Weekly Preview: Earnings to Watch This Week 1-8-23 (C, DAL, JPM)

A stronger-than-expected December jobs report, which revealed a surprise decline in the unemployment rate, sent stocks sharply higher on Friday. The favorable response to the strong jobs report is a surprise to many investors and a stunning reversal of what has typically interpreted as “bad news” for the stock market.

Friday’s jobs report revealed that 223,000 new jobs were created in December, which came in higher than economists had predicted. The increase in jobs sent the unemployment rate lower to 3.5%, a decline of 0.2 percentage points, which also came in better than expected. Many economist expected for the unemployment rate to remain steady 3.7%. However, average hourly earnings increased to 4.6%, falling short of the 5% economist had modeled for.

Overall, although the job numbers came in better than expected in December, it still showed a slight decelerating in payrolls, compared to the 256,000 gain in November. It appears that growth deceleration, along with the softer average hourly earnings number, is what sparked Friday’s rally in stocks. It signals yet another reason for the Federal Reserve to be less aggressive in its attempt to curb inflation and slow economic growth. Will the Fed use this latest job data to pause — or even just slow down — the pace of rate increase? Investors are betting they will.

On Friday the Dow Jones Industrial Average soared 700.53 points, or 2.13%, to close at 33,630.61. Strong gains in Apple (AAPL), Microsoft (MSFT), IBM (IBM), Nike (NKE), Salesforce (CRM) and several other blue-chip names powered the rally. The S&P 500 index added 86.98 points, or 2.28% to end at 3,895.08, while the tech-heavy Nasdaq Composite gained 264.05 points, or 2.56%, to end at 10,569.29. For the broader market as a whole, Friday’s action is a positive sign for the all three major averages.

It’s also encouraging to see the sustained jobs growth, which is typically a lagging indicator of where the economy truly is. That question will be clearer following the fourth quarter results of the holiday shopping season. Investors will brace for strong guidance and the market will watch closely not only for stronger corporate profits, but for how CEOs talks about the pace of economic activity. That said, staying invested and riding the rate-hike cycle is hard to do. But understanding that this is part of the cycle, and remaining patient is certain to pay off in the long run.

On the earnings front, here are the stocks I’ll be watching this week.

Citigroup (C) – Reports before the open, Friday, Jan. 13

Wall Street expects Citigroup to earn $1.22 per share on revenue of $17.88 billion. This compares to the year-ago quarter when earning were $1.46 per share on revenue of $17.02 billion.

What to watch: Commercial bank stocks such a Citigroup did not fare as well as investors expected in 2022 amid a period of rising interest rates. Banks often benefit from increasing interest rates, which increases net interest margins and their overall profits. However, that was not the case for Citigroup, which suffered a near 30% decline in its stock during 2022, underperforming its bank peers. Aside from fears of a global recession, the bank was seemingly punished for its fundamentals, including suspending its shares buyback program due to an increase of 1.5% in its capital requirements. Essentially, Citi’s stress, or its capital position, didn’t allow it to return capital to shareholders. In the most recent quarter, the bank recorded a loan loss provision of $1.33 billion. For some context, this was higher by more than 50% (on average) than the reported loan loss provisions in the first half of 2022. The stock was punished for this, even though the bank reported a net interest income of roughly $12.6 billion, which rose 15% year over year. Heading into the fourth quarter, investors will be looking to see how the bank continues to improve in this area where it still has tons of ground to make up when compared to its peers. The bank currently offers plenty of value, trading at roughly 75% of its tangible book value. That combined with an attractive dividend yield of 4.36%, along with a potential resuming of the share buyback makes Citi a stock to own in 2023.

Delta Air Lines (DAL) – Reports before the open, Friday, Jan. 13

Wall Street expects Delta to earn $1.34 per share on revenue of $12.39 billion. This compares to the year-ago quarter when earnings came to 22 cents per share on $9.47 billion in revenue.

What to watch: Airline stocks have been under pressure for most of 2022, with data showing that booking trends fell below pre-pandemic levels in some cases, while a surge in oil prices, which is often a prelude to a recession, pressured the profitability in airline stocks. However, Delta Air Lines has found ways to land softly amid slowing air travel. The stock has risen 22% over the past six months, including 10% this week alone. Ahead of the quarter, the company is expected to benefit from revenue increases from international travel, where it has reported a gradual recovery, especially in Latin America and Transatlantic routes. This week Argus analyst John Staszak upgraded Delta to a Buy rating from Hold, setting a new price target of $39. From currently levels, the target implies a potential return of 15%. “We think that the current multiple inadequately reflects prospects for steady growth in business travel and a recovery in international flight,” noted Staszak. The airline is expected to report 2022 EPS of $3.10 and 2023 EPS of $5.50. Staszak also expects low double-digit operating margins for 2024. As such, with the stock currently trading at a P/E multiple of less than 10 times 2023 estimates which is significantly below its historical levels, Delta remains one of the better bargains in transportation stocks.

JPMorgan Chase (JPM) – Reports before the open, Friday, Jan. 13

Wall Street expects JPMorgan to earn $3.12 per share on revenue of $34.3 billion. This compares to the year-ago quarter when earnings came to $3.33 per share on revenue of $30.35 billion.

What to watch: With gains of more than 20% over the past six months and 21% in three months, shares of JPMorgan Chase have been one of the better performing stocks in the financial sector. Despite the backdrop of a possible recession, the bank is being rewarded for several quarters of operating efficiency. JPMorgan has shown it can navigate these tough headwinds to return value to shareholders, producing strong third results with revenue growing by 10% year over year. The bank capitalized on higher interest rates, resulting in $17.5 billion of net interest income. With strong Q4 profitability guidance of $19 billion, the bank sees no signs of slowing down. At the current valuation of $137 per share, JPMorgan stock trades below the average price target of $143. What’s more, shares are currently priced at a forward P/E ratio of 11 which is below its normal P/E of 13 and its five-year and ten-year average go 12.5 and 11.4, respectively. With the company projected to grow EPS at an annual rate of 9% in 2023. Combined with its 3.00% dividend yield, which has grown at an average of almost 8% over the last five years, JPMorgan looks like a solid opportunity ahead of Q4 earnings.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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