pool adsEarnings Radar: NKE, FDO, SWHC, SCHN
Although second quarter earnings season doesn’t get underway until mid-July – unofficially when Alcoa (AA) announces results on July 9 – there are a few notable reports out this week that traders and investors will be keeping an eye on. On Thursday, June 28, one of the world’s largest sports apparel companies will issue its results, providing a good barometer for the health of the consumer. Additionally, a prominent steel producer is on the calendar for Thursday, giving us a look into how the manufacturing sector is faring.
With global economic and corporate growth rates decelerating, and with companies facing perhaps as many risks and uncertainties since the Great Recession, the Q2 earnings season may prove to be yet another hurdle for the stock market. It is fair to say that expectations have come down quite a bit over the past few weeks, but, the primary risk resides in corporate guidance. Have estimates for 2H12 and beyond come down far enough to match what will likely be pretty cautious guidance? We will soon find out, but investors and traders should keep in mind that, traditionally, analysts have been slow to react to a slowing economy.
Just Buy It?
The earnings report that may get the most attention this week is Nike (NYSE: NKE), which is slated to release its fiscal Q4 numbers after the market closes on June 28. As one of the world’s premier sports apparel and equipment brands, its results will serve as an indication regarding the state of the consumer. Because of this, NKE’s results have the potential to be a market moving event.
NKE shares enjoyed an impressive multi-month rally, beginning last September, as the stock went from the mid-$70s to the $110 level. However, the month of June has been unkind to NKE as the stock broke below $100, on a number of cautious sell-side analyst notes. The primary causes for concern: slowing revenue growth, FX headwinds, & potential inventory concerns.
The good news is, NKE has a history of beating estimates. In fact, over the past four quarters, NKE has topped both the revenue and EPS numbers. To do that again, EPS will need to be up better than 10% year/year to surpass the $1.37 estimate, and revenue will need to have increased by more than 12.5% to beat the $6.5 billion consensus.
With the stock’s recent slide, some downside risk has been taken off the table. Therefore, should NKE’s string of beats come to an end here, the stock could still hold up well. The caveat, though, is that if it issues guidance well below expectations, the stock – as well as shares of its peers – could come under pressure.
A Red-Hot Discounter
As a group, dollar and discount retailers have been incredibly strong over the past few years. This is another “sign of the times”, so-to-speak, as more and more people look to trim their monthly budgets as wages have been stagnant and many are still unemployed or underemployed. One of those companies that has benefited from this trend is Family Dollar (NYSE: FDO), which operates over 7,000 stores in 45 states. Shares of FDO have been on a tear since early 2010, up roughly 130% since then.
Heading into its print, the stock has displayed some impressive relative strength, signaling that investors remain upbeat and confident regarding its upcoming results. For the quarter, analysts are expecting EPS of $1.07 on revenue of $2.37 billion, equating to growth of 18% and 10%, respectively. Looking at its recent earnings history, its performance has been fairly spotty. While it topped its fiscal Q2 EPS estimates by two cents, it fell short on the topline. Prior to that, it reported an inline Q1 EPS number while again missing on the topline.
In addition to this inconsistency, FDO’s valuation is getting lofty, trading with P/E of about 21x. All in all, though, the current environment remains quite favorable for FDO and we would expect some bullish commentary in that regard on its conference call (& 10 am ET).
On Target
Another counter-cyclical play is Smith & Wesson (Nasdaq: SWHC), the maker of firearms, handguns, and rifles. SWHC shares have surged higher since late 2011, soaring by ~130% in that time. Its strength is mostly attributable to a couple key factors. First, gun sales have been escalating ahead of the November presidential elections, because the belief is, if President Obama is reelected, he will focus on implementing much tougher gun ownership laws. Secondly, companies with exposure to security products tend to perform well during tough and uncertain economic times.
These tailwinds have certainly boosted SWHC’s business. For its Q3, EPS improved to $0.07 from a loss of ($0.08) in the year ago period, with sales up 24% to $98.1 million. EPS and revenue were both better than expected. Back on May 21, the company issued FQ4 revenue guidance of $129 million, far ahead of the $119.8 million consensus. What also really stood out, though, was its comment that preliminary firearm order backlog increased by 135% year/year. This provides the company with outstanding visibility, paving the way for solid guidance for the second half this year.
Weighing in on Metal
Schnitzer Steel (Nasdaq: SCHN), which operates a metals recycling business, an auto parts business, and a steel manufacturing business, is set to report its quarterly results before the open on June 28. Analysts are expecting EPS of $0.32 on revenue of $886.7 million. Sentiment on steel and metal producers is decidedly bearish right now due to the slowing global economy.
One of the larger steel producers, Nucor Corp, issued downside guidance on June 13, citing weak construction markets and a poor pricing environment. This news flowed through to other steel producers, such as SCHN, sending its stock sharply lower. Shares have found some support at the $23-$25 level at the moment, but a follow-through to multi-year lows to the $20 area can’t be ruled out should it provide very weak guidance.
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