Q3 is just wrapping up, but we're already looking ahead. Source: Seniorliving.org
As the third quarter earnings season wraps up, some of us have already begun looking to Q4. After all, each quarter's report only gives us three months' of business results, and often leaves investors with new questions to replace the ones just answered. This is especially true for companies in the midst of a transition, or which operate in a struggling industry. Whether you're looking for evidence of a turnaround, proof that a new strategy is paying off, or just hoping a favorite company can figure it out, investing is about looking ahead to the future more than a company's past success.
We asked three of our top contributors to give us a little insight on a company they're watching closely in the fourth quarter, and they gave us legendary motorcycle maker Harley-Davidson Inc (HOG -1.66%), military, scientific, and home robot builder iRobot Corporation (IRBT -1.43%), and independent oil and gas driller Chesapeake Energy Corporation (CHKA.Q).
Let's take a closer look at what our experts are looking for.
Daniel Miller (Harley-Davidson): One stock to watch during the fourth-quarter is Harley-Davidson. Harley-Davidson has a phenomenal brand image and is arguably one of the most recognizable brands in America over the past century. However, the motorcycle manufacturer took one on the chin during a disappointing third-quarter that sent investors heading to the door: at one point sending its stock price down 17% on the Tuesday after its earnings release.
The problem is that Harley-Davidson’s core demographic is aging and the company plans to rev up marketing and product innovation to lure a younger consumer, the company’s future bloodline of sales.
To do this, Harley-Davidson plans on increasing its investment in customer-facing marketing by 65% next year compared to 2015. That's not the full story, either, as Harley-Davidson had already accelerated spending in customer-facing marketing to help offset a challenging second and third quarter. That means it will spend roughly twice the amount on customer-facing marketing next year that it did in 2014.
Further, Harley-Davidson understands it needs to extend the reach of its products to a new demographic, and grow new ridership in the U.S. market. To help with that, management will increase its investment in product development by 35% in 2016 compared to this year.
Investors are hoping that Harley-Davidson’s stock can start rebounding next year on the back of stronger marketing and product innovation. That’s a story that should start in the fourth-quarter and investors would be wise to tune in and see if its accelerated marketing is gaining traction with U.S. consumers.
Jason Hall (Chesapeake Energy): Chesapeake was struggling before the downturn in oil and natural gas prices that set in last year, but had begun making progress in reducing debt, and focusing on developing its most profitable resources. Unfortunately, things have gotten much harder for the independent oil and gas driller in the current environment. The company's recent earnings report wasn't great, as Chesapeake continues to realize ridiculously-low prices for natural gas and natural gas liquids and blow through capital. The company's hedges are working well in oil, as the company recorded an average price per barrel of $67.91 in the second quarter, and $62.68 in the third quarter, both above the market's average price for WTI crude over that period:
WTI Crude Oil Spot Price data by YCharts
Unfortunately, high transportation expenses and a massive glut of NGLs on the market are seriously impacting the prices the company is realizing for both natural gas and NGLs. Natural gas especially is problematic, as it makes up more than 70% of the company's total production. Management is actively negotiating with major gathering partner Williams Companies to lower its midstream costs, but the benefits of that are yet to show up on the balance sheet.
As things stand, oil and gas prices are near record-lows, and we are at the halfway market in the fourth quarter. I'll be watching very closely to see how Chesapeake does at preserving cash, lowering production costs, and taking steps to realize more for its natural gas sales. This is a critical juncture for the company.
Steve Symington (iRobot): Last month, iRobot stock dropped after the company's lighter-than-expected Q4 guidance overshadowed a largely solid third-quarter report. So I'll be watching iRobot closely to determine both whether that light guidance was merited and, more specifically, signs of whether iRobot will continue to sustain its outsized share of the robotic vacuum space.
Specifically, in Q3 iRobot management described a "tremendous" response from consumers to its smart new Roomba 980, which helped drive strong demand in both the United States and China. However, iRobot continued to see softness in Japan, the primary blame for which it says were macro economic headwinds. Due to the intensity of these headwinds, iRobot decided to withhold previously announced incremental marketing investments originally intended to boost demand in Japan.
That said, last month Dyson marked its long-awaited entry into the market with the launch of its new 360 Eye robotic vacuum -- but only in Japan. And though iRobot has previously insisted it's not worried about this new entrant, I want to know whether Roomba suffers any incremental weakness in Japan as a direct result of Dyson's launch. If it does, it could be an ominous sign for things to come as Dyson intends to bring the 360 Eye to the U.S. market by the summer of 2016.
To be fair, over the long term I still think there's room for more than one company to succeed here, and Dyson's product could even be beneficial if it serves to further validate iRobot's core market. In addition, iRobot has already made clear its ambitions to use the new cloud-connected and visual navigation technologies incorporated into Roomba 980 as a launching point to expand into other areas of the connected home. But if iRobot demonstrates weakness in the coming quarter as patient investors wait for those exciting developments to materialize, our fickle market will almost certainly punish iRobot stock in the near term.
iRobot is best known for Roomba, but its future could look very different. Source: iRobot
