Earnings Season Doldrums Doesn’t Mean No Reports Are Out
With another 6 or 7 weeks until the peak of the 4th quarter earnings cycle, the market is anxious for whatever news it can get about how the quarter is going. The earnings calendar is short on names this week but there are some, and those that are could set the tone for an entire sector of the market.
Oracle (ORCL), Adobe (ADBE), and Broadcom (AVGO) are all slated to report results after the close of trading. Between them, they represent a broad swath of the tech sector including SaaS, cloud computing, media, and communications. If these companies aren’t able to meet expectations the outlook for 4th quarter earnings will slump further into negative territory.
Earnings for the tech sector, as represented by the S&P Information Technology Index (XLK), are expected to fall in the calendar 4th quarter season. The consensus estimate is sitting near 1.9% and has been edging lower over the past two months. The consensus for the full-year 2019 isn’t much better, 0.0%, but there is a ray of sunshine for investors to cling to. 2020 is expected to bring earnings growth back to the sector.
Broadcom’s Future Lies With 5G
Broadcom is expected to post EPS of $5.85, a -8.5% decline from the YOY period even as revenue increases. Revenue is expected to have increased by 5.5% to $5.74 billion but there are risks. The company has experienced some recent weakness in its networking and storage businesses that will drag on results. EPS has beaten consensus 100% of the time over the past two years so market confidence is likely very high. This sets up a chance the market will get a big disappointment when the report is released so investors should be wary.
Looking forward, Broadcom is well-positioned to benefit from the switch to 5G. The 5G industry is worth about $45 billion in 2019 and expected to grow with a 56.7% CAGR over the next six years. Broadcom is also a Dividend Aristocrat in the making. The company pays over 3.0% at today’s prices and has been growing the distribution for 8 years. Those looking for dividend growth will be pleased with the 55% payout ratio and eye-popping 50% 5-yr distribution growth rate.
Oracle, Taking Technology To The Clouds
Oracle’s report is expected to show a wide-based and rapidly-growing adoption of its cloud-computing services but there is risk, adoption of cloud is moving forward as fast as the company had expected. The analysts are bullish on the stock but have been cutting their revenue targets because of it. In terms of outlook, revenue is expected to grow just shy of 1.0%, down from the 2-3% predicted earlier in the year, while EPS is expected to grow by 11.2%.
The risk to revenue and earnings is that the transition to the cloud, while wide-spread, may not gain traction for some time. Until that happens, revenue growth is unlikely to surpass the low to mid-single-digits. In the meantime, investors can count on share buybacks, the 1.75% dividend yield and a healthy track record of dividend increases to support share prices.
Adobe Dominates Digital Media
Adobe is dominating the digital media space and firing on all cylinders. Investors should look for strength in the Digital Media, Creative Cloud, and Cloud Document segments. The consensus for both revenue and EPS growth is robust, well ahead of its index peers, at 20.7% and 18.9% respectively. The company has beaten consensus 100% of the time for both metrics over the last two years and is likely to do so again. The analysts have been cutting their targets steadily over the past two months so the bar is relatively low.