Earnings Preview: Big Tech, Coke, Visa, Verizon and Boeing

Earnings season starts in full flow this week and so far the banks have done a tremendous job setting the tone with better than expected numbers.

We have a host of important earnings this week and we’re covering them, as always, from a macro perspective. We’re not making predictions here but, more importantly what we should be looking out for and what they tell us about the economy and the markets as a whole.

We’ve decided to move to a written format so that you can pick and choose the earnings / sector that most interests you.

This is the busiest week of earnings season and we have decided to split it into two. We cover Mon to Wed before market open in this post.

Market Update

S&P 500

So far, we’ve had 86 companies in the S&P 500 report with an actual EPS growth of 4.86%. This was 16.12% last week. This brings the blended earnings growth to a -0.68%. We’ve also included the positive and negative price impact this time. Seems like thus far, negative impact is leading with 71%.

The blending earnings is the actual earnings + estimated earnings for all the companies in the index. As we move through earnings season, blended earnings = growth reported.

Nasdaq-100

For the Nasdaq-100, we’ve had 14 companies report with an actual growth rate of -16.58% (previous week-19.51%).

This Week’s Earnings

Earnings Covered in this Post

Verizon (VZ) - Reporting Tue, Oct 24 (BMO)

VZ has been struggling this year, with wireless churn, high built-out costs for their 5G network, and increasing competition from AT&T and T-mobile. The company’s stock is now yielding over an 8% dividend, which some feel may put the payout at risk.

Overview

• Revenue: The anticipated revenue stands at $33.27 billion, which is slightly higher than the Consensus Estimate of $33.39 billion for the third quarter​​.

• EPS: Earnings per share (EPS) are projected at $1.18, which aligns with some estimates but is a tad higher than the Consensus Estimate of $1.17 for the quarter​​.

Market Reaction

• Near-term options indicate a projected market reaction of about a ~4.8% move post-earnings release.

Key Metrics

• Wireless Net Adds: FactSet estimates for Q3 wireless net adds are 323,300, showing an improvement from Q2's 308,000 but still trailing Q3 2022's 407,500.

• Churn Rate: Churn is anticipated to slow down to 1.5, led by postpaid customers with an estimated gain of 604,200, and a slowing loss in prepaid segments.

Operational Highlights

• Verizon obtained full access to the 5G C-band spectrum in Q3, significantly enhancing its 5G Ultra Wideband network capabilities, which is expected to reflect positively in the quarterly results​​.

• The firm continued its capital expenditure on the FiOS network build-out, hiring 1,800 new technicians for expanding its NorthEast network infrastructure. There were 139,000 FiOS Internet net additions, showcasing strong growth​​.

Risks and Concerns

• The company faces challenges from high operating costs for 5G deployments and promotional offers which may lead to soft margins​​.

• Churn has been an ongoing problem in wireless, particularly prepaid.

• Growth has shown signs of peaking long-term.

  

  Verizon Wireless subscribers via Statista

What to Watch

• Wireless Turnaround: Signs of a broader wireless turnaround, especially in mobile customer churn amidst rising competition, are crucial. Aggressive sales efforts to win back clients may compress margins.

• FiOS Performance: Continued strong net additions in FiOS Internet amidst DSL churn are positive, though FiOS TV struggles.

• Lead Liabilities: The lead liabilities issue, which is likely to be less severe than initially reported by WSJ, could provide room for the company to discuss it further in this quarter as more evidence accrues.

Closing Thoughts

The anticipated slight decline in revenue and EPS, coupled with the challenges faced in margin maintenance due to infrastructure investments and promotional activities, present a mixed picture for Verizon in Q3 2023.

The enhancements in the 5G network and FiOS internet growth are positive signs, yet the ongoing concerns over wireless churn and competitive pressures remain. The lead liabilities issue and how Verizon addresses it in the upcoming earnings report could also provide more clarity to investors on the company's financial health and risk management strategies.

Alphabet (GOOGL) - Reporting Tue, Oct 24 (AMC)

GOOGL is largely an advertising company, with some other key product segments, such as their Google Compute cloud offering. The company has seen slowing revenue growth as advertising has been more challenging. How they fare this quarter will be interesting to analyze.

Overview

• Revenue: Analysts expect a slight increase in revenue for Q3 2023, from the previous estimate of $75.7 billion to $76.0 billion due to a resilient ad business​​.

