Earnings can change the outlook for a company, good or bad, and they can also validate an opinion that you already may have. In the case of these four companies, earnings on Wednesday showcased significant concerns, and you should be careful before buying.
Strong Presence, What About the Future?
Eli Lilly & Co. (NYSE:LLY) traded higher by more than 3% after significantly beating Q2 earnings expectations. The company posted a 6% year-over-year rise in revenue at $5.93 billion and beat EPS expectations by $0.15 with $1.16. This strength was attributed to strong sales in Cymbalta and Cialis, which grew 22% and 13% respectively. Lastly, the company slightly raised full-year revenue and EPS guidance above the consensus.
Looks like a home run, right? Sure, the company’s quarter and 2013 guidance was strong. However, the concerns surrounding Eli Lilly & Co. (NYSE:LLY) are in regards to next year, not this year. In 2014, Eli Lilly & Co. (NYSE:LLY) will lose patent protection on the blockbuster Evista and its $5 billion a year drug Cymbalta, which led to the company’s large beat on Wednesday.
Due to the company’s questionable pipeline, and the massive fundamental losses expected next year, I urge investors to think past the present and look further down the road. Most likely, you won’t like what you see.
Fundamentals Falling Fast
Seagate Technology PLC (NASDAQ:STX) began Wednesday’s session with losses of almost 9% following its report, but then recovered to post losses of just 2.67%. There are many who might view this performance as a good sign, seeing as how Seagate Technology PLC (NASDAQ:STX) did meet expectations. However, I am not buying it.
First off, the company’s historically high gross margins fell 560 basis points year-over-year to 28%. Secondly, PC shipments for the hard disk drive maker fell 25% year-over-year. Lastly, only $42 million was spent on share buybacks, down from $102 million last quarter.
The lack of buybacks is most striking to me, as the upside for this company has always been that it is the most shareholder-friendly tech company in the market. However, with operating cash flow dropping to $394 million from $1.4 billion in the prior year, I am not sure how the company can make good on its new $2.5 billion buyback program. Therefore, with the company’s fundamentals falling fast, I would seek value elsewhere.
Something Has to Give
Reynolds American, Inc. (NYSE:RAI) lost almost 1% of its valuation after reporting earnings that met expectations. The company’s revenue was near flat year-over-year, which has led many to speculate that it could present a good opportunity in an industry that is seeing fewer and fewer smokers.
Reynolds American, Inc. (NYSE:RAI) is the manufacturer of Camel cigarettes and now Vuse e-cigarettes among other brands. The company’s most popular brand is its Camel menthol cigarettes, which could face pressure after the FDA issued guidance on the dangers of menthol cigs relative to other flavors.
Right now, there are a lot of questions surrounding the future of e-cigs and there’s a good chance that large tobacco companies are going face significant modifications to their products. With Reynolds American, Inc. (NYSE:RAI) paying out 87% of its earnings in dividends, I see them having a tough time in maintaining their high dividend and making any costly changes. Therefore, I wouldn’t buy on any hint of optimism, as something will have to give.
The Unknowns Suggest Caution
Lastly is Caterpillar Inc. (NYSE:CAT), which fell 2.43% on Wednesday. This is a tough one for me, because at 10.5 times next year’s earnings the stock does not appear expensive. However, the company continues to face headwind after headwind.
We already knew that growth in China was slowing and that mining had been an issue for the company. However, the rate at which dealer machinery is declining is a bit alarming, and unexpected.