First quarter earnings season is coming to an end and the earnings recession still deeply entrenched in the market’s memory. Almost all S&P 500 companies have reported and results have been largely disappointing.
This marked the first time the S&P 500 recorded four consecutive quarters of year-over-year declines in earnings since 2009. Unfortunately, Q2 is shaping up to be another slow period for America’s biggest companies including Chipotle (CMG) , Gap (GPS), Apple (AAPL), Alcoa (AA) and Gilead Sciences (GILD).
According to the Estimize data these names have been on the move, as witnessed by negative year over year growth estimates, heavy downward revisions and a history of missing expectations. The combination of these factors have typically led to a significant underperformance in each of the stocks.
1) Chipotle Mexican Grill (NYSE:CMG)
Consumer Discretionary – Hotels, Restaurants & Leisure
The food safety and health scares that closed out 2015 have really put a damper on Chipotle’s earnings. Financial performance of CMG has dipped along with the traffic, with many consumers not ready to return to the burrito chain in the wake of the E.coli and norovirus cases.
The first quarter of 2016 featured declines in every key metric: revenue decreased 23.4%, comparable sales down 29.7% and operating margins slide 27.5%. It hasn’t helped that food prices such as chicken and beef have been rising while Chipotle also continues to raise wages for its in-store employees. As the company continues its gradual path to recovery, it’s safe to say that it won’t be fully realized this quarter.
The Estimize community is down on Chipotle heading into its Q2 earnings. The consensus data is calling for earnings per share of $1.12 on $1.03 billion in revenue. Compared to a year earlier, this reflects a 70% decline on the bottom line and 12% on the top. In the last 3 months per share estimates have declined 65% with revenue falling 16%. Estimates should continue to fall as we near Chipotle’s July report date. All of these troubles have no doubt hurt shareholders. Shares are down nearly 40% since news broke of the first health scare.
2) Gap (NYSE:GPS)
Consumer Discretionary – Specialty Retail
Weak consumer spending for apparel and accessories has been a consistent trend that has been affecting certain retailers, the Gap included. Prior to its Q1 report, management warned that earnings would significantly miss expectations and, no surprise, they did. Earnings of 32 cents per share fell short of the Estimize consensus data by 12 cents, recording a drop of 41% from a year earlier.
Weaker traffic and higher levels of inventory put pressure on the bottom line. This marked the fifth consecutive quarter that both earnings and revenue declined. The Gap’s core brands have all struggled in this time period, with Banana Republic stores faring the worst.
Competitive pressures and the emergence of fast fashion have also played a role in Gap’s dwindling growth. The Estimize community is already predicting another weak quarter. The consensus is calling for earnings per share of 46 cents on $3.69 billion in revenue. Profits are expected to contract 25% on a year-over-year basis with revenue down 4% over the same time frame. Per share estimates have been cut 22% since its last report, reflecting analysts' negative sentiment towards the company.
3) Apple (NASDAQ:AAPL)
Consumer Discretionary – Computers & Peripherals
A long held favorite on Wall Street, Apple has hit a few bumps in the last 6 months. The iPhone has been at the core of its problems.
Last quarter marked the first time Apple reported negative revenue growth in 13 years, thanks to slowing iPhone trends. It’s already expected that these trends should continue to be a problem for 2016 and perhaps 2017.
Things are only getting worse for Apple, when earlier this year major iPhone suppliers guided lower on fiscal year expectations, and just this week Apple announced its shift to a 3 year iPhone product cycle. The iPhone is a cash cow for Apple, accounting for two thirds of sales in a given year. Apple’s over-reliance and now demise of the iPhone puts the stock in an uncertain situation.
In the past 12 months, shares have slid 25.4% with no sign of recovering until the iPhone 7 is released. Just last week, Goldman Sachs) cut its price target for Apple on negative sentiment towards the company’s lack of innovation and sluggish earnings. Consequently, the Estimize community believes this will be another disappointing quarter. The consensus data is looking for earnings per share of $1.46 on $42.47 billion in revenue reflecting double-digit declines on both the top and bottom line. Analysts have revised estimates down nearly 24% in the past 3 months and should continue to fall in the run up to its July report date.
4) Alcoa (NYSE:AA)
Materials – Metals & Mining
Earnings season doesn’t officially kick off until metals and mining giant, Alcoa, reports results. Earnings have underperformed lately with Q1 marking the third consecutive period that both profits and revenue declined.
Alcoa is not alone however. The industrials sector in the United States have suffered in recent years, driven by a strong U.S. dollar, volatile oil prices and overall economic weakness. Alcoa felt the impact of this last quarter, particularly in its international markets.
The company is guiding for declines in the range of -2 and -4% this year for its global heavy duty truck and trailer segments. They have also unveiled plans to spin its profitable assets over two new companies in an effort to boost its share value. Shares are down 25% from a year earlier with a high chance of falling further if earnings disappoint.
The Estimize consensus believes earnings this quarter will be just as bad, as evidenced by downward revisions activity. Analysts are looking for earnings per share of 9 cents on $5.27 billion in revenue. Compared to the same period last year this represents a 51% decline on the bottom line and 9% on the top. Weak comparisons have contributed to the 2% declines the stock typically sees in the 5 days following a report. Unless the economy starts to improve, the industrial sector and Alcoa will continue to hurt.
Gilead Sciences (NASDAQ:GILD)
Health Care – Biotechnology
Healthcare is one of the most volatile industries today. A single announcement can swing a stock significantly in either direction. Gilead had been on the right side of those swings as earnings continued to rise and top expectations over the past few years. However, dismal first quarter earnings have experts believing that Gilead’s success is coming to an end.
Last quarter broke a 6 quarter streak of beating on both the top and bottom line. Shares are now down 15% since the start of the year and may move lower unless investors hear some good news.
Gilead is best known for its Hepatitis C drugs, Harvoni and Solvaldi. The drugs have been very successful in the past few years but the emergence of Merck's (NYSE:MRK) own hep C drug at a lower price point has started to take its toll. With a number of new drugs in the pipeline and the recent approval of its new HCV drug Epclusa, earnings should start stabilize. For now though, Q2 is expected to be just as underwhelming.
The Estimize consensus is calling for earnings per share of $3.04 on $7.79 billion in revenue. Compared to a year earlier, this reflects a 2% decline on the bottom line and 5% on the top. Those losses should expand as revisions activity becomes more rampant in the run up to its report date.