• Adjusted Earnings Per Share (EPS): The adjusted EPS is projected to be $1.41, which is 3% above the consensus estimate of $1.37​​.

Market Reaction:

• Near term options imply a ~5.6% move.

Key Metrics

• Advertising Revenue: Google's advertising revenue, especially from YouTube, will be a key metric to watch. YouTube's ad revenue in Q2 was $7.7 billion, 4% higher than Q2 2022​.

• Cloud Revenue: Revenue from Google Cloud, which was $8 billion in Q2 2023, will also be closely watched​​.

Risks and Concerns

• Slowing revenue growth, especially in core areas like Search and YouTube, might pose a risk that investors have yet to fully price in. Alphabet's search revenue experienced a modest 1.87% YoY increase in Q1 2023, which was significantly lower than the growth in previous quarters​​.

What to Watch

• Advertising Growth: The growth trajectory of advertising revenue, particularly from YouTube, will be critical to watch.

• Cloud Business Performance: The performance of Google Cloud will be another focal point, given its potential to drive long-term growth.

• Investments in New Technologies: Alphabet's investments in new technologies and how they contribute to revenue growth will also be of interest.

• Response to Slowing Growth: How Alphabet addresses the slowing growth in its core business segments and any strategies unveiled to reaccelerate growth will be keenly observed.

Closing Thoughts

Alphabet's Q3 2023 earnings report will provide a clearer picture of how the tech giant is navigating the challenges of slowing growth in its core business segments while investing in new growth areas like Cloud and other technologies.

The report will also offer insights into whether the recent positive market sentiment and stock price appreciation are justified by the company's financial performance and growth prospects. To us, the company’s stock seems expensive given a NTM P/E of 20.8, with slowing revenue growth and an increasingly muddy macro picture.

Microsoft (MSFT) - Reporting Tue, Oct 24 (AMC)

Microsoft is the most diversified mega cap technology company. Their earnings are a key barometer of economic health and growth, as the global reach of their products and services that are widely used by businesses and consumers alike, can provide insights about the health of companies and households.

Overview

• Revenue: Microsoft reported a revenue of $56.18 billion for Q4 2023, marking a 9% increase, or 11% in constant currency, from the previous year​​.

• Adjusted Earnings Per Share (EPS): The adjusted EPS for the quarter was $2.69, representing a 20% increase.

Market Reaction

• Near term options imply a ~5.0% move

Key Metrics

• Cloud Revenue: The company's Azure cloud platform continues to be a significant driver of revenue, with an 11% rise in the Intelligent Cloud segment's revenue reported in Q3 2023​​.

• Productivity and Business Processes Revenue: This segment, which includes Office commercial and consumer products and cloud services, saw a 8% year-over-year revenue increase in Q3 2023​​.

Risks and Concerns

• Despite the positive outlook, there are concerns about the impact of rising inflation, interest rates, and slower tech spending which forced Microsoft to trim its global headcount and shift resources away from non-strategic areas​​.

What to Watch

• AI-Driven Growth: The market’s optimism is tied to Microsoft's aggressive push into artificial intelligence through its investment in OpenAI​.

• Cloud Adoption: The company's ability to gain market share in the cloud and AI markets, as reflected in its Azure and Intelligent Cloud segment growth​.

• Management Guidance: Investors will be keen on management’s guidance on how the company plans to navigate through the margin headwinds and other macroeconomic challenges​​.

Closing Thoughts

The upcoming Q1 2024 earnings release will shed light on how well Microsoft is executing on its growth strategies, particularly in AI and cloud computing. The market seems to have a positive outlook on Microsoft's long-term growth, fueled by its AI-driven initiatives and robust cloud adoption. Whether this is sustainable in a what is becoming a more challenging global economic environment remains to be seen.

RTX - Reporting Tue, Oct 24 (BMO)

RTX, formerly Raytheon, will provide some important insights on the defense industry, which is likely to see multiple tailwinds from escalating geopolitical tensions and increasing need to resupply key weapons and ammo stockpiles.

Overview

• Revenue: Revenues for Q3 2023 are expected to be $17.11 billion, marking a 5.6% increase from the year-ago quarter​​.

• Adjusted Earnings Per Share (EPS): The adjusted EPS is anticipated to be $1.19, which would represent a decrease of 1.7% year-over-year​​.

