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Earnings Season Winners and Losers

Posted on Friday, July 26th, 2019 by Chris Markoch

As second-quarter earnings continue to come in, it’s not too early to start discussing the companies that have exceeded expectations and those that have come in below expectations. A silver lining for all earnings has been the anticipated action of the Federal Reserve to cut interest rates at their upcoming meeting. However, some stocks are rising in the face of already lofty valuations. The cloud hanging over earnings is the continued trade war with China. When they reported first-quarter earnings, companies in the affected sectors largely sloughed off the trade war as something that would be resolved quickly. The reality that we could be months away from a signed deal is now causing companies to adjust their forward guidance for the rest of 2019.

First, let’s take a look at three companies who are seeing their stock growing after releasing positive earnings.

3M finds value in under-promising and over-delivering

After a horrible first-quarter earnings report that saw 3M (NYSE: MMM) stock suffer its worst single-day decline in almost 30 years, investors had low expectations. Although the company reported a decline in sales and earnings per share (EPS) largely due to low demand in China’s automobile and electronics sectors. The declines beat analysts’ expectations. As a result, the stock saw a bump of 4% in after-hours trading and was continuing to rise as markets opened on July 25. The stock is still trailing the Dow Jones Industrial Average (DJIA), but the company will have to continue to show that it can continue to remain profitable even in the face of weak demand from China.

Why the worst may be over for AT&T

AT&T (NYSE: T) met expectations for earnings per share and slightly exceeded revenue expectations, but that’s not what has investors excited about the company’s stock. While rivals like Verizon and have been concentrating their efforts on their core wireless business to take advantage of emerging 5G technology, AT&T set its sites on the direct-to-consumer streaming market and announced their intention to launch their own streaming service, HBO Max. In the process, the company added significant debt to its balance sheet when they acquired Time Warner (and its assets) for $104 billion. The good news for AT&T is that the strategy appears to be paying off. The stock (up 18% YTD) is still lagging behind the S&P 500 index (21%), as well as other stocks in its sector such as T-Mobile (23%) and Sprint (22%). The favorable earnings report may help them close that gap or even overtake the competition.

Facebook continues to beat the odds

Investors may hate Facebook (NASDAQ: FB), but they’re still buying the stock. The company is in the crosshairs of regulatory agencies who are threatening to punish the company after multiple privacy concerns have arisen. The company is also drawing speculation regarding its intention to create its own cryptocurrency, Libra. Despite the negative news surrounding the stock, including a $5 billion decline in revenue for the first half of 2019, investors continue to give the stock support. The company met expectations in their second-quarter earnings and, even though their forward guidance showed further deterioration as they will seek to comply with new regulations, at least 20 analysts have increased their price targets for Facebook stock, which is already up over 50% for the year.

Other companies have not been meeting expectations. Here’s a look at three companies that are seeing their stock declining after poor results.

For Tesla, it was all about the (lack of) profits

After reporting an unexpected rise in sales in June, Tesla (NASDAQ: TSLA) was faced with the question of when they will show a path to profitability. If second-quarter earnings are any indication, it may be awhile. The company reported a $408 million loss, negating any lift the company was receiving from strong June sales numbers. Investors responded by a rapid sell-off which saw the stock plummet over 35 percent.  Shrinking margins and operating costs having to do with the building of a new plant in China were cited as primary reasons for the loss. For investors who see the company as an automaker (albeit an unconventional one), then you will be alarmed at revenue of $6.3 billion with $408 million in negative net income. However, many investors see Tesla as a “technology” company and are betting their patience will be rewarded.

Why are investors finding Hershey’s stock to be less sweet?

Hershey (NYSE: HSY) showed favorable top line and bottom line but is seeing their stock decline when the company forecast 2% growth for 2019. While this was technically not much different than projecting 1-3% growth as they did in the first quarter, the number disappointed analysts who are concerned that the stock may not have much room to grow given its lofty valuation. Prior to the earnings report, the stock was up over 35% in 2019 and was trading at a forward PE multiple of 25.

Netflix is facing its greatest challenge

By now, most investors know the story that the numbers tell about Netflix (NASDAQ: NFLX). In addition to seeing a decline in new subscribers, the streaming content provider reported a loss of 130,000 current subscribers. The problem for Netflix is simple … competition is growing. Disney and Comcast are just two examples of companies that will be launching streaming services. But what is making these launches particularly challenging for Netflix is that they will be losing two of their most popular shows. The Office and Friends will be moving to the Comcast/NBC service. Netflix has a heavy investment in original content such as Orange Is the New Black and The Crown. The question is will that new content be enough to save Netflix as consumers have more streaming options – and leverage – than ever before.

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