Earnings Outlook: Can It Get Worse for Netflix?

Summary

• Apart from Netflix (NFLX) The other big names to watch this week are Tesla (TSLR) and Twitter (TWTR) (Elon Musk news); and energy services companies Halliburton (HAL), Baker Hughes (BKR), and Schlumberger (SLB) (energy production outlook).
• United Airlines (UAL) and American Airlines (AAL) should indicate whether travel demand looks strong through the second half.
• Transport companies JB Hunt (JBHT) and CSX (CSX) may report on how supply chains are adapting to sharply higher fuel costs.

What We Learned Last Week

• Banking – If investment banking results at major banks (JP Morgan (JPM), Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS) among others) are any indication, Corporate America is turning more cautious – less dealmaking, less raising capital, and presumably less investment. Trading profits amid high volatility offset some of this weakness.
• Wells Fargo (WFC), JPM and C increased loan loss reserves. Banks cannot ‘manage’ earnings through loss reserves. Higher provisions – even if modest – imply their models anticipate meaningful loan problems in coming months and quarters.
• Consumer Staples – PepsiCo (PEP) and Conagra (CAG) reported differing experiences and outlooks. PEP was able to pass on rising costs of 12% to consumers and roughly stable volumes; CAG was unable to pass on all its rising costs, and volumes were down 6.4%.
• Anecdotal evidence suggests the CAG storyline will be the common refrain among consumer staples in this earnings season.

Names to Watch

• The most closely watched report this week is surely Netflix (NFLX), due Tuesday. Investors will focus on subscriber volume and any announcement about an advertising tier. 2Q EPS is projected to be $2.99, down from last year’s 2Q $3.11. NFLX is trading near $197, similar to 4Q 2017. Then it traded at a P/E of about 150; given its P/E is now 18, it may take a big shock to knock the price down much further.
• Tesla (TLSA) reports on Wednesday; Twitter (TWTR) reports on Friday. Whether these turn out to be quite separate events will depend on the common link: Elon Musk.
• On Thursday, homebuilding DR Horton (DHI) may report on the outlook for the housing market – and its ability to keep making money facing a widely anticipated slowdown.

Energy

• Oil and gas services companies Halliburton (HAL), Baker Hughes (BKR) and Schlumberger (SLB) report on Tuesday, Wednesday, and Friday, respectively. They may indicate whether energy companies are likely to ramp up production in coming months given high oil and gas prices and pressure from the Russian invasion of Ukraine. Any hint of rising production plans could push oil prices down.

Regional Banks

• Various regional banks report this week, including Citizens Financial (CFG), Signature Bank (SBNY), M&T Bankcorp (MTB), Keycorp (KEY), Comerica (CMA) and Regions Financial (RF). These banks do not have large trading businesses – the question here is whether middle market lending is holding up even as big companies pull back.

Airlines

• United Airlines (UAL, Wednesday), Alaska Airlines (ALK), and American Airlines (AAL, both on Thursday) may miss consensus due to rising fuel costs and cancelations.
• But the key question is whether they see continued strong demand through the second half.

Supply Chains

• Transportation costs and bottlenecks have been a large contributor to supply-chain woes over the past year. Industrial supplier Fastenal (FAST) said last week that supply chain problems were easing.
• Logistics and trucking company JB Hunt (JBHT) and railroad transporter CSX (CSX) may indicate whether that is more broad-based, as well as whether they have been able to pass on rising fuel costs.

Wrapup

• Alongside the S&P 500, we now follow the Russell 1000 index to better gauge company performance and outlook across large- and medium-sized companies.
• Some 105 companies report 2Q earnings this week.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)