Market Reaction

• Near term options imply a ~4.9% move

Key Metrics

• The key metrics to look out for would include segment-wise revenue growth, especially in their aerospace and defense segments.

Operational Highlights

• RTX has been grappling with near-term challenges, particularly around the Geared TurboFan (GTF) technology and free cash flow issues​​.

Financial Guidance

• In Q2 2023, RTX guided higher on 2023 sales, tightened the adjusted EPS outlook, and revised the cash outlook​​.

Risks and Concerns

• The market expects a year-over-year decline in earnings on higher revenues for the quarter ended September 2023​​. Near-term challenges with the GTF technology and free cash flow issues are also points of concern​​.

What to Watch

• Aerospace and Defense Segment Performance: The performance of RTX's aerospace and defense segments will be critical, especially given the challenges with the GTF technology.

• Guidance for FY 2023: Any updates or changes in the financial guidance for FY 2023 will be closely watched by investors.

Closing Thoughts

The upcoming Q3 2023 earnings report of Raytheon Technologies will provide insight into how the company is navigating the near-term challenges and how these challenges are impacting the financial performance. The report will also offer a glimpse into the performance of its key segments and any strategic moves to enhance shareholder value.

Texas Instruments (TXN) - Reporting Tue, Oct 24 (AMC)

TXN is a diversified semiconductor company with global reach and therefore an important company to watch.

Overview

• Revenue: Texas Instruments has provided revenue guidance for Q3 2023 estimating a range between $4.36 billion and $4.74 billion. The Consensus Estimate stands at $4.57 billion, indicating a 12.9% decline from the previous year's Q3 reported figure​​.

• Adjusted Earnings Per Share (EPS): Management expects earnings of $1.68-$1.92 per share for Q3 2023. The consensus mark is pegged at $1.81 per share, reflecting a fall of 26.1% from the prior-year quarter's reported figure​​.

Market Reaction

• Near term options imply a ~5.3% move

Key Metrics

• Analog Revenues: The consensus estimate for Q3 2023 Analog revenues is pegged at $3.3 billion, implying a decline of 17.3% from the year-ago reported figure​​.

• Embedded Processing Segment Revenue: The consensus estimate for Q3 2023 Embedded Processing segment's revenues is pegged at $887 million, implying year-over-year growth of 8%​.

Operational Highlights

• Texas Instruments' Q3 performance is likely to have benefited from its broad product portfolio, expanding manufacturing capabilities, competitive advantages in manufacturing and technology, and strong momentum in the automotive market.

• Widespread weakness in communications equipment and enterprise systems, new export regulations, and a weakening demand environment, primarily due to inventory reductions by customers, are expected to have negatively impacted the performance of the Analog segment during Q3 2023​​.

Risks and Concerns

• The aforementioned operational challenges, particularly in the Analog segment and the broader market, pose risks and concerns for investors.

What to Watch

• Segment Performance: The performance of the Analog and Embedded Processing segments will be critical areas to watch, alongside any strategic shifts to mitigate operational challenges.

• Market Conditions: The impact of market conditions, including demand dynamics and export regulations, on Texas Instruments' performance.

Closing Thoughts

Texas Instruments is an excellent barometer of economic health. The diversified semiconductor company has exposure in a variety of key product segments, from automotive, to appliances, to aerospace, and beyond.

Their conference call is always interesting as it offers insights on the semiconductor industry and global economy just the same. We recommend giving it a listen.

Coca-Cola reporting Tue Oct 24, 2023 BMO

This earnings results was meant to be all about volumes and pricing. With inflation coming down, we’re certain to see an expansion in margins as the company has not revised their prices down - at least not to my knowledge.

Pepsi reported at the start of the quarter with a decline in North American Beverage volumes by -2.5%. In fact, they reported volume declines across the board but still managed to beat on revenues and EPS. The one thing that caught my eye from Pepsi was “Expect higher inflation and price mix in 2024 compared to historical levels”.

Coca-cola will likely have a similar experience. Last quarter, volumes remained muted but the company delivered on pricing. A few issues we will be looking out for:

• Discussion on Ozempic / GLP-1 - although we think this is overblow with the effects of GLP-1 taking years to manifest. Plus Coke is a global company and it will be a while by the time the drug is freely available worldwide.

