Can These Companies Deliver Amid High Expectations?

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The U.S. stock market is extending its rally heading into the week of July 22, with the S&P 500 finishing in positive territory during 10 of the last 11 trading sessions.

On Wednesday, July 18, Federal Reserve Chairman Ben Bernanke testified in front of Congress, stating the central bank will not take its foot off the pedal until the U.S. economy is strong enough to stand on its own feet. Equity markets became rattled in late June when investors misinterpreted Bernanke’s comments, but the broader market has now resumed the upward trend it established back in November 2012.

Expectations are high for the market to continue its impressive rally. Analysts at Bank of America raised their year-end price target for the S&P 500 to 1,750 based on improving fundamentals and earnings growth. As of this writing, the S&P 500 stands at 1,688.51, indicating a modest 3.6% upside through year-end.

All in all, expectations are high for many of the companies reporting on Wall Street in coming days. Here are three companies with very high expectancies that could cause the market rally to falter:

Streaming television and movie service
Monday, July 22, 2013 after market close; EPS $0.40 / Revenue $1.07 billion

Internet subscription service Netflix (NASDAQ: NFLX) is approaching the all-time record highs reached in July 2011, nearly 2 years later to the date. Shares have risen 190% in calendar 2013 heading into Monday’s Q2 2013 earnings release.

Investors are applauding the company’s domestic streaming margin, which expanded to 20.6% during Q1 2013 from a previous 14.3% during Q1 2012. More impressively, the contribution margin has consistently expanded during each of the last five quarters (14.3%, 16.4%, 17.2%, 19.2%, 20.6%).

Concerns remain for Netflix shareholders, however. The company continues to lose money every quarter within international streaming, as total members have more than doubled from 3.07 million to 7.14 million subscribers. Analysts at the Wall Street Journal disagree with the focus on profitability, providing their take in a July 15 piece titled Netflix Should Read Amazon's Script (paid login required). The Journal argues that Reed Hastings should focus on building its subscriber base at the expense of profits, similar to the model of Amazon CEO Jeff Bezos.

Ahead of Monday’s earnings report, analysts at Barclays raised their Netflix price target to $250 from a previous $220. The investment firm believes Netflix will report strong subscriber growth trends due to original content growth and increased usage on smartphones.

I’ve written negatively on Netflix before, most recently 5 Reasons to Sell Netflix and Pandora, and Buy Coinstar and It's a Bubble: Why Netflix Doesn't Deserve a Dot-Com Valuation.

Telecommunications giant
Tuesday, July 23, 2013 after market close; EPS $0.68 / Revenue $31.82 billion

Expectations are high for AT&T (NYSE: T) heading into its Q2 2013 earnings release, following the company’s announcement to acquire Leap Wireless for $15 per share on July 12. The deal for the small wireless carrier, which operates under the Cricket brand, is subject to regulatory approval. Competing bids from other carriers could emerge for Leap Wireless, such as AT&T competitor T-Mobile.

News of the Leap Wireless acquisition comes following persistent rumors that AT&T would acquire the wireless spectrum owned by Dish Network or the entire company outright. A Spanish newspaper also reported in June that AT&T submitted a $93 billion offer for European telecom giant Telefonica.

All in all, telecom companies are positioning themselves to compete as demand for wireless spectrum heats up (Additional reading: How to Invest for a 13-Fold Increase in Mobile Web Traffic). Wireless spectrum can be thought of as virtual real estate with limited availability. AT&T and Verizon Communications have benefitted most as the FCC has awarded the most spectrum to the highest bidder.

For the current quarter, investors will be looking to learn more about the Leap Wireless deal and the potential for regulatory approval. Owners of 29.8% of outstanding LEAP shares have agreed to vote in favor of the transaction, decreasing the likelihood of a competing bidder such as T-Mobile.

World’s largest restaurant chain
Monday, July 22, 2013 before market open; EPS $1.40 / Revenue $7.10 billion

McDonald’s (NYSE: MCD) is the world’s leading global foodservice retailer with more than 34,000 restaurants in 118 countries around the globe. The company states on its Investor Relations website that it serves food to more than 69 million people each day.

On June 10, McDonald’s announced global comparable sales rose 2.6% in May, with an increase in all major markets. U.S. sales rose 2.4% lead by strength in the breakfast category, Europe sales rose 2.0% in spite of the recession, and Asia/Pacific, Middle East and Africa rose 0.9%.

For the current quarter, investors will be focused on a continuation of positive comps following a disappointing report from the Commerce Department. Food service sales fell 1.2% in June, the largest decline since February 2008 according to government data. The American consumer might be pressured over rising gas prices and stalling wage growth, substituting a trip to McDonald’s with a trip to the grocery store.

Wall Street has a mixed outlook on McDonald’s ahead of Monday’s earnings report. Analysts at Wells Fargo believe that sales are poised to improve in the second half of 2013 despite the negative report from Commerce. In contrast to Wells Fargo, analysts at Janney Capital believe that expectations are too high for Q2 results, and that recent checks indicate that results will likely fall below consensus.

Foolish takeaway

Expectations stand near all-time highs for AT&T, McDonald’s, and Netflix as investor sentiment remains elevated for these companies.

AT&T is expected to solidify its position as the #2 wireless carrier in the United States by acquiring new wireless spectrum in its battle against Verizon Communications. Investors are hoping that McDonald’s will be able to continue its impressive comps despite rising gas prices and a tepid economy. Finally, Netflix bulls and bears continue to battle over the company’s subscriber growth versus a focus on profitability.

John Macris has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Netflix. The Motley Fool owns shares of McDonald's 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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