The fourth-quarter earnings season kicked off last week with mixed results from several big banks. Financial firms will be in focus again this week, with blue chip Goldman Sachs (GS, $383.64) one of the highest-profile banks to report. Insurance giant UnitedHealth Group (UNH, $468.37) and streaming pioneer Netflix (NFLX, $517.61) round out a busy earnings calendar.
Earnings season is always an important time, says Brad McMillan, chief investment officer for registered investment advisor Commonwealth Financial Network. But this one, in particular, will be especially important.
Why?
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For one, he says, Q4 results will likely show how much damage was done to the economy in the short term by the delta and omicron variants of COVID-19. "In the longer term, this quarter's results will give us some guidance as to whether the very strong earnings growth we saw last year will continue for another couple of quarters – or peter out," McMillan adds.
"The resilience of corporate earnings has far exceeded even the most bullish of forecasts coming out of this crisis," says Michael Reinking, senior market strategist for the New York Stock Exchange. In recent quarters, companies' use of pricing power and strong demand by consumers helped firms beat estimates, and Reinking sees a similar setup heading into the Q4 earnings season.
"The operating environment remained challenging again though there were some signs that supply chain issues were dissipating before omicron hit," he writes. And while omicron could throw a wrench in any progress that was made in Q4, it seems as though "the demand side of the equation has remained strong."
And while just a slim percentage of S&P 500 companies have unveiled their results, the news, so far, is good, McMillan adds. "More than three-quarters have reported earnings higher than expected, and nine of 10 had better revenue than expected."
Are Slowing Growth Expectations Priced Into Netflix Stock?
Netflix stock entered the fourth quarter of 2021 with the wind at its back. The shares were trading north of $600 per share in early October, well above their summer lows near $490. The momentum continued into November, with the shares briefly topping the $700 mark for the first time ever, before it all came crashing down. At last check, NFLX stock is hovering around $518 – down 26% from that mid-November peak.
UBS analyst John Hodulik thinks momentum stalled in Q4 subscriber growth, as well. Specifically, he says NFLX came into October following the September launch of the highly popular Squid Games series and the seasonal pickup in December lagged previous years. "This is despite the robust content slate, suggesting the industry is still digesting outsized growth from the pandemic," he adds.
Hodulik is targeting 7 million new net adds in Q4, which marks a 14.3% year-over-year (YoY) decline. Nevertheless, given Netflix stock's recent selloff, the analyst believes expectations for slowing net subscriber growth are likely already priced in. He has a Buy rating on NFLX, calling the company a "secular winner with scale, penetration upside and pricing power."
As for Netflix's full fourth-quarter results, which are due after the Jan. 20 close, analysts, on average, are expecting earnings per share (EPS) of 82 cents – down 31% from the year prior. Revenue, on the other hand, is forecast to arrive at $7.71 billion, +16.1% YoY.
Analyst: Goldman Sachs Remains "Best in Class"
Goldman Sachs will follow in the wake of several of its peers when it steps into the earnings confessional ahead of Tuesday's open.
For GS' fourth quarter, the consensus estimate among Wall Street pros is for earnings of $11.73 per share (-2.9% YoY). The big bank is expected to post revenue of $12.01 billion, which is a modest 2.3% improvement from the year-ago figure.
In what was a record-setting 2021, "a spike in difficult-to-navigate late-quarter market volatility weighed on fixed-income trading and underwriting enough to mute the magnitude of our 4Q EPS estimate increases," says Jefferies analyst Jeffery Harte (Overweight, the equivalent of Buy).
Still, Harte is targeting earnings of $11.94 per share for Goldman, which is above the consensus. He sees GS as one of the big banks that has the scale to support returns and boost market share; whose business is fundamentally leveraged to economic recoveries; and whose valuation is attractive.
CFRA Research analyst Kenneth Leon (Strong Buy) agrees. "GS is executing on all cylinders with industry-leading performance, gaining market share, and growing assets under supervision, at $2.37 trillion, which drives fee income," he says.
"We think GS can extend quality growth in asset and wealth management and consumer banking, while investment banking has a strong pipeline," Leon writes, adding that Goldman is the best way to play these trends.
And the "best-in-class" stock is cheap, Leon adds. GS is currently trading at 9.8 times forward earnings, well below the S&P 500 at 21.1x and other lead asset managers like Charles Schwab (SCHW) at 24x.
Wall Street Expects Strong Q4 Results for UnitedHealth Group
UnitedHealth Group stock has pulled back alongside the broader equities market to start 2022, down 7% for the year-to-date.
Can the company's fourth-quarter earnings report – slated for release ahead of the Jan. 19 open – provide the jolt the stock needs to resume its longer-term uptrend?
Analysts are certainly bullish on the Dow Jones stock ahead of earnings. Of the 26 following UNH tracked by S&P Global Market Intelligence, 16 say it's a Strong Buy, six call it a Buy, three believe it's a Hold and one deems it a Sell.
Truist Securities analyst David MacDonald is one of those with a Buy rating on UNH. "We are bullish on UnitedHealth Group tied to the company's scale, diversification, attractive growth opportunities across multiple business segments and differentiated business model," he writes.
The analyst calls Optum – the company's pharmacy benefits manager – a "key differentiator." Among other bullish drivers, MacDonald points to UNH's "sizable" balance sheet and its ability to drive significant free cash flow, which is the money left over after a company has paid its expenses, interest on debt, taxes and long-term investments needed to grow its business.
When it comes to expectations for UNH's fourth-quarter results, Wall Street's pros are upbeat. On average, they see earnings of $4.31 per share (+71% YoY) and revenue of $72.67 billion (+11% YoY).
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