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Q3 Earnings Season Preview

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We still have a few days to go before September ends, but the September-quarter earnings season has already gotten underway, as we explained here last week. CarMax KMX, the used-car sales retailer, became the sixth S&P 500 member to report quarterly results today.

The CarMax report showed all-around strength and momentum, as did the FedEx FDX release a few days back, helping the respective stocks to go higher. But not all of these early Q3 releases have been positive, with the Oracle (ORCL - Free Report) and Adobe ADBE results raising questions about the near-term outlook for the cloud business, which has thus far been a stand-out growth area in the broader tech space.

This week’s Accenture ACN report could offer some clarity as to whether the Oracle and Adobe disappointments resulted from company-specific issues or something that will show up in the Q3 results from other cloud operators as well. But we will likely have to wait a bit longer to get a clearer picture.

We have almost 40 companies on deck to release results this week, including 9 S&P 500 members. All of these index members will be releasing their fiscal August-quarter results, which get counted as part of our Q3 tally. By the end of this week, we will have seen Q3 results from 15 such index members and the tally will have reached almost two dozen by the time the big banks put the spotlight on this reporting cycle with their earnings releases on October 12th.

This week’s notable reports include:

Nike NKE– Nike reports results after the market’s close on Tuesday, September 26th, with the sneaker giant expected to earn $0.48 per share on $9.07 billion in revenues, representing a -34.7% decline in EPS on essentially flat revenues relative to the year-earlier period. Estimates have been coming down lately, with the current $0.48 estimate down from $0.49 two months  and $0.65 three months back. Nike shares move in response to earnings releases, with the stock moving higher following the last quarterly report in late June and lower in response to the release prior to that in March 2017. These are tough times for Nike and other apparel and footwear operators given the ongoing problems in the traditional brick-and-mortar retail space. Nike shares are up +5.2% this year, roughly where they were in late June ahead of the last quarterly report, but they had big up and down moves since then.

Micron Technology MU– Micron’s report comes out after the market’s close on Tuesday, September 26th, with the company expected to earn $1.84 per share on $5.95 billion in revenues, up from  a loss of -$0.05 per share on $3.22 billion in sales in the year-earlier quarter. Estimates have been steadily going up, with the current $1.84 up $1.81 a month ago and $1.51 three months back, reflecting firm chip pricing and steadily improving margins. The stock was down following the last quarterly release in late June, but has been a stellar performer  this year, as have been other chip makers. The stock is up +64.5% in the year-to-date period, in line with the Zacks Semiconductor industry’s +63.8% gain. The stock’s recent momentum and the uptrend in estimates implies that market participants wouldn’t like anything that is short of superb in the September 26th report.

Darden Restaurants DRI– Darden reports August quarterly results before the market’s open on Tuesday, with the operator of Olive Garden and restaurants expected to earn $0.98 per share on $1.93 billion in revenues, representing year-over-year growth rates of +11.5% and +12.5%, respectively. Estimates have been stable lately, but have are modestly up from three months back. While industry-wide comp sales have been sluggish Darden appears well placed for positive same-store sales growth on the back of momentum in its core Olive Garden business, which accounts for almost 60% of total profits. The stock has given back almost half of its year-to-date gain, likely reflecting hurricanes-related worries. But it still remains a solid performer and is up +14% this year, outperforming the Zacks Restaurant industry’s +7.9% gain.

Expectations for Q3

Total Q3 earnings are expected to be up +3% from the same period last year on +5.1% higher revenues. This would follow +11.1% earnings growth in 2017 Q2 on +5.5%, the second quarter in a row of double-digit earnings growth.

Estimates for Q3 came down as the quarter unfolded, with the current +3% growth down from +6.3% at the end of June. The chart below shows how Q3 earnings growth expectations have evolved over the last 10 weeks.

Please note that while Q3 estimates have followed the well traversed path that we have been seeing consistently over the last few years, the magnitude of negative revisions nevertheless compares favorably to other periods. In other words, Q3 estimates have come down, but they haven’t come down by as much.

The table below shows the summary picture for Q3, contrasted with what was actually achieved in Q2.

In terms of sector focus, the strongest growth in Q3 is coming from the Energy sector which benefits from easy comparisons. Excluding the Energy sector, the aggregate growth pace drops to +1.1% from +3.3%. The Construction and Conglomerates sectors are the only other sectors with double-digit growth rates. Earnings growth is also strong for the Technology sector, with total earnings for the sector expected to be up +9% on +6.7% higher revenues.

On the negative side, Q3 earnings are expected to be below the year-earlier level for 7 of the 16 Zacks sectors, with double-digit declines for the Transportation, Aerospace, Basic Materials and Autos sectors.

The chart below shoes Q3 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace has started decelerating from the double-digit level of the first two quarters of the year.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysisarticle for Zacks Premium subscribers.

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