A nervous market has had a hard Friday, but better news could be ahead. Earnings season begins at the end of next week before kicking into high gear in the second half of April.
For investors rattled by outside factors ranging from higher Treasury yields to trade war fears and the jobs report, a focus on corporate earnings will be welcome. Tax reform should lead to strong headline earnings growth figures. Higher rates should help financial stocks. The economy still looks solid domestically, and even emerging-market demand trends appear to be headed in the right direction.
There’s a clear path for broad market gains over the next few weeks — as long as earnings cooperate. And while the big news won’t come next week, investors will be able to get a glimpse of what earnings season might look like.
A major brick-and-mortar retailer will, like so many of its peers, try to stabilize its business and regain investor confidence. A transportation giant looks to reclaim all-time highs. And a troubled big bank will try and shake off its troubles and reassert its growth prospects.
It might not be the biggest week of the year — but it will be an interesting, and important, prelude to what should be a pivotal earnings season.
3 Earnings Reports to Watch: Bed Bath & Beyond (BBBY)
Earnings Report Date: April 11, after market close
Here’s what I told my subscribers about Bed Bath & Beyond Inc. (NASDAQ:BBBY) back in November:
“[BBBY might] look attractive at first blush at 8X forward multiples, [but] the question is when do their sales and margins bottom out? Without an answer, there is no way of determining what their earnings may be five years from now … I would need to see signs of operational stability along with increased investor enthusiasm for the name first since bottom fishing can be dangerous.”
Five months later, ahead of the company’s fiscal fourth quarter earnings report on Wednesday, little has changed. Despite a rally in retail over the past few months, BBBY shares haven’t moved. The stock now trades at less than 8X forward EPS. A consensus beat with Q3 results in December didn’t help the stock much. And a downgrade from JPMorgan Chase & Co. (NYSE:JPM) in January showed that the Street still isn’t behind the story of a Bed Bath & Beyond turnaround.
At the moment, this still looks like a declining business — and BBBY still doesn’t look like it’s worth chasing. Analysts are expecting sales to rise in Q4, but consensus estimates assume the negative trend returns in fiscal 2018 (ending February 2019). The threat of Amazon.com, Inc. (NASDAQ:AMZN) looms. Margins are still compressing, with the company itself guiding for a 25% decline in EPS in Q4.
If Bed Bath & Beyond can post a big quarter, there’s room for substantial upside. BBBY has a decent-sized short float, which could cause a post-earnings squeeze following good numbers. Even stable profits suggest a path for the stock to clear $30.
But that argument could have been made for the last couple of years now, and BBBY has declined 70%-plus since early 2015 and 45% over the past twelve months. Until the company proves it can stabilize earnings, investors should steer clear.
3 Earnings Reports to Watch: Delta Air Lines (DAL)
Earnings Report Date: April 12, before market open
From a fundamental standpoint, there’s not likely to be much in the way of fireworks following the Q1 report from Delta Air Lines, Inc. (NYSE:DAL). At a conference last month, Delta narrowed its EPS guidance to 65 cents to 70 cents, and this week detailed Q1 traffic results.
But the post-earnings conference call has the potential to move DAL stock. Investors still seem relatively skeptical of the airline industry, and Delta, which trades at just 8.3X the midpoint of 2018 guidance. Despite a strong broad market, airline stocks as a whole have been relatively choppy after big gains a few years back.
So there is a clear runway to big upside for Delta stock – if the company, and the industry, can convince investors that the days of fare wars and unprofitable flights are over. With tax reform providing a major benefit, traffic trends strong, and fuel costs coming down, Delta will have an opportunity on Thursday to push its case.
3 Earnings Reports to Watch: Wells Fargo (WFC)
Earnings Report Date: April 13, before market open
The reports from key financials will be important for the market as a whole. But the Q1 release Friday seems particularly important for Wells Fargo. WFC stock has fallen 20% just since late January. Increased sanctions from the Federal Reserve have been a key driver. And with the steady revelation of new abuses and new scandals over the past 18 months, WFC desperately needs some good news.
That good news very well may come on Friday. For all the negative headlines, Wells Fargo actually has kept profit growth relatively consistent. Rising rates should help net interest margins. The bank’s credit profile looks reasonably strong, with the company already pulling back in the auto space, where there are some fears of defaults rising along with interest rates.
Heading into the report, WFC does seem to have bottomed. The Street sees upside, with an average target of $64 suggesting 20% gains from current levels. On Friday, Wells Fargo may be able to get investors to remember what’s right about the stock, instead of focusing on what’s wrong. And if the company can finally put its troubles behind it, Wells Fargo could be a long-term winner as well.
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.