Earnings Predictions
for the
Week Beginning January 14, 2019

by Ian Harvey

January 13, 2019

A Quick Review of Last Week’s Market…..

Stocks posted solid weekly gains, but an ongoing U.S. government shutdown and worries about an economic slowdown in China pushed shares marginally lower on Friday.

Even though this was the calmest week experienced by the stock market in quite a while, expect more volatility in the foreseeable future.

On top of the partially closed federal government, which has been closed for 21 day as of Friday, and matching the longest U.S. government shutdown on record from late 1995-early 1996; there are concerns over a possible slowdown in China’s economic growth as China tries to strike a permanent deal with the U.S. to settle a punitive trade war.

For the week, the Dow Jones Industrial Average (DJI) finished up 2.4% at 23,995.95.

The S&P 500 Index (SPX) was up 2.5% at 2,596.26 for the week.

And the Nasdaq Composite (IXIC) also up 3.4% for the week at 6,971.48.

Moving Ahead…..

It seems that most of the decline is over; but bear-in-mind that there are also geopolitical and other factors that could affect stocks.

The S&P 500 is suffering resistance at the 2,600 level, and may see some more pullbacks before over-coming this barrier.

However, if earnings are better than expected, they could act as a positive force to help fend off further declines.

The health care sector seems to have positive revision trends and earnings are expected to be strong.

As we have noticed in the past many companies that beat earnings were hardly rewarded; but, the market may be ready to reward positive news, and the biggest winners could be those that beat expectations for revenue and profit.

Earnings to Watch…..

Monday

Citigroup, Shaw Communications

Tuesday

J.P. Morgan Chase, UnitedHealth, Wells Fargo, Delta Air Lines, United Continental, First Republic Bank

Wednesday

Bank of America, Goldman Sachs, BlackRock, U.S. Bancorp, Fulton Financial, Bank of NY Mellon, Charles Schwab, PNC Financial Services, Comerica, Kinder Morgan, Hancock Whitney, CSX, Alcoa

Thursday

Morgan Stanley, Netflix, Bank of the Ozarks, Commerce Bancshares, KeyCorp, M&T Bank, PPG Industries, American Express

Friday

State Street, VF Corp, SunTrust, Regions Financial, Kansas City Southern, Schlumberger

Economic Data to Watch…..

Tuesday

  • 8:30 a.m. PPI
  • 8:30 a.m. Empire State manufacturing, 11:30 a.m. Minneapolis Fed President Neel Kashkari 1 p.m. Kansas City Fed President Esther George, 1 p.m. Dallas Fed President Robert Kaplan

Wednesday

  • 8:30 a.m. Business Leaders survey
  • 10 a.m. NAHB survey, 2 p.m. Fed's beige book, 4 p.m. TIC data, 6:30 p.m. Minneapolis Fed's Kashkari

Thursday

  • 8:30 a.m. Initial claims
  • 8:30 a.m. Philadelphia Fed

Friday

  • 9:15 a.m. Industrial production
  • 9:05 a.m. New York Fed President John Williams, 10 a.m. Consumer sentiment, 11 a.m. Philadelphia Fed President Patrick Harker

 CONTROL OF EMOTIONS AND LESS PANIC WILL HELP YOUR PROFIT MARGIN!

Reviewing the Earnings Predictions from Last Week…..

Here is a look at theEarnings Predictionssent to members last week.

The article “Helen of Troy Slumps After Reporting Earnings!” nicely sums up the situation last week…..and the statement below outlines the outcome….

With just the profits from this trade, the cost for all six (6) trades for the week – total cost $1,360.00 – is covered. Any monies from the remaining 5 trades is extra profit!!!”

Just briefly, Constellation Brands, Inc. Class A (NYSE: STZ), had a potential profit of 189%. Also, KB Home (NYSE:KBH) was up 74% at one stage.

Note that Delta Air Lines, Inc. (NYSE:DAL) earnings report has been delayed until Tuesday, this week.

