Earnings season has been in full swing for a few weeks now, and two of the big food names are reporting this week. We're also going to get a look at some big names on U.S. retail from two very different points of view.
Corporate food stocks have had a rough time finding growth of late, with big names like Kraft Heinz meeting serious headwinds in its efforts to drive growth in its product segments. Similarly, Tyson Foods (TSN 0.48%) and Dean Foods (DF) have had some flat years and renewed sales growth is much needed.
Walmart (WMT 0.18%) on the other hand is one of the best indicators of continued consumer strength in the economy. Being the largest U.S. retailer, and largest employer, the gains and losses at Walmart are very indicative of overall economic health. Meanwhile, J.C. Penney (JCPN.Q) has been bogged down in the so-called "retail apocalypse" and is having trouble adapting to the changing retail landscape.
Consumer strength remained strong early in the year, despite growing fears of a recession. These companies are all inherently tied to consumer spending. Let's take a look at the four companies that all have earnings reports out this week and see what those reports might have to say about the forward trajectory of their stocks.
1. Tyson Foods: Earnings out Nov. 12
Tyson Foods has experienced rather slow revenue growth over the past five years. Despite that, prudent management has still managed to result in annually improving operating income and subsequent earnings. Full-year diluted earnings increased by 71% to $8.35 per diluted share in 2018. Through the first three quarters of fiscal 2019, total sales are up 4.8% to $31.52 billion. While third-quarter earnings were strong, net income is down 33.5% through the first nine months of the year to $1.65 billion. On an adjusted basis, earnings are down 7% through the first nine months.
What to watch for: So far the strength in the business has been in beef, which set record operating margins. Looking to the fiscal fourth quarter, analysts are expecting earnings of $1.23. The company's own guidance provided forecasted adjusted full-year earnings of $5.75 to $6.10. Aside from an earnings beat, I'd be watching for continued strength within their beef products, with hopes for some top-line growth. Tyson Foods has done well unlocking earnings value from its business. What it needs to do now is jump-start total revenues a bit.
2. Dean Foods: Earnings out Nov. 12
Dean Foods has had a real problem growing sales. Through the last five fiscal years, we've watched the dairy products company's revenue stagnate. Through the first nine months of 2019, the company has reported losses of $1.38 per share. Headwinds like low milk prices have hit Dean Foods pretty hard this year, and the stock has reflected that. The stock is down from just under $4 a share at the end of 2018 to less than $1 this week.
The stock is trading well below book value, but that doesn't necessarily make it tempting as a bargain purchase. Analyst estimates are calling for continued losses through 2020, and the balance sheet seems to be deteriorating quickly. Total shareholder equity on the balance sheet was down 37% through the first six months of the year to $195.7 million. Long-term debt is rising, and the lack of a clear way back makes Dean Foods seem pretty risky.
What to watch for: Third-quarter estimates are calling for losses of $0.22 per share. In terms of earnings, the forecasting doesn't really inspire hope of surprises. Instead of focusing on the foregone conclusion on earnings, I'll be watching the balance sheet and cash flow. The big questions here are whether or not Dean Foods is healthy enough to survive the problems at hand.
3. Walmart: Earnings out Nov. 13
We've watched Walmart put a lot of effort into driving its comp sales higher despite the rise of e-commerce. Initiatives like "order online, pick up at the store," the growth of its online shopping option, and the integration of India's e-commerce operation Flipkart seem to be taking things in the right direction.
The catch has been that earnings over the past few years have suffered declines due to the added investment costs it's making. In the company's most recent quarter, Walmart displayed strong U.S. comparable-store sales growth of 7.3%, indicating continued strength from consumers. Total revenues through the first six months of the year are up 1.4% to $130.37 billion. Thanks to a drop in one-time charges, net income was $7.42 billion through the first half of the year compared to $1.27 billion in 2018.
What to watch for: Third-quarter emphasis will be on continued digital success and comp sales. Walmart needs to prove that it can continue the success of its brick-and-mortar business, while also demonstrating an ability to compete online. The integration of its stores with online ordering is where the value truly lies for Walmart. What we don't want to see are earnings diminished by the expense of things like next-day delivery. Analyst estimates are calling for $1.09 per share in the third-quarter results.
4. J.C. Penney: Earnings out Nov. 14
Simply put, J.C. Penney (JCPN.Q) is in dire straits. The decline of this one-time powerhouse has been well documented. J.C. Penney failed to react to a shifting retail environment and carries a painful debt load that will be very difficult to overcome. Sales have fallen 7.4% through the first half of the year, and losses continue to plague the company. In the second quarter, J.C. Penney did manage to shrink those losses, reporting $48 million in losses compared to $101 million in the second quarter of 2018.
The problem here is the debt. J.C. Penney carried more than $3.5 billion in long-term debt at the end of Q2, and the liability is hindering its ability to put its full resources into bringing the business back to life. The losses are only making the situation worse, and it's hard to see how management will turn things around. We've seen the stock fall below $1 this year, and the company really needs some good news. Estimates are calling for losses of $0.55 per share in the third quarter.
What to watch for: It's all about sales. J.C. Penney is really going to start suffering if we don't see some sort of proof that comparable-store sales and/or earnings can shift to the positive. Obviously the shares have already suffered, but the company has managed to maintain some equity on the balance sheet. That won't last much longer unless we see some improvement on the income statement. New ideas like stores with fitness classes, coffee shops, etc., might seem like a clever draw, but how much will it cost J.C. Penney to revamp all of its stores? It's going to be a hard sell when comp sales are still declining.