Sunday, April 20, 2008

Monday's Biggest Earnings Reports

The deluge of earnings releases will continue this money, as multiple noteworthy companies report earnings.

If Monday's morning reports are good, the market should continue the rally that began last week. Asia is currently up a couple percent overnight, led by exporters like Honda.

The biggest story Monday morning will be Bank of America. According to Yahoo! Finance and EarningsWhispers.com, the average analyst estimate is either $.41 or $.45 per share, though estimates vary wildly from losses to almost $1 of profit.

Based on releases from Citi and other major banks, BAC will probably disappoint, but anything short of absolutely unthinkable will be applauded (ala Citi's earnings on Friday). As many professionals are starting to believe that we are in the bottoming process, they expect bad news, just not new, terrible news.

BAC started last week around $35.5 and ended up 10% at $38.5 - I think it'll trade at $40 after earnings tomorrow. However, if BAC does turn a $.50 profit, maybe the shares will be up 10% at $42.

Netflix is another company reporting today that I'll focus on.

First, according to Yahoo! Finance, insiders sold 700,000 shares, or almost 20% of total holdings, over the past 6 months. It's acceptable to cash out of a successful investment and diversify, but maybe they think the valuation has become too rich.

The average estimate for NFLX's quarter is $.21/share, while EarningsWhisper is calling for $.25. Whether or not they beat the street, I think that the NFLX is already fully valued.

Expecting $1.25 this year makes NFLX's current P/E about 30, while next year's estimated $1.53/share creates a 25 forward P/E. Those valuations aren't insane, but Netflix may not be able to continue growing as quickly as they have in the past.

BlockBuster seems to be getting their act together, as they recently reported a profitable quarter. For some that is interested in mail-in DVDs, BB offers the same mail-in program with the added bonus of in-store exchanges.

However, even the quick 1-2 day turnaround of NFLX may be obsolete in just a few years. Now, movies are available on-demand through digital cable for about $3 a pop - and most cable providers and premium channels include a large library of free movies. Also, companies (including NFLX) are rolling out downloading services, which will become even more accepted as internet connections keep becoming faster.

A 4-month chart of NFLX shows its impressive run-up from about $21 to $40, which occurred even as the wider market was moving sideways (or down). NFLX actually fell about 5% on Friday while the broad market rallied, due to an analyst's comment about valuation.

It looks like this quarter's report will determine the direction of NFLX stock. The long-term uptrend looks like it could be broken as the stock just bounced off an "overbought" RSI level, but there appears to be support at $35, minimizing pain. However, as the valuation is a little rich, I think that a good report may already be priced in. Maybe if NFLX surprises positively, it'll bounce back to $40, which is where it was two sessions ago. There really hasn't been much options volume on NFLX, which can show where investors expect the stock to move to.

NFLX will close near $35 if the earnings don't meet estimates or guidance isn't good, while the stock may pop to $40 if they beat and raise.

In the long term, unless they say they'll make $1.50 this year and $2 next year, I don't see much more upward movement for NFLX over the coming months. As I stated, growth is slowing, competition is increasing, and valuation is already rich (though not ridiculous). 20% is nothing to sneeze at, but I see $45 as the ceiling for NFLX in 2008. If things take a turn for the worse, NFLX has much of a recent 90% price increase to give back.


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