The second quarter earnings season of 2020 is finally here. One way or another, the list of concerns the market has had regarding the devastation the coronavirus pandemic had on corporate profits will be realized.
Starting this week, the market gets commentary from some of the nations’s largest banks, including JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C). We will also hear from the hardest-hit sectors such as the airlines and restaurants with both Delta (DAL) and Domino’s Pizza (DPZ) announcing results. Last but certainly not least, investors will hear from vaccine makers such as Johnson & Johnson (JNJ) and Abbott Labs (ABT) as well and health insurer UnitedHealth (UNH).
But how much weight should the earnings numbers themselves carry, particularly given what we already know about the economy and pandemic? The Wall Street Journal on Friday reported a record number of new infections of COVID-19, surging by more than 63,000 with increases in hospitalizations in states like Texas and California. As it stands, total U.S. COVID-19 cases not only spiked to 3.1 million, the death toll has now surpassed 133,000, according to data compiled by Johns Hopkins University.
Yet, the beat goes on as stocks ended higher Friday, driven that optimism that a coronavirus vaccine is on the horizon. Investors are seemingly racing to get ahead of the news as the Dow Jones Industrial Average surged 369.21 points, or 1.4%, to close at 26,075.30. The S&P 500 gained 32.99 points, or 1.1%, to close at 3,185.04, while the tech-heavy Nasdaq Composite added 69.69 points Friday to close at 10,617.44, posting its 27th record of 2020. For the week, the Nasdaq was the biggest gainer, adding 4%, driven by Tesla (TSLA), Netflix (NFLX) and Amazon (AMZN) which each soared to all-time highs.
For the week ahead, earnings reports and guidance will continue to sway investor sentiment, namely about the so-called “V-shaped economic recovery” that investors are apparently expecting. Here are some names to keep an eye on.
Pepsi (PEP) – Reports before the open, Monday, Jul. 13
Wall Street expects Pepsi to deliver EPS of $1.25 per share on revenue of $15.34 billion. This compares to the year-ago quarter when earnings came to $1.54 per share on $16.45 billion in revenue.
What to watch: The company has taken a hit during the pandemic, in part due to the lockdown restrictions and the effect it has had on the restaurant industry – many to which Pepsi is a beverage supplier. Conversely, with more people working and learning from home, Pepsi’s Frito-Lay brands snack business is likely to see a surge in sales. The question is, will those sales be enough to offset the impact in other areas? With Pepsi shares down some 3% year to date, it has outperformed not only the 5% decline of the Consumer Staples Select Sector SDPR ETF (XLP), it has crushed rival Coca-Cola (KO) which has plunged 20% on the year, namely due to its larger restaurant exposure.
JPMorgan Chase (JPM) – Reports before the open, Tuesday, Jul. 14
Wall Street expects JPMorgan to earn $1.19 per share on revenue of $30.29 billion. This compares to the year-ago quarter when earnings came to $2.82 per share on revenue of $29.57 billion.
What to watch: JPMorgan’s earnings are expected to be much lower in 2020 than they were in 2019. But that should be expected, considering the coronavirus-induced recession the nation is facing, coupled with business closures. Add in the Fed’s persistent stance on lower interest rates, the bank is facing multiple headwinds. Accordingly, JPM — now down 29% YTD — trades at its cheapest valuation in eight years, per a price-to-book value basis. Nevertheless, the bank’s industry-leading profitability and strong balance sheet could be an opportunity for investors who are willing to look beyond the current pandemic-induced economic crisis. On Tuesday that’s the operating theme the management team must relay to the market.
Wells Fargo (WFC) – Reports before the open, Tuesday, Jul. 14
Wall Street expects Wells Fargo to lose 11 cents per share on revenue of $18.43 billion. This compares to the year-ago quarter when earnings came to $1.30 per share on revenue of $21.58 billion.
What to watch: Wells Fargo is not completely out of the penalty box even as it has shown drastic operational improvements. The bank not only generated over $4 billion in profits last year, it also improved its efficiency ratio, making it less risky. But it’s still not enough. Despite passing the Fed’s recent stress test, showing strong capital levels, Wells Fargo was slapped with a number of restrictions, such as on dividend payouts. But the bank, which has seen its stock price sink 52% year to date, recently received multiple upgrades due to its valuation. Citing the fact that the stock is trading at 73% of its book value, Evercore analyst John Pancari rated Wells Fargo as Outperform and sees near-term upside to the shares.
Bank of America (BAC) – Reports before the open, Thursday, July. 16
Wall Street expects BAC to earn 27 cents per share on revenue of $22.01 billion. This compares to the year-ago quarter when earning were 74 cents per share on revenue of $23.23 billion.
What to watch: You would be hard-pressed to find a bank that is executing better than Bank of America, which has beaten earnings estimates in thirteen straight quarters. But with its shares plunging 31% year to date, Bank of America has fallen prey to the devastation and disruption the caused by the pandemic, namely business closures and waning consumer confidence. Bank of America’s consumer segment makes up some 40% of its revenue. On Thursday investors will focus on metrics such as loan and deposit growth and get a sense of how the bank can grow revenue and and profits amid the low-rate environment.
Netflix (NFLX) – Reports after the close, Thursday, Jul. 16
Wall Street expects Netflix to earn $1.81 per share on revenue of $6.08 billion. This compares to the year-ago quarter when earnings were 60 cents per share on $4.92 billion in revenue.
What to watch: Expectations of another blowout quarter has sent Netflix shares surging more than 17% over the past several sessions. Now trading at around $550 and up 56% year to date, analysts see more upside, hiking Netflix price target as high as $670 in anticipation of strong Q2 subscriber growth. The streaming giant guided for only 7.5 million new subscribers in the just-ended quarter. But that may not be enough to sustain the stock. Citing app download data and consumer trends, and the fact that people are spending significantly more time at home due to the COVID-19 pandemic, Goldman Sachs analyst Heath Terry forecasts Q2 subscriber additions of 12.5 million, which is 66% above Netflix’s own guidance.
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