The holidays are finally behind us, and after two shortened trading weeks, this the week where the market should get back into its natural rhythm with volume starting to pick up.
The real earnings season will not officially kick off until the 15th when big banks Wells Fargo (WFC) and JP Morgan (JPM) get things going with their quarterly reports, but there are a few big names to pay attention to before that happens.
This week the earnings reports will feature a couple of the biggest homebuilders. Last year was a tough year for housing stocks as rising interest rates hang over the sector and could lead to a material slowdown in U.S. home sales.
While the housing market has already started to slow, we are still a long ways away from a housing crisis, but you would not know that from looking at the charts of some of the big housing and housing-related stocks. The good news for the sector is that when the Federal Reserve lifted rates again last month it did so while at the same time lowering its forecast of 2019 rate hikes from three to two. If the market continues to show volatility through the year the Fed may not even move to lift rates more than one time.
With the Fed lowering its forecast rate hikes for 2019, housing stocks could find bottom and start to erase some of last year’s losses, but that will only happen if they are able to impress the market with their quarterly reports.
This week’s reports will shed some light on the health of the housing market but there are also a few big non-housing stocks scheduled to report their quarterly numbers this week. Let’s take a closer look at five reports that the market will be closely following.
KB Home (KBH)
KB Home (KBH) is set to report its fourth-quarter results before the market open on Wednesday. The company is expected to report earnings of 93 cents per share on sales of $1.35 billion. During the same period last year the company earned 84 cents and had sales of $1.36 billion. KBH has been weak over the last year with the rest of the housing sector, and while the stock has stabilized over the last two months it remains in the lower end of its 52-week range. KBH is currently trading at just 13 times earnings and 7 times forward earnings, making it an attractive value. Earnings are expected to drop just under 11 percent this year, but the long-term outlook is favorable with profits forecast to rise 18 percent per annum over the next five years. As the Federal Reserve slows its pace of rate hikes the housing sector should stabilize, and if KBH is able to keep pace with its future estimates the stock should trend higher based on its current valuation. KBH is now trading at $20.82 and analysts have an average price target of $24.70 on the stock.
Lennar Corp. (LEN)
Lennar Corp. (LEN) will report its fourth-quarter numbers before the market open on Wednesday. Ahead of the quarterly report analysts expect the company to post earnings of $1.93 per share on sales of $6.53 billion. During the same period last year, the company had earnings of $1.29 and sales of $3.8 billion. Earnings and sales have both been rising sharply, but the market has driven the stock lower over the last year, but the stock has been stable since the start of November in a sideways trend. The stock’s valuation looks very attractive with shares now trading less than 10 times earnings and having a forward P/E of just 6.2. If the company hits its estimate, it would mark year over earnings growth of 49%. The street expects the company to not only hit its estimate, but to top estimates with a whisper number of $1.96 for the quarter. LEN is currently trading at $42.12 with an average price target of $61.40.
Bed Bath & Beyond (BBBY)
Bed Bath & Beyond (BBBY) may not be a U.S. homebuilder, but the stock is closely tied to the housing sector and as such is worth mentioning. Bed Bath & Beyond was weak in 2018, but the stock’s weakness goes much further back than 2018. The home goods retailer has struggled to keep pace in the changing retail landscape where e-commerce continues to grow in importance. Last quarter the company missed estimates on both the top and bottom line, and earnings were down 46% year over year with sales flat. The company reports after the market close Wednesday with the consensus calling for earnings of $0.17 per share on revenue of $3.04 billion. During the same period last year, the company had earnings of $0.44 and revenue of $3.0 billion. Despite the growing importance of e-commerce, most big brick-and-mortar retailers have enjoyed higher customer traffic, but Bed Bath & Beyond has not been so fortunate, with comparable same store sales down 5% last quarter. The company has been forced to rely on discounted merchandise to keep sales from falling, but this has hurt its gross margins and resulted in sharp declines in income. This is expected to continue for at least the next two years and poses big risks to the stock. BBBY is currently trading at $11.77 with an average price target of $14.36.
Discount retailer PriceSmart (PSMT) will report its fiscal first-quarter numbers before the market open on Wednesday. The consensus calls for earnings of 52 cents for the quarter, down from 74 cents during the same period last year. PriceSmart has a horrible earnings track record, posting weaker than expected earnings each of the last 11 quarters. The company has managed to top revenue estimates the last four quarters which has helped cushion the damage of the earnings misses, but still the stock has steadily lost value over the last six months. PriceSmart is a discount retailer and its quarterly report will give a better insight into the overall retail sector. Despite the stock’s recent weakness, analysts remain upbeat with an average price target of $80 on the stock, which is currently trading at $61.40. PriceSmart is expected to grow earnings by 17% during the current year and looking ahead analysts forecast average annual earnings growth of 15% for the next five years. The stock is now trading with a forward P/E of 18, so there is a decent amount of upside potential if the company is able to break its streak of earnings misses and post results in-line or better than expected.
Constellation Brands (STZ)
Beer, wine and spirits maker Constellation Brands (STZ) will report its fiscal third-quarter numbers before the market opens Wednesday. The company is expected to post earnings of $2.04 per share on revenue of $1.91 billion. During the same period last year the company earned $2.00 on sales of $1.8 billion. The street expects a small earnings beat for the quarter with a whisper number of $2.08.
Constellation Brands believes there are big opportunities in the growing medical and recreational marijuana markets that are opening (ten states in the U.S. have legalized recreational marijuana use and 33 have medical marijuana), and over the last year the company assumed a $4 billion stake in Canadian cannabis company Canopy Growth which is around 35% of the company. As more regions open, marijuana could provide Constellation a valuable revenue stream that could boost earnings growth substantially. The company will likely discuss its view of the growing marijuana market in its conference call. Investors are very excited about the marijuana sector, and Constellation is a top pick since it has such a strong non-marijuana beverage business just in case the marijuana sector has been overhyped by Wall Street. The stock currently trades at 10 times earnings, and analysts see decent upside potential with an average price target of $238.13 versus its current price of $170.99.