I follow a large number of companies, so the usefulness of a watchlist for me cannot be overstated. Without my watchlist, I'd be unable to keep up with my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week. I'll also discuss at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, and I don't guarantee I'll take action on the companies being discussed; but I do promise that you can follow my real-life transactions through my profile, and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
This week's watchlist is devoted to three upcoming earnings events you should have a close eye on.
There are plenty of tech names to watch this earnings season, but few have as much prestige as e-commerce kingpin Amazon.com. Amazon is already unique in that it's challenging the common boundaries of what an e-commerce company is.
However, Amazon is particularly intriguing in that it tends to defy the laws of gravity come earnings season. Normally, a company valued at more than 115 times forward earnings gets pulverized if its misses Wall Street's EPS estimates. Yet for Amazon, missing estimates is somewhat common, with the company falling short of the Street's estimates in six of the past eight quarters. Instead, investors tend to focus on year-over-year operating cash flow with the understanding that Amazon is reinvesting almost all of its profits into new projects and personnel. Therefore you'll also want to be keen on the operating-cash-flow figure, as will play a large role in where Amazon heads during the near term.
Ironically, this report is less about what Amazon has done recently and more about what it plans to do in the second half of 2014. Investors are excited about the company's launch of its Amazon Fire smartphone, which has the potential to give Apple and other smartphone developers a run for their money. Although, ask any number of Fools how they believe the Fire phone will perform, and you'll get a wide array of responses.
Investors are also highly intrigued with Amazon's request two weeks ago to the Federal Aviation Administration to be granted the go-ahead to test its flying delivery drones in the vicinity of Seattle, Wash. The thought process here is that drones could reduce traffic and expedite delivery, which would create a happier customer who's more likely to stay loyal to Amazon.
While talk of both upcoming events may be important in its conference call, I'm more interested in two other aspects of Amazon's results. First, I'm curious to see whether Amazon's international growth has stabilized or is still falling. In the first quarter, Amazon reported international sales growth of "just" 18%, but delivered a subpar increase in online media revenue of just 4% overseas, potentially signaling that Netflix is beating it to the punch.
The other factor I'm watching closely -- if Amazon discloses this figure -- is consumers' acceptance of the company's 25% price hike to its Prime membership. Prime is a great deal if you buy things from Amazon on a regular basis and/or use it as a streaming video service. For the on-the-fence Amazon user, however, Prime's price increase could scare shoppers away. I'm interested to see how well shoppers have adapted to this price hike.
All told, it will be an interesting quarter for Amazon, and you should certainly be watching it unfold Thursday evening.
Speaking of companies that have had a hard time meeting or exceeding Wall Street's estimates for an extended period of time, we have Xerox.
First of all, understand that this isn't your parents' Xerox anymore. Xerox has transformed itself and pushed away from its printing machine heritage to become a print services and information technology powerhouse. This isn't to say that Xerox doesn't still receive a good chunk of its revenue from the print business; but a majority of its revenue is geared toward high-margin services these days.
The big knock against Xerox is that it has completed a number of restructurings in recent years that have given way to spurts of growth, but nothing that's been consistent. Tight cost controls and share buybacks have kept Xerox's EPS steady during the past couple of years despite the fact that its net income has actually dipped in two straight years.
When Xerox reports this coming Friday, I specifically will be looking to see how the Affordable Care Act is helping its bottom line. One of the service aspects Xerox moved into was Medicaid payment processing. Xerox is responsible for all of California's Medicaid processing. California is one of the 26 states that chose to expand Medicaid, and also is the largest state by population in the U.S. There's a good chance Xerox picked up a significant amount of business related to last-minute ACA enrollments.
I'll also be looking at Xerox's percentage of service revenue relative to legacy revenue. Xerox has maintained that it would like to see IT and other high-margin services comprise two-thirds of its total revenue pie by 2018. In the first quarter, services revenue represented 57% of total sales, which could put Xerox ahead of schedule to reach its target.
At just 11 times forward earnings, and sporting a 2% yield, there's plenty to like for long-term-minded investors; but they'll also need to see solid evidence that Xerox is getting ready to emerge from its multiyear quagmire.
Gilead Sciences (NASDAQ:GILD)
Last, but certainly not least, reporting after the closing bell today is biopharmaceutical giant Gilead Sciences, which will deliver much-anticipated results from the sales of oral hepatitis C drug Sovaldi.
The story behind Sovaldi has been filled with joy, as well as controversy. On one hand, Sovaldi has turned into every bit a wonder drug as Gilead had anticipated when it purchased Pharmasset, the company behind Sovaldi's development, in Nov. 2011. In multiple phase 3 clinical studies, Sovaldi helped clear detectable levels of the hepatitis C virus in 90% or better of patients. Furthermore, it's approved for genotype 2 and 3 patients without the need for interferon administration, which often comes with nasty flu-like side effects, so patient quality of life during treatment has also improved.
On the other hand, this drastic improvement in patient quality, compounded with Gilead's $11 billion purchase of Pharmasset, comes with a bountiful price tag of $1,000 per day. A standard course of treatment for Sovaldi will set patients and/or insurers back a cool $84,000. This is a price that insurers have had some push back against, and to which select Congressional regulators have voiced their displeasure.
Gilead's upcoming second-quarter results will shed light on a number of factors and questions. For instance, have any insurers stopped covering the drug because of its high costs? Also, does Gilead have any intention of dropping Sovaldi's price tag if its combo of Sovaldi and ledipasvir is approved? This combo appears to have the tools to go head-to-head with AbbVie's direct-acting antiviral combo in treating the most common, but difficult-to-treat, type of HCV, genotype 1.
I'm also curious to see whether sales for Sovaldi drop off dramatically this quarter in lieu of the heavy stockpiling investors witnessed in Q1. No one was even close to expecting $2.27 billion in Sovaldi sales in Q1, so I wouldn't be surprised if sales dipped by as much as $500 million from the sequential first quarter. What will really be important is how well investors have prepared for this news. If Wall Street's hopes are too optimistic, then Gilead's shares could take a hit.
I still consider Gilead to be one of the more attractively valued biopharmaceutical companies you can buy today, and I strongly suggest keeping a close eye on this earnings report.
Is my bullishness or bearishness misplaced? Share your thoughts in the comment section below, and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company:
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Amazon.com, Apple, Gilead Sciences, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.