Friday, May 24, 2013

5 Reasons to Worry About Next Week

The economy is showing signs of fumbling the recovery.

Even though some Fed members have suggested easing back on central bank stimulus, the coast isn't exactly clear. Despite the spike in home sales and this week's better-than-expected report on new claims for jobless benefits, we still saw a report showing that manufacturing has slowed for the second month in a row.

The news isn't just iffy on the macro level. There are also more than a few companies that aren't pulling their own weight in this supposed economic recovery.

There are still plenty of names posting lower earnings than they did a year ago. Let's go over a few of the companies that are expected to go the wrong way on the bottom line next week.

Company

Latest Quarter EPS (estimated)

Year-Ago Quarter EPS

Seadrill (NYSE: SDRL  )

$0.58

$0.71

Guidewire (NYSE: GWRE  )

$0.03

$0.10

Splunk (NASDAQ: SPLK  )

($0.06)

($0.04)

Yingli Green Energy (NYSE: YGE  )

($0.43)

($0.20)

Joy Global (NYSE: JOY  )

$1.58

$2.04

Source: Thomson Reuters.

Clearing the table
Let's start at the top with Seadrill. The deep-sea offshore oil-drilling rig contractor has been magnetic to income investors seeking out beefy dividends. Seadrill's 8.4% yield is certainly attractive. Is it sustainable? Payout chasers need to be careful when their investments start reporting dips in profitability. If the trend continues to worsen, the chunky dividend checks will be endangered.

Thankfully, that isn't the case at Seadrill. Yes, net income is expected to take a hit in Tuesday's report, but analyst see earnings climbing 29% for all of 2013 and another 31% come next year.

Guidewire is a provider of enterprise software solutions for the property and casualty insurance industry. It went public last year at $13, and has gone on to more than triple in value. You certainly don't expect that kind of ascending stock chart to be accompanied by a company with profits going the other way.

Top-line growth is still there. The pros see Guidwire's revenue increasing at a reasonable 12% clip in its latest quarter. The problem here is contracting margins, and that often happens when a company is early in its growth cycle and investing in expanding its reach.

Splunk is another of last year's hot IPOs. The "big data" specialist has gone on to more than double since going public at $17.

Splunk provides the software that thousands of companies, government agencies, and universities use to get smarter by analyzing the streams of real-time and historical machine data that can be used to improve operations.

Just like Guidewire, there isn't a growth crisis at Splunk. Analysts see a hearty 45% surge in revenue. The problem here is that Splunk has been losing money. It did manage to squeeze out a rare profitable showing three months ago, but the pros see a return to red ink this time around.

Yingli's future is bright. Few deny the long-term significance of solar energy. The problem for Yingli is that dicey global economies have forced countries and corporations to scale back on the costly initial outlays to go public, leaving the vertically integrated maker of photovoltaic products posting widening losses.

Shares of Yingli did open sharply higher today after it announced a lucrative deal to provide multicrystalline photovoltaic modules to a major Malaysian power plant. However, that deal obviously had no bearing on Yingli's recently concluded quarter.

Finally, we have Joy Global. The maker of mining equipment was a big winner when metal prices were soaring and emerging markets were digging deep for natural resources. It's a different scene these days, and Joy Global joins Yingli as a company projected to post a sharp drop on the bottom line and a double-digit percentage decline in revenue.

Joy Global has managed to beat profit targets in three of its past four quarters, but analysts don't see its revenue growing again on an annual basis until fiscal 2015.

Why the long face, short-seller?
These companies have seen better days. The market has rewarded many of these stocks with reasonable gains over the past year, but they still haven't earned those upticks. Lower earnings translates into higher earnings multiples, and nobody wants to see that happen.

The good news here is that Wall Street already expects these companies to deliver shrinking bottom lines. In other words, the bad news is already baked into the shares.

The more I think about it, the less worried I become.

Start moving in the right direction
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