The end of the Major League Baseball schedule is just days away, and that has teams fighting tooth and nail for the last of the playoff spots available. It’s make-or-break time for those on the outside looking in. Something good has to happen in the next few days, or their season is officially dead.
The same can be said for seven well-known companies and their upcoming October earnings reports. None are going out of business anytime soon, but certainly the numbers they deliver in the coming weeks will give investors a better idea what’s going on at each of their businesses — good and bad.
According to FactSet, S&P 500 companies in the third quarter are expected to post a 2.3% decline — the sixth consecutive quarter of profit drops, which hasn’t happened since it began tracking this information in 2008.
The good news: 69% of companies have issued negative EPS guidance for Q3 2016, which is 5 percentage points less than the five-year average.
Sometimes, it’s not how a company has performed in a particular quarter that matters, but rather how it delivers the news. In the next four weeks, a bunch of companies will report earnings. Some will be good; some will be bad. All will be observed intently by investors.
These are my seven make-or-break earnings reports coming up in October.
Make-or-Break Earnings: Wells Fargo (WFC)
Scheduled Earnings Date: Friday, Oct. 14
The first earnings report up to bat might be the most important.
Sen. Elizabeth Warren, D-Mass., believes Wells Fargo CEO John Stumpf should resign and return his pay while he’s at it. She even accused the CEO of “gutless leadership.
There’s no question Wells Fargo is in the middle of a firestorm.
When WFC releases its Q3 earnings on Oct. 14, it had better be prepared for an earnings conference call like no other. Analysts are going to absolutely grill the company about the 2 million unauthorized accounts, but there are other problems on the horizon that Wells Fargo might have to own up to given its most recent and most flagrant transgression.
In July, Barron’s had a very interesting piece about Wells Fargo’s practice of dressing up earnings to match analyst estimates. Barclays analyst Jason Goldberg suggests that over the past 11 quarters, 19% of its earnings were the result of one-time gains. Without these, it would have missed on more than one occasion, including its latest quarter.
Without the scandal, this window-dressing issue gets a pass. Now, everything is open for discussion, and what Wells Fargo says will go a long way to keeping its largest shareholder in the fold.
Make-or-Break Earnings: Chipotle Mexican Grill (CMG)
Scheduled Earnings Date: Tuesday, Oct. 18
I’m quite conflicted about Chipotle Mexican Grill, Inc. (NYSE:CMG).
On the one hand, I believe CMG stock has become a heck of a lot more reasonably priced since the E.coli scandal broke in October 2015. It’s down about 40% since then, and investors are waiting to learn more about where the bottom is for declining sales.
In the second quarter ended June 30, Chipotle had negative comps of 23.6% on average revenue per unit of $2.1 million — $400,000 less than before the E.coli outbreak. As a result, operating margins have been cut to the bone (4.2% in Q2 2016).
Investors are going to look to the Q3 report for some confirmation that Chipotle’s sales slide is coming to an end. Only that will bring about higher operating margins, which ultimately lead to higher earnings and stock prices.
On the downside, this is a management team that has been overpaid and, at least in recent times, underdelivered. Investors need to know that these guys have a plan. If Q3 comes and goes and Chipotle doesn’t do a good job on this front, you should expect the downward spiral to continue for the rest of the year.
Make-or-Break Earnings: Skechers (SKX)
Scheduled Earnings Date: Tuesday, Oct. 18
Skechers USA Inc (NYSE:SKX) had a good run from 2013 through October 2015 when the footwear business saw its stock move from a single-digit small-cap to a reasonably large mid-cap worth almost $5 billion.
Then, at this time last year, it announced a seemingly innocuous earnings report that saw revenues grow 27% year-over-year to $856 million on 10.4% comps. Analysts expected more from the hard-charging Nike Inc (NYSE:NKE) wannabe, and down went its stock; SKX lost more than a third of its market value in a day.
Most analysts at the time felt it was an overreaction. However, since then, Skechers has walked its way down to $22. Morgan Stanley downgraded SKX stock on Sept. 21 and cut its 12-month target from $41 to $25, suggesting that the company is facing larger “longer-lasting issues” that explain its slowing growth in 2016.
When Skechers announces earnings on Oct. 18, investors better hope that stagnating sales in its U.S. business are the only problem. If the international business also shows decelerating sales, look out below.
Make-or-Break Earnings: Yahoo (YHOO)
Scheduled Earnings Date: Tuesday, Oct. 18
If Marissa Mayer isn’t the worst CEO of a major tech company, she certainly ranks right up there.