GETTING OUT WHILST THE GOING IS GOOD!

GREED CAN BE THE UNDOING OF A GOOD PROFIT!

YOU NEED TO BE IN IT TO PROFIT!


Options Trades to Consider Based on Expected Earnings Reports:

Tuesday, January 15, 2019

Atlanta, GA-based carrier Delta Air Lines, Inc. (NYSE:DAL), will report earnings before the market opens. Delta Air Lines kicks off fourth quarter earnings season for major American airline carriers, with analysts expecting the company to report earnings per share of $1.29 on quarterly revenue of $10.8 billlion. The company's guidance was for earnings of $1.10 to $1.30 per share. Consensus estimates are for year-over-year earnings growth of 32.29% with revenue increasing by 5.71%.

After shares of Delta Air Lines lost altitude and plunged into multi-percentage-point loss territory Thursday, things were looking pretty grim -- and they were, but only for about 24 hours. Then Friday saw the stock make an upswing gaining 5%.

This downturn was due to the fact that Delta made an 8-K filing with the Securities and Exchange Commission (SEC) describing how its Q4 total revenue per available seat mile ( TRASM ) is likely to come in below previous estimates but "adjusted" earnings will arrive on target -- and toward the high end of previous guidance at $1.25 and $1.30 per share. Profit margins also look strong for Q4, rising into the 10% to 11% range.

Delta now expects adjusted total revenue per available seat mile (TRASM: a key measure of unit revenue) to increase approximately 3% on a year-over-year basis. This compares unfavorably to the previous guidance, which had called for an approximately 3.5% rise in this key metric.

Per Delta, slower-than-expected improvement in close-in yield (prices of tickets sold close to departure) in late December compelled the company to trim its guidance for this key metric. In fact, this was the second time that Delta had trimmed its fourth-quarter unit revenue forecast in a short span of time. In December, the carrier said that it expects unit revenues to rise 3.5% compared with the 3-5% improvement predicted in October.

Delta reduced its fourth-quarter 2018 projection for fuel costs per gallon from the $2.47-$2.52 range to $2.38-$2.43 due to the declining trend in oil prices. Non-fuel unit costs are expected to be down approximately 0.5%. Capacity is anticipated to expand approximately 4%.

Total revenues are anticipated to grow approximately 7%, excluding third-party refinery sales. Additionally, the pre-tax margin is predicted between 10% and 11%. The Consensus Estimate for earnings per share and revenue growth is pegged at $1.27 and 6.1%, respectively.

Investors focused on the negative aspects of this report, and in particular, Delta's observation that the ticket prices it was able to charge "in late December [were] more modest than anticipated" -- and extrapolated these trends into a theory that all airline stocks were in trouble.

However, investors obviously re-thought and refocused on more positive aspects of Delta's commentary, such as the fact that "the overall demand environment remains healthy with strength in both business and leisure segments throughout the quarter," while "fuel price per gallon is expected to be ... approximately 10 cents below initial guidance."

There are several positive factors for airline stock futures…..

  • ….. lower fuel costs,
  • ….. ancillary revenue – passengers paying for extras,
  • ….. recent market selloffs where investors have gotten too pessimistic, and global growth actually strengthening,
  • ….. supply-and-demand balance - year-over-year capacity growth, and
  • ….. rerating - a focus on product enhancements, dividends, and debt reduction would be positives.

Assuming strong demand for air travel services and reduced cost of fuel, this seems to imply there's a good chance Delta’s profits will exceed expectations when Q4 earnings are presented.

Short interest has decreased by 11.8% and overall earnings estimates have been revised higher since the company's last earnings release.

 Option trade to consider: Buy the DAL FEB 15 2019 50.000 CALL at approximately $1.25.


UnitedHealth Group Inc. (NYSE:UNH), a leader in health insurance for years, will report earnings before the market opens. The consensus earnings estimate is $3.22 per share on revenue of $57.94 billion. Consensus estimates are for year-over-year earnings growth of 24.32% with revenue increasing by 11.29%.

