MoneyShow’s Jim Jubak highlights the third quarter earnings of several companies because the question of which way the earnings sword will cut is very important, especially for a market poised between a rally and the continuation of a drop.
A reminder today that earnings reports for the third quarter are a two-edged sword.
Shares of IBM (IBM) and SAP (SAP) were down at the close today by 7.1% and 4.8%, respectively, as the companies lowered earnings guidance.
On the other hand, shares of Apple (AAPL) and Chipotle Mexican Grill (CMG) were up 2.1% and 1.7%, respectively, by the close on hopes that earnings to be reported after the close of the New York markets would beat already optimistic expectations.
For a market poised between a rally from a 6% drop and a continuation of that drop, the question of which way the earnings sword will cut is extremely important.
At IBM, third quarter adjusted earnings from continuing operations fell to $3.68 from $4.08 in the third quarter of 2013. Revenue dropped for a tenth straight quarter, falling by 4%. But probably the biggest blow to the shares came when IBM CEO Rometty abandoned a target—first pledged by former CEO Sam Palmisano—to reach $20 a share in annual earnings by 2015. The company now says it will provide an update on projections in January. IBM customers continue to move data and software to cloud-based networks, which has reduced demand for IBM’s hardware. IBM has responded by creating a separate business unit for its own cloud services—and with acquisitions such as the $2 billion 2013 purchase of SoftLayer Technologies—but cloud revenue at IBM, while growing to $3.1 billion this quarter from $2.8 in the second quarter (a 10.7% sequential increase), is still just 3% of IBM’s total $100 billion in annual revenue.
The cloud is creating similar problems at SAP, the world’s largest maker of business-management software. The company today cut its forecast for 2014 operating profit (excluding some items) to a range of $5.6 billion euros ($7.1 billion) to 5.8 billion euros from earlier projections of as much as 6 billion euros. (For the third quarter, operating profit rose 4.6% but trailed the consensus estimate of Wall Street analysts of 1.37 euros at 1.36 euros.
The other edge of the earnings sword includes Apple. After the close, Apple reported revenue of $1.42 a share for the fiscal fourth quarter. That beat Wall Street estimates by 11 cents a share. Revenue of $42.12 billion was well above the consensus estimate of $39.84 billion. Revenue climbed 12.4% year over year.
In the all-important guidance for the first quarter of fiscal 2015, which includes the holiday shopping season, Apple upped its revenue estimates to $63.5 to $66.5 billion versus the revenue consensus projection of $63.44 billion. Apple said it expects first quarter gross margins of 37.5% to 38.5%, Wall Street is expecting a little over 38% versus 37.9% a year earlier. On iPhone unit sales, the company reported 39.27 million for the fourth quarter versus Wall Street projections of 38 million.
Apple shares were already up 21% in 2014 against a 2% gain for the NASDAQ Composite Index before the news and after-hours trading wasn’t quite sure whether it wanted to sell (shares dropped as low as $98.50) or buy the shares on the news (shares climbed as high as $101.50). The uncertainty in after-hours trading does leave open the possibility of a sell on the news reaction in the full session tomorrow but it doesn’t look like we’ll see a huge drop in the shares.
Chipotle Mexican Grill showed the same after-hours uncertainty after it reported with the stock surging as high as $675 and falling as low as $640. Comparable store sales were expected to grow by 17% or so—matching the 17.3% growth in the second quarter—instead they increased by 19.8%. That was a hugely positive number for Chipotle since the company had raised prices in order to keep up with rising food costs and the fear was that this would hurt traffic and sales. Food costs did indeed climb to 34.3% of revenue, an increase of 70 basis points. But revenue climbed 31.1% year over year to $1.08 billion (versus the $1.06 billion consensus). Earnings of $4.15 per share for the quarter beat Wall Street projections by 31 cents a share.
The challenge for a momentum growth stock such as Chipotle, however, is that as great as these numbers look, they aren’t a whole lot better than last quarter (when the company beat earnings estimates by 41 cents a share) and because traders, investors, and analysts worry about whether or not the company can keep up the growth momentum next year. I think markets will have a better feel for that once they’ve been able to digest the growth prospects outlined in the company’s conference call that began at 5:00 PM today. Even with the gain in shares today, the stock closed some 45 points below its all-time intraday high of $698. The shares have built solid support at $650, near the current price, but on a disappointment, the next level of support doesn’t kick in until $600.