Not only did she fumble and bumble the sale of its legacy internet business to Verizon Communications Inc. (NYSE:VZ) — some estimates put the value as high as $10 billion; it ultimately sold for $4.8 billion — but now she has the company embroiled in the world’s largest hacking of personal user information (500 million Yahoo accounts) just as it’s trying to get this deal put to bed.
Analysts suggest this could shave $100 million to $200 million off the price tag Verizon pays for Yahoo’s core business. While there was some possibility of Mayer having a role with Verizon when the deal was first announced in July, it looks as if Mayer’s days at Yahoo are coming to an end.
Make-or-Break Earnings: Tractor Supply Company (TSCO)
Scheduled Earnings Date: Wednesday, Oct. 19
Between 2009 and 2013, Tractor Supply Company (NASDAQ:TSCO) — a retail chain that specializes in providing weekend farmers with all the goods they need on their 10-acre spreads — could do no wrong. Its stock averaged an annualized total return of 56%.
More recently, TSCO stock has been downright anemic down 24.8% in the past three months alone. Much of the downdraft came from lower Q3 and 2016 guidance in early September.
The big kicker in addition to an earnings decline year-over-year is the sudden freeze in same-store sales. Tractor Supply now expects Q3 comps to be no better than flat compared to a 2.9% increase in Q3 2015.
Nothing spooks investors more when it comes to retail stocks than downward revisions in same-store sales expectations. Tractor Supply has a history of being conservative when it comes to earnings guidance, so investors should pay close attention to what is said on Oct. 19 when it announces actual earnings.
It’s not the numbers — we pretty much have them locked in already. It’s what TSCO has to say about the future beyond next quarter. If it’s relatively upbeat despite the lower results, expect this stock to jump.
Make-or-Break Earnings: Boston Beer (SAM)
Scheduled Earnings Date: Thursday, Oct. 27
There’s no denying that the maker of Samuel Adams beer and Angry Orchard cider is one of the country’s biggest manufacturers of alcoholic products. But the reality is competition’s intensified for Boston Beer Co Inc (NYSE:SAM), and that has put a crimp in its earnings the past couple of quarters.
Not surprisingly, SAM stock is down 25% as a result of the slowdown in profits.
The bad news got rolling in April when Boston Beer announced that first-quarter earnings were nearly cut in half. More importantly, SAM cut full-year earnings from between $7.60 and $8 per share to between $6.50 and $7.30 per share. “We believe Samuel Adams has lost share due to the increased competition and continued growth of drinker interest in variety and innovation,” Boston Beer co-founder Jim Koch said at the time.
It didn’t get much better in the second quarter, with depletions down 5% while earnings per share were $2.06 — 12 cents less than in Q2 2015.
Investors will be looking to hear two things from Boston Beer when it announces Q3 earnings on Oct. 26:
First, SAM has been introducing new beers to keep up with its smaller, more nimble competition. Investors will want to know how they’re doing sales-wise. Secondly, Boston Beer has indicated that now that it has become a more mature company, it needs to put greater focus on cost savings and business efficiencies. Shedding more light on this subject will help keep its stock out of solitary.
If not, expect more pain before the ship rights itself.
Make-or-Break Earnings: Diamond Offshore Drilling (DO)
Scheduled Earnings Date: Monday, Oct. 31
One of the best allocators of capital used to be the Tisch brothers over at Loews Corporation (NYSE:L), the family-controlled holding company that owns 53% of the provider of offshore drilling services.
However, Loews’ ownership of Diamond Offshore Drilling Inc (NYSE:DO) has become a noose around its neck.
Diamond has lost $274 million on $2.4 billion in revenue in 2015, so it’s no wonder DO stock lost more than 40% of its value last year. Year-to-date, it’s down nearly 20%. If this keeps up, Diamond shareholders — including the Loews — will have experienced four straight years of declining stock prices.
In May, Loews CEO James Tisch predicted that a barrel of oil will sell for $65 or higher by 2018. He believes that there’s a shortage of oil exploration and production and that this lack of investment will become readily evident over the next 2-5 years.
Tisch isn’t the only one who sees oil in the $60s. T. Boone Pickens recently said it could hit $55 or $60 by the end of the year.
Diamond investors will want to see some sort of non-GAAP adjusted profit like it delivered in the second quarter. The Oct. 31 report doesn’t have to be spectacular (because it won’t be), but any sign that Diamond is doing what it can to minimize costs while waiting for oil prices to recover should be good for DO stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.