UnitedHealth Group has one of the best charts on the Street, beating every quarter for the last 10 years. Over the last two years, shares are up 50% versus the S&P 500 return of just 13%.

Revenue growth at both UnitedHealthcare and Optum segments along with membership strength is expected to boost the company's fourth-quarter results.

For the company's UnitedHealthcare segment, expect revenue rise from an increasing number of people served, greater membership growth in higher acuity programs coupled with higher pricing to cover expected medical cost trends and resumption of the health insurance tax for 2018.

Also, expect Optum, the company's health service business, to be a significant catalyst for its earnings. Optum's sub-segment Optum Health's earnings are anticipated to be driven by growth in care delivery, and behavioral, digital consumer engagement and health financial services while its sub-segment OptumInsight's revenues are expected to be bumped up by an expansion in payer technology and services plus care provider advisory services.

The company's solid membership can be attributed to rise in Medicaid and Medicare Advantage enrollments.

Overall earnings estimates have been revised higher since the company's last earnings release.

One investment analyst has rated the stock with a hold rating and twenty-two have assigned a buy rating to the company. UnitedHealth Group presently has a consensus rating of “Buy” and an average target price of $294.20.

Option trade to consider: Buy the UNH FEB 15 2019 260.000 CALL at approximately $2.90.


Wells Fargo & Co (NYSE:WFC), one of the largest U.S. mortgage lenders, before the market opens. The consensus earnings estimate is $1.17 per share on revenue of $21.42 billion; but the Whisper number is for $1.20 per share. Consensus estimates are for year-over-year earnings growth of 20.62% with revenue decreasing by 13.26%.

The large-cap banks will be facing some challenge when trying to fend off concerns about a looming recession, as investors have concerns about being exposed to financials as a recession tends to cripple the industry with loan losses. With the post-crisis recovery now in its 10th year, warning signals — such as the Fed easing on its monetary policy and slight deterioration in credit quality — are starting to flash.

And adding fuel was the pre-Christmas surprise statement from the U.S. Treasury, in which Treasury Secretary Steven Mnuchin gave an all-clear sign on liquidity levels at the largest, most systemic financial institutions. Markets sold-off as the public scratched their heads over whether or not there was a liquidity issue in the first place.

Wells Fargo underperformed the S&P 500 by a wide margin last year, especially when concerns of a global growth slowdown peaked in December. Beyond that general exposure to economic downturns, Wells Fargo shares suffered under the weight of its fake-accounts scandal this past year; plus the impact of a few other scandals, helped push many of the bank's key operating metrics, including deposit and loan growth, efficiency, and profitability, below that of its peers.

WFC posted weaker than expected earnings each of the last two quarters which has applied additional pressure to the stock and creates a situation where the market really needs to see an earnings beat for enthusiasm to return to the stock.

Short interest has increased by 58.1% and overall earnings estimates have been revised lower since the company's last earnings release.

 Option trade to consider: Buy the WFC FEB 15 2019 47.500 PUT at approximately $1.50.


Wednesday, January 16, 2019

Railroad operator in eastern U.S. and Canada CSX Corporation (NASDAQ:CSX) will report earnings after the market closes. The market expects CSX to deliver a year-over-year increase in earnings on higher revenues when it reports results for the quarter ended December 2018. This freight railroad is expected to post quarterly earnings of $1.00 per share in its upcoming report, which represents a year-over-year change of +56.3%. Revenues are expected to be $3.13 billion, up 9.2% from the year-ago quarter.

In the third quarter, the company delivered impressive results, with earnings and revenues beating the Consensus Estimate. The bottom line was driven by lower costs. Also, the top line improved on a year-over-year basis.

CSX has an impressive earnings surprise history. The company's earnings beat estimates in each of the trailing four quarters, the average being 15.4%.

The company fared a bit better than peers last year, thanks mainly to higher efficiency, which shows up in the operating-ratio metric. That figure improved to 70% over the first nine months of 2018 from 60% in the prior-year period, in fact.

