenue of 63 cents and $1.11 billion, respectively. For the full fiscal year, current expectations are for $2.58 and $4.56 billion.


Generally speaking, sentiment on VMW is quite bullish as the virtualization space continues to be a hot spot in the tech space, experiencing healthy deal flow and ordering activity. An ever-growing number of companies are migrating towards cloud-based solutions and data center automation -- systems that can decrease information-technology spending, alleviate data storage concerns and free up manpower.

With that said, VMW is a pretty expensive stock, trading with a 1-year forward price-to-earnings ratio of 36 and a trailing price-to-sales ratio of near 13. This valuation, combined with some potential resistance at the $115 level, are risks traders should be aware of.


Will eBay Find a Bid?

After trading in essentially a one-year range between $28 and$35, shares of EBay (EBAY) broke out to their highest levels since 2007 in February. More recently, though, the stock has cooled off, but has found support at its 50-day moving average. Another interesting development is that put buying increased notably last week, ahead of its earnings report coming up on Wednesday. Considering eBay's inconsistent track record relative to consensus expectations, the fact that shares have seen some weakness of late seems logical.


For the quarter, analysts are looking for per-share earnings of 51 cents and revenue of $3.15 billion. This would equate to annual growth of 9% and 27%, respectively, a fairly sharp decline from fourth-quarter growth rates of 15% and 36%. Key drivers for its growth have been its acquisition of GSI Commerce, which eBay continues to integrate, in addition to continued strength for PayPal.


With momentum now to the downside, eBay will need to provide an upside report to turn the tables. The stock should have some support at the $35 area, however.


F5 looking to re-connect

April has been an unkind month for F5 Networks (FFIV), with the stock down some 12% since April 3. Some cautious commentary from William Blair about its upcoming quarter, in addition to a downgrade from Stifel Nicolaus, have pulled the stock down this month. The good news is that some of the risk has been taken off the table heading into its report and this $118-$120 level looks to be providing some support.

For the quarter, the company is expected to report per-share earnings of $1.07 and revenue of $335.44 million. Another positive factor to consider is that F5 does have a history of issuing better-than-expected reports. In fact, over the past three quarters, it has exceeded revenue and per-share earnings estimates on each occasion.


Every stock in this article and real-time trading reports, including detailed technical analysis, can be found HERE.




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