October 7, 2022


Skillful Business Crafters

Weekly Preview: Earnings To Watch This Week (AA, BAC, NFLX, UAL)

Several days of profit taking sent stocks lower on Friday, prompting some skeptics to assert that the anticipated long-overdue correction has finally arrived. Evidenced by week’s market performance, de-risking mode is now the go-to strategy, especially at a time when inflationary pressures are likely to impede near-term growth of various companies.

Friday’s U.S. retail sales data showed a declined 1.9{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} in December, much worse than the forecast for a 0.1{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} drop. Downbeat online sales were blamed for the weak number, along with a decline in spending restaurants and other leisure activities, which doesn’t inspire confidence for the degree of growth the market expected for during the holiday shopping season. It also didn’t help matters that John Williams, a key ally of Fed Chairman Jerome Powell, predicted economic growth to slow to a 3.5{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} annual rate which is two percentage points below 2021.

So, it’s not a surprise that several retail stocks saw heavy selling pressure Friday, leading the broader market lower. As the battle rages on between growth and value, all three major averages were punished on Friday, though they bounced noticeably off the lows. The Dow Jones Industrial Average which plunged more than 400 points, ended the day down 201 81 points, or 0.56{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, to close at 35,911.81. The leading decliners on the Dow were, among others, Home Depot (HD) and Disney (DIS) which posted respective declines of 3.87{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} and 2.25{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}.

The S&P 500 Index, which was down more than 1{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} at one point Friday, ended up 3.82 points, or 0.08{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, to close at 4,662.85, while the tech-heavy Nasdaq Composite rose 86.94 points, or 0.59{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, to close at 14,893.75. Investors have been looking for reasons to take profits on yield-sensitive stock such as technology. That coupled with the expected rise of interest rates and tighter monetary policy is causing rash uneasiness in the market. But as has been the case, dip-buyers continue to swoop in.

Many investors who have been on the sidelines see the declines as a buying opportunity, focusing on big-cap winners. That is a worthwhile strategy, particularly for those investors with tons of cash and time to stomach the volatility and headline risk. Fourth quarter earnings season kicks into high gear with results expected from technology heavyweight Netflix (NFLX). Can its earnings pull tech stocks out of the doldrums? Netflix is one of several names worth watching this week.

Bank of America (BAC) – Reports before the open, Wednesday, Jan. 19

Wall Street expects BAC to earn 77 cents per share on revenue of $22.36 billion. This compares to the year-ago quarter when earning were 59 cents per share on revenue of $20.21 billion.

What to watch: Bank stocks have outperformed the broader S&P 500 Index in the first few trading weeks of the new year, driven by the prospect of rising interest rates. Among the group, Bank of America stock has been a hot commodity, rising some 10{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} over the past thirty days and 22{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} over the past six months. With the stock now up 10{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} year to date, besting the 2{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} decline in the S&P 500 index, the market seemingly expects strong results from Bank of America in 2022. But can the bank deliver? Bank of America has beaten earnings estimates in ten straight quarters driven by strong execution. The bank’s focus on consumers and lending has been key to its success. In the quarters ahead, among other tailwinds, the bank should benefit from potentially three interest rate increases in 2022, which should boost its net interest margins and help drive earnings per share above pre-Covid levels. On Wednesday, investors will want to see these positive trends continue, specifically within loan and deposit growth. Analysts will also look to gauge how other parts of the business such as investment banking can support top-line growth and profits.

Alcoa (AA) – Reports after the close, Wednesday, Jan. 19

Wall Street expects Alcoa to earn $1.89 per share on revenue of $3.33 billion. This compares to the year-ago quarter when earnings came to 26 cents per share on revenue of $2.39 billion.

What to watch: Shares of the aluminum giant have been one of the bright spots in the materials sector, rising more than 60{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} over the past six months, including 24{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} over the past thirty days. Already up 4{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} year to date, besting the 2{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} decline in the S&P 500 index, Alcoa has a lot to prove. The rise in metal stocks have been driven by optimism surrounding infrastructure spending aimed at repairing the country’s airports, roads and bridges, among other projects. How much of that money will come to Alcoa? Aluminum is used in a broad range of industrial and consumer end markets. And the commodity is enjoying a strong run as the global economy swings back into motion. As a result, Alcoa last quarter posted its tenth consecutive quarterly profit beat, thanks to improving aluminum business. Q3 revenue rose 31{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} year over year to $3.11 billion, beating expectations by almost $200 million. While there appears to be support for higher aluminum prices, the company on Wednesday must speak positively about the demand/supply outlook for the next several quarters to keep Alcoa stock in high demand as it has been.

United Airlines (UAL) – Reports after the close, Wednesday, Jan. 19

Wall Street expects United Airlines to lose $2.15 per share on revenue of $7.96 billion. This compares to the year-ago quarter when the loss came to $7 per share on revenue of $3.41 billion.

What to watch: With a more than 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} decline in the last nine months, shares of United Airlines has been one of the hardest-hit stocks in the transportation sector. The company has struggled not only through slumping booking demand, but also labor challenges and a liquidity pressure. Had it not been for timely government assistance, many airlines might not be around today due to the pandemic. In the case of United, investors want to know if clearer skies are ahead. Citing benefits from international and corporate recovery, analyst Conor Cunningham of MKM Partners listed United among the airlines that will recover in 2022. United plans to boost 2022 international capacity 10{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} above 2019 levels. Cunningham upgraded United to Buy from Neutral, calling it a “compelling cost story.” Analysts forecast United Airlines returning to a profitable year in 2022 and heading to a meaningful $7.60 projected EPS in 2023. In part, this is based on the company stated plan to have all international locations to reach record travel levels by summer 2022. It remains to be seen what (if any) impact Omicron has on the company’s capacity plans. The company’s guidance on Wednesday will determine how confident the management is in these projections.

Netflix (NFLX) – Reports after the close, Thursday, Jan. 20

Wall Street expects Netflix to earn 82 cents per share on revenue of $7.71 billion. This compares to the year-ago quarter when earnings were $1.19 per share on $6.64 billion in revenue.

What to watch: Netflix has underperformed the market significantly over the past three months, falling about 15{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} compared to an 8{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} rise in the S&P 500 index. This has prompted some investors to wonder whether the company can maintain its status as the king of streaming. The company is not alone anymore. The likes of Disney (DIS), which also own Hulu in addition to Disney+, is catching up. Hulu compared favorably to Netflix when assessing the number of percentage streaming hours consumed. While the market broadly expects Netflix to remain a successful streamer in 2022, the company’s pricing power is now a legitimate question. That said, Netflix has tons of cash and will spend almost $14 billion on content to continue growing its subscribers. The question is, how quickly can that investment in content turn into profits? That question was answered in the most recent quarter when the company delivered an 83{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} growth in profit on only 16{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} rise in revenue, suggesting the company can grow its profits meaningfully in the long run as long as subscriber growth continues at a solid rate. That, along with timely price increases. Will this be the case again this Thursday?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.