09 January 2015

Trading US Earnings Season in Volatile Markets

Earnings season kicks off in the US this week and here’s a preview of Alibaba, Citigroup and Exxon Mobil; three stocks you may want to look at ahead of their earnings announcement.

​​​​​​​​​​US earnings season got off to a strong start on Monday with Alcoa Inc. (AA:xnys) reporting fourth-quarter earnings of $0.33 a share on revenue of $6.4 billion. The aluminium producer beat the $0.27 a share forecast by analysts in a Bloomberg survey, sending shares in the company higher during extended trading. 

The first US earnings season of 2015 comes at an interesting time for global financial markets. Concerns regarding the oil price and increased speculation as to when the Federal Reserve will take decisive monetary policy action are currently dominating headlines in the US.

It is important to note that the declining oil price has had a large impact on estimates this time round. Over the last few months, total earnings growth across the S&P 500 has been falling, partly due t​o energy sector companies slashing their earnings estimates.

Nevertheless, US earnings season presents stock, CFD and stock option traders with an array of choices, even in these volatile times. Earnings releases from large companies and sectors can have a big influence on the performance of entire indices. Here is a brief look at three stocks and what the market may expect from their earnings release.

1) Citigroup Inc. (15/01)

Citigroup Inc. (C:xnys) has endured a difficult end to 2014. At its last earnings release on 7th October, the banking giant was forced to restate its earnings to account for additional legal fees for the quarter. Nevertheless, a 13% rise in income, compared to the third quarter of 2013, saw its share price rise by 3.15%, as the bank announced a shift in strategy that would lead it to cut its operating footprint from 35 to 24 countries. The move took markets by surprise and was seen as one of the first announcements to trigger a rally in stocks that earnings season. 

The bank has moved in line with US equities on the whole over the last month; although it may need an improvement on the $1.081 earnings per share (EPS), forecast by analysts in a Bloomberg survey, to keep its share price above the $50 level. It hovers just around there now.

2) Exxon Mobil Corp. (02/02)

Major energy companies like Exxon Mobil Corp (XOM:xnas) have borne the brunt of the recent slump in oil prices. At the beginning of October last year, WTI Crude Oil futures were trading above $90. After OPEC's decision in November not to reduce output, WTI Crude Oil futures have fallen to below $50. This also had a significant impact on companies such as Exxon Mobil and Chevron Corp. (CVX:xnas). 

It is important to remember that the estimated EPS for the last quarter of 2014, forecast by analysts in a Bloomberg survey, has already been revised down. The market has thus perhaps already priced in a weak quarter for the company, pushing the share price from above $94 before Christmas to below $90 in January. This may be a difficult stock to trade, one may have to consider the company's long-term outlook should the oil price remain low.

3) Alibaba Group Holding Ltd. (13/02) ​

Alibaba (BABA:xnys), the Chinese internet giant which is part-owned by Yahoo! Inc. (YHOO:xnas), underwent the largest IPO in stock market history on 18th September of last year. After a long auction period before the opening of the NYSE that day, the stock uncrossed to open far above $99. This retail powerhouse is trading at approximately $110 at the start of this year. 

Around 90% of the company's revenue is generated in China. As a result, the share price has endured a bumpy ride at times amid fears over Chinese economic growth. Surprise rate cuts introduced by China's central bank on 23rd November of last year may not be enough to reach the central bank's target growth of 7.5%. This does not necessarily mean that Alibaba will report a lower EPS than the $4.642 predicted by analysts in a survey by Bloomberg. 

On 'Singles' Day' in China, the company's sales surpassed the $5.9 billion in revenue generated during 2013 with a record day of over $8 billion in sales. This was an extraordinary day for the company and despite the economic slowdown in China, the company is still extremely profitable. Alibaba's earnings report due out on 13th February, one day prior to Valentine's Day, will tell investors just how profitable it is.

Earnings season may throw up more surprises, both to the upside and downside, than it has done previously because of the volatility of the global economy in the last quarter of 2014.​

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.