CSX's CEO James Foote is carrying the previous CEO Hunter Harrison’s vision forward successfully, as is evidenced in the dramatic improvement in CSX's operating ratio to 60.3% during the nine months ended Sept. 30, 2018, from 69.6% in the comparable period last year. CSX's total expenses, in fact, declined 8% during the period despite 7% higher revenue. CSX's cash flows have visibly taken off since the implementation of the model in 2017.

CSX is expected to perform well in the fourth quarter on the back of impressive performance in the Precision Scheduled Railroading system, which is designed to enhance operational efficiency. Reduction in costs is expected to improve operating ratio (operating expenses as a percentage of revenues) in the to-be-reported quarter.

As well, consistent strength in coal, intermodal and merchandise revenues are expected to boost top-line results in the fourth quarter.

The current tax law, which reduces corporate tax rate significantly, has been boosting the company's results ever since its implementation in 2017. The significant cut in corporate tax rate is likely to boost cash flow, which is expected to drive the bottom line in the to-be-reported quarter.

The consensus EPS estimate for the quarter has been revised 2.25% higher over the last 30 days to the current level.

 Option trade to consider: Buy the CSX FEB 15 2019 65.000 CALL at approximately $1.30


Thursday, January 17, 2019

Video-entertainment veteran Netflix, Inc. (NASDAQ:NFLX), a provider of Internet television network, will report earnings after the market closes. The consensus earnings estimate is $0.25 per share on revenue of $4.21 billion; but the Whisper number is for $0.26 per share. The company's guidance was for earnings of approximately $0.23 per share. Consensus estimates are for earnings to decline year-over-year by 39.02% with revenue increasing by 28.13%.

During the same period last year the company earned $0.41 and the stock is down 15.7% since the beginning of July.

NFLX hit a high and then started to trend lower in July as weakness started to hit all of the FAANG stocks. The company has posted better than expected earnings each of the last two quarters, but in both cases, sales have been just below analyst estimates.

Netflix was one of the strongest stocks in recent years, but the strength pushed the valuation a bit too high. With the high valuation, the market was quick to drive the stock lower on any sign of weakness. The stock’s valuation remains a concern. NFLX trades at 120 times earnings, and 80 times forward earnings.

With shares still priced for perfection the company needs to hit all of its estimates and show gains in subscribers. The company has forecast 9.4 million new subscribers globally, and that will be a key number to watch for.

As well, the company's content costs are soaring and cash is disappearing from the books at close to $3 billion per year.

Overall earnings estimates have been revised lower since the company's last earnings release.

 Option trade to consider: Buy the NFLX JAN 18 2019 320.000 PUT at approximately $8.60.

 


An Important Note: That these suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.

It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented.

GETTING OUT WHILST THE GOING IS GOOD!

GREED CAN BE THE UNDOING OF A GOOD PROFIT!

If you wish to receive more options trading recommendations similar to this, which will help boost your portfolio strategy, check out the other  memberships available at Stock Options Made Easy.

When To Exit A Trade Based On Earnings?.....

It is also worth considering, when options trading earnings reports – “Do we exit on already existing profits or leave the companies to report their earnings and hope for bigger profit?” 

As most traders realize, there is a 50/50 chance that the company stock price could go either way after reporting earnings – even if the report is good, the stock price could reverse – and if you hold a call option, means depletion of an already good profit if it exists. A similar situation can be found if you hold a put option, and a report is not that sound (and you expect a profit from this) but the stock price can, at times move upwards due to traders bias or other external conditions......READ MORE.....

The Decision Is Yours!

Before You Trade Consider This Strategy……

"Trading Capital Management" is a key component of your trading strategy. The strategy, on which we base our trades to achieve maximum profit, and to minimize loss, is contingent on using an equal amount of money for each trade.

……continue reading this article……


Best of Trading,
Ian Harvey
Director of Stock Options Made Easy


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