A strong 2017 for the broad markets is coming to a close. Major indices remain at or near all-time highs. Tax reform hopefully is on the way, which could give the market another boost heading into next year. Unemployment is low, the housing market is solid and consumer confidence and spending are positive.
In that context, the last month of 2017 looks particularly critical as we head into 2018. Corporate earnings have been strong enough this year to keep the optimism going — and that needs to continue through an important holiday season for retailers, and key reports in other sectors.
Two of those retailers report this week, with Costco Wholesale Corporation (NASDAQ:COST) leading the charge. COST shares are at an all-time high, so it’s important to watch this name.
There’s also another retailer, and a report from a key supplier for hardware tech plays. These three reports should give an idea of how two key sectors look heading into next year.
Earnings Reports to Watch – Pier 1 Imports
Like so many brick-and-mortar retailers, Pier 1 Imports (NYSE:PIR) is trying to prove to investors that it still has a place in the modern economy. The company gets another chance to make its case when it reports fiscal Q3 earnings on Wednesday afternoon.
In the context of a tough space, Pier 1 isn’t doing that badly. Both same-store sales and adjusted EPS are expected to be roughly flat for the full year. Pier 1 has had some success on the e-commerce front, and a plan to lower its store count could help margins going forward.
In the near term, there might be some room for post-earnings gains next week. Street expectations look low, with consensus estimates implying a 2% decline in revenue and a 50% year-over-year drop in earnings per share. Meanwhile, a number of retailers this season — among them Vera Bradley, Inc. (NASDAQ:VRA), Foot Locker, Inc. (NYSE:FL), and Tilly’s Inc (NYSE:TLYS) — have posted 20%+ post-earnings gains after coming in ahead of analyst estimates. Even a modest beat against soft expectations should be enough for a nice pop in PIR stock.
Longer-term, the case looks a bit tougher. PIR trades at 12.3x the midpoint of that earnings guidance – about where a stock with flat profits should trade. To drive sustainable upside, Pier 1 is going to have to show a lot more in both Q3 results and Q4 guidance to win over investors.
All told, the Q3 report looks like a potential opportunity for traders in PIR stock. But investors would be served digesting the results – and getting more clarity on Pier 1’s long-term positioning.
Earnings Reports to Watch – Costco
While PIR heads into earnings near a post-crisis low, Costco Wholesale Corporation (NASDAQ:COST) trades just off an all-time high ahead of its fiscal first quarter release after the bell on Thursday.
That’s nothing new for COST stock, which has one of the most impressive long-term charts in the market. The acquisition of Whole Foods Market by Amazon.com, Inc. (NASDAQ:AMZN) temporarily spooked investors, and led to a 17% pullback in COST shares. But COST has made up those losses even despite a sell-off coming out of Q4 earnings in early October.
Given the recent move, I’d advise caution on COST before Thursday’s report. Long-term, Costco’s story is as good as any on the market. But its valuation always has been rather high and the stock now even has eclipsed the average Street target of $179. Impressive first quarter comparable sales data already was released, and looks priced in by the recent run.
All told, it’s will be difficult for COST to produce an earnings surprise barring a big jump in its traditionally thin margins. Combined with the run-up heading into the release, that seems to make the odds of big post-earnings gain rather slim. Any sell-off could be seen as a buying opportunity for investors who believe in the Costco story long-term. But traders, in particular, should exercise caution in COST stock this week.
Earnings Reports to Watch – Jabil
Electronics contract manufacturer Jabil Inc (NYSE:JBL) reports after the close on Thursday as well. And the stock looks cheap heading into earnings. JBL trades at less than 11x fiscal 2018 EPS guidance, and at a 13% discount to the average analyst target price.
But there are some value trap concerns here as well. EMS (electronics manufacturing services) stocks like JBL almost always look cheap, in part because of the razor-thin operating margins in the contract manufacturing model. The chart shows a multiple top at $31, and even in a strong environment for tech JBL stock has traded mostly sideways this year.
Apple Inc. (NASDAQ:AAPL) is Jabil’s key customer, driving 24% of revenue growth in each of the last three fiscal years. And the iPhone X should help fiscal 2018 results. But delays in that product might lead Q1 results down – and lead to a third consecutive post-earnings sell-off in JBL shares.
Because of the margin concerns and limited growth opportunities, contract manufacturing stocks are all about price. At the moment, JBL’s price doesn’t look quite good enough. But a strong quarter – or an unjustified post-earnings sell-off – could change that.
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.
