Earnings season is in full swing, and as always some reports are more important than others. For stocks that are struggling, quarterly earnings represent a chance to change the narrative. But they also run the risk of making a bad situation worse.
Investors have been fairly encouraged this earnings season, with 73% of companies in the S&P 500 Index beating earnings. Since these companies are scraping by, however, they don’t get the same benefit of the doubt from Wall Street.
For these three stocks, next week’s second-quarter releases are particularly worth watching, as each one is looking to rebound from recent declines. The best way to start that would be to give investors a positive earnings surprise, so let’s take a look at what could be in store.
Earnings Reports to Watch: Twilio (TWLO)
Twilio Inc (NYSE:TWLO) has been on a wild ride since its IPO a little over a year ago. After clearing $70 in October, the stock has fallen back to its first-day closing price near $29. A good chunk of that decline came after May’s first-quarter earnings report, when shares fell 26% on news that major customer Uber was pulling back on using the Twilio platform for its communications needs.
I expect more fireworks next Monday when the company releases second-quarter results after the market close. Analysts are expecting a net earnings loss of 11 cents a share, slightly larger than last year’s loss of 8 cents a share. However, I believe the key number is revenue, which is projected to rise 33.7% year-over-year.
It was revenue guidance coming out of the first quarterthat was impacted by Uber’s decision and tripped up TWLO in May. If the company can beat expectations — and calm fears that Facebook Inc (NASDAQ:FB) property WhatsApp, another Twilio client, will limit its spend as well — then we should see that initial optimism that greeted TWLO return.
All told, the second-quarter report looks like a significant one for Twilio. With expectations and the share price down heading into the report, there could be good upside for aggressive investors to consider opening a long position ahead of Monday’s release.
Earnings Reports to Watch: Michael Kors (KORS)
Michael Kors Holdings Ltd (NYSE:KORS) is next up with its fiscal first-quarter report due next Tuesday before the market open. After hitting a five-year low in June, the stock looks cheap and for good reason.
Analysts are looking for earnings to fall a whopping 30% to 62 cents a share on a 7% year-over-year revenue decline. KORS could be set up for an upside surprise with such low expectations, but even trading at 10X EPS estimates the shares look like a value trap.
The handbag business continues to face challenges as millennials buy expensive ‘athleisure’ apparel from Lululemon Athletica inc. (NASDAQ:LULU) instead of pricey purses from Michael Kors or Coach Inc (NYSE:COH), and KORS itself seemed to admit as such when it agreed to buy Jimmy Choo last month. That $1.25 billion deal was intended to diversify KORS away from handbags, indicating a lack of confidence in its legacy business.
Even if the company manages an earnings beat, it still implies declining profits, and the Jimmy Choo deal adds risk to the balance sheet. KORS might be cheap, but Tuesday’s report will likely show why bargain hunters should stay away.
Earnings Reports to Watch: Valeant Pharmaceuticals (VRX)
Of course, neither of those stocks have struggled the way that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has. VRX has bounced 86% off its April lows — and yet it still trades 94% off its all-time high!
With over $28 billion in debt, Valeant remains at risk of bankruptcy if results don’t improve. Wall Street doesn’t see that happening when second-quarter numbers are released before the market open next Tuesday, with revenue projected to decline 13% year-over-year and earnings to fall 44%.
The report certainly won’t be enough to fix Valeant’s debt problem, but an earnings beat could drive optimism that new CEO Joe Papa can find a way out of the company’s current mess. And there will be plenty of news beyond earnings that’ll be worth paying attention to. More information on recent asset sales will give some clarity on how much future profit Valeant is giving up to attack its debt problems. A return to growth also hinges on the psoriasis drug Salix that was launched last month, so investors will be listening closely for any early results from that key product.
VRX does look cheap, trading at less than 5X this year’s estimated EPS. But there’s simply too much debt, and too much risk, to make it a buy right now. Still, a strong earnings report and more evidence that Valeant can find a way to manage that debt could change its future potential.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
