The Q3 earnings season has just begun and we are yet to get a clear picture of the overall market condition. The season has seen an encouraging start courtesy of stable bank results. However, growth trends are still dreary particularly due to the weaknesses in the energy, transportation and auto sectors.
The energy sector remains a big drag on the aggregate growth picture, with total earnings for the sector expected to be down 68.3% from the same period last year. The transportation sector decline will primarily stem from the legacy air carriers, particularly American Airlines (AAL - Analyst Report) and United Continental (UAL - Analyst Report) , which are experiencing higher costs. The auto sector’s growth issue is primarily due to lackluster performance by Ford (F - Analyst Report) .
As per the latest Earnings Trends report, the overall third-quarter earnings for the S&P 500 companies are expected to be down 2.9% from the year-ago quarter on revenues that are estimated to improve 1.2%.
The medical sector which was among the best performing sectors in Q2, is yet to come up with its scorecard. Our report shows that this sector will continue its stellar performance in Q3, with earnings expected to grow 2.7% on revenue growth of 7.4%.
With four medical stocks including industry bellwether Johnson & Johnson (JNJ - Analyst Report) scheduled to report results on Oct 18, let’s see how these stocks are placed ahead of the earnings announcements.
Johnson & Johnson, which delivered an earnings beat in the last reported quarter, has a diversified business model with a presence in three segments: Consumer, Pharmaceutical and Medical Devices.
The New Brunswick, NJ-based company’s Pharma segment is once again expected to drive results this quarter on the back of strong sales of new products as well as core growth products. Robust market growth and increased share should boost sales of Simponi and Stelara. Imbruvica should benefit from increased patient uptake. New cancer treatment, Darzalex, is off to an encouraging start in the U.S. It gained EU approval in May 2016. This should further add to the drug’s sales.
Currency and devaluation in Venezuela will remain headwinds while the company’s share buyback will boost the bottom line. J&J has an Earnings ESP of +4.24% and a Zacks Rank #3 (Hold), which makes it likely that the company will beat estimates in Q3 as well. (Read more: J&J Likely to Beat Earnings Estimates in Q3 Again).
Cepheid (CPHD - Analyst Report) is scheduled to report third-quarter earnings results after market close on the same date. The company has a Zacks Rank #1 (Strong Buy) but an Earnings ESP of -8.33%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Last quarter, the company posted a positive earnings surprise of 35.71%. It is worth noting that Cepheid outperformed the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 38.53%. (Read more: What's in Store for Cepheid this Earnings Season?)
Health insurer, UnitedHealth Group Inc. (UNH - Analyst Report) also has the right combination of a favorable Zacks Rank #2 (Buy) and a positive Earnings ESP (+1.44%), which makes it likely that it will beat estimates in Q3.
UnitedHealth’s health services segment, Optum, has been recording double-digit earnings growth for the several quarters and the third quarter should be no exception. Within the segment, Optum Rx sales are expected to outpace the other two sub-segments – OptumHealth and OptumInsight. This is because the Catamaran acquisition has been bringing in new business wins and strong renewal rates for Optum Rx, thereby fuelling growth at the segment. (Read more: UnitedHealth Q3 Earnings: Stock to Beat Estimates?)
Intuitive Surgical Inc (ISRG - Analyst Report) is set to report third-quarter 2016 results on Oct 18, after the closing bell. Last quarter, the company reported earnings of $4.86 per share, which exceeded the Zacks Consensus Estimate by 65 cents. Intuitive Surgical currently has an Earnings ESP of 0.00% and a Zacks Rank #3.
We believe that the growing adoption of Intuitive Surgical’s da Vinci system among physicians for general surgery, oncology, urology and gynecology procedures is a key catalyst. In this regard, the venture with Dextera Surgical to initiate a joint development program on robotic staplers for da Vinci Surgical System is notable. However, unfavorable currency fluctuations, increasing regulatory headwinds and low capital investment in hospitals are expected to be major dampeners. (Read more: Intuitive Surgical Q3 Earnings: What's in Store?)
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