And… They’re Off

So it begins – another earnings season is upon us.  As we noted yesterday, this week’s reports are heavily skewed toward the financial sector with a few key stocks in other businesses seemingly thrown in for good measure.  It is always tempting to extrapolate the first day’s results to the whole of the reporting period, but today’s reactions make it even more difficult than normal.  We learned plenty about the goings-on at specific companies, but little to base further opinions upon.

The four major financial institutions that reported this morning – JPMorgan (JPM), Goldman Sachs (GS), Citigroup (C), and Wells Fargo (WFC) have spent the morning meandering around yesterday’s close.  Indeed, JPM and GS have spent more of the session so far in positive territory, while C and WFC have been more biased to the downside, but only C’s 3% drop is close to an abnormal post-earnings reaction.  Furthermore, does it matter for anyone else in the financial sector, let alone beyond it, that JPM and GS had good trading results in equities but poor results in fixed income, and vice versa for C?   As we have noted innumerable times, although these companies, particularly JPM, C, and WFC, have relationships with customers large and small throughout the US and beyond, the specific factors influencing their quarterly profits are esoteric and generally non-translatable to other companies and industries. 

Instead, the larger takeaway comes from the two key healthcare stocks that we highlighted yesterday, along with another consumer-facing stock that we didn’t mention.  Guidance, or the lack thereof, was the key to the post-earnings moves in UnitedHealth Group (UNH), Johnson & Johnson (JNJ), and Domino’s Pizza (DPZ).  UNH got off to a solid start, rising 5% in premarket trading after upping its full-year adjusted earnings per share (EPS) guidance to at least $20.50.  That is above the $19.50 to $20 that the company previously saw.   UNH also checked the boxes of higher-than-expected EPS ($4.69 vs $4.12 exp) and revenues ($112.69 billion vs $111.03 bn exp).  The latter two are necessary conditions for a post-earnings rally; solid guidance is the sufficient condition.  All were met, yet the stock had drifted back toward unchanged levels by noon.

The condition of good guidance was met by neither JNJ nor DPZ, and both stocks are being punished for it.  In JNJ’s case, as-expected was clearly not good enough.  Its EPS of $2.59 of course beat the $2.52 analyst consensus, but its guidance did not.  The company offered full-year guidance of $11.05-$11.15, which was above prior guidance but only matched the $11.08 expectation.  Oops.  It also didn’t help that growth in their faster-growing medical technology sector disappointed even as the slower-growing pharmaceutical sector did well.  Guidance matters most, as evidenced by the nearly 7% drop in JNJ’s share price.

DPZ suffered a similar fate.  This stock, along with many other consumer-facing companies, has been flirting with multi-year lows.  They too beat their EPS expectations, but tepid growth and discounts are causing some analysts to consider cutting forward estimates.  That stock was down as much as 12% earlier in the session but has now stabilized around 4% lower. 

Thus, if there is a too-early takeaway from day one of this earnings season, it is that guidance will be the key.  Improve it, and you should be ok, but it is no guarantee of a sustained post-earnings rally.  Miss it at your peril.