• Inflation coming back - again, while inflation has abated in the US to a large extent there are signs of a resurgence. However, globally the situation is far more dire. During the last earnings call they said: “Five of our top 40 markets are currently experiencing over 20% annual inflation.”

• China - China remains a major market for them and growth has slowed there. They remarked on this last quarter saying that inflation may have slowed but, consumer confidence is also low.

Revenues are expected to be $11.435B (+3.5% YoY) and EPS is expected to be flat at $0.69.

Visa (V) reporting Tue Oct 24, 2023 AMC

Are we seeing a slowdown in consumer spending? Who better to tell us than Visa. So far, results have been strong, particularly on the cross-border volume side. But we have macro headwinds playing out and various data points tell us that the consumer is slowing. I doubt however, that we see a bad quarter from Visa since summer would be peak spending for the North America and Europe.

As the savings rate has started to increase, we will likely see more and more people defer purchases to earn on their saved cash. The narrative is rampant that the Fed will have to cut rates next year and I won’t be surprised if people are waiting for that. As of last quarter, payment volumes in the US have already started to stagnate with cross border volumes leading the way. However, in constant dollar terms the situation doesn’t look as rosy.

The other side to the story of course is the fact that many of the stimulus measures are gone and credit cards appear to be maxed out. Last week we noted that delinquencies and defaults were rising with credit cards.

Estimates are higher - EPS $2.16 (+9.1% YoY); Revenue $8.123B (+11.7% YoY)

Boeing (BA) reporting Wed Oct 25, 2023 BMO

I honestly don’t know what I hope to see with Boeing earnings. Their earnings have been erratic through this period of recovery and as their CFO put it: “recoveries tend to be lumpy, not linear”.

On a positive note, they did post Free Cash Flow of $2.6B last quarter which is a great turnaround for them. But, they’re still posting a negative core operating margin of -2% and core loss per share of -$0.82, which came in worse YoY. Revenues also came in higher for the quarter at $19.8B vs. $16.7B in Q2, 2022. Possibly the highlight of their earnings was the fact that they started paying down their debt from $55.4B in Q1 to $52.3B in Q2.

They’re still committed to deliver FCF in the range of $3B - $5B and they’re seeing strong demand in terms of orders. The issue is delivering them fast enough. Q2 results showed that the company has a solid backlog of orders but, navigating operational issues is a whole different thing.

We’ve recently learned about yet another issue - “On August 23, 2023, Spirit Aerosystems, a key supplier of components for Boeing aircraft, issued a press release acknowledging "a quality issue involving elongated fastener holes on the aft pressure bulkhead on certain models of the 737 fuselage produced by Spirit AeroSystems.” Boeing’s troubles just don’t seem to go away.

Boeing has now struck a deal with Spirit. Boeing will receive price reductions from Spirit and the deal includes money from Boeing for tooling, changes to product liability claims, and restructured finance payments due from Spirit Aero to Boeing. tend to come with higher volumes. The deal includes a poison pill that would net Boeing $1.2 billion if Spirit tries to sell itself without the plane maker's approval.

As for this quarter’s estimates, analysts forecast further deterioration - a negative operating margin of -2.3% and Free Cash Flow of -$266M and EPS of -$3.18. Deliveries have now been revised down particularly for the 737 from 109 in early August to 70 most recently due to the quality issues.

ThermoFisher Scientific (TMO) reporting Wed Oct 25, 2023 BMO

Thermo Fisher Scientific is a provider of various scientific instrumentation, consumables, reagents, and software used in healthcare, life science research, laboratory settings, and diagnostics.

They serve a more extensive market, including pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions, and government agencies, among others. Its services are more diverse, encompassing not just equipment but also reagents, consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics.

The stock chart isn’t looking great and neither are the earnings for that matter. Thermo Fisher played an important role during the pandemic by providing test kits for Covid-19 including the reagents for the lab tests. That excess income has now waned and what we’re seeing is a normalization.

In all fairness, I like this company and when they finally shake out the “over-earning” part of the cycle, I may consider it for an investment. As of now, what we will be looking for is the strength in demand, i.e., top line revenue numbers because they tell us whether healthcare is picking up or not.

We saw a resurgence of healthcare because of pent-up demand and normalization in the workforce but, some of that has begun to slow. Costs have increased as we can see in the monthly CPI data and I am wary of the level of demand that may be persistent.

Cleveland Cliffs, Nucor and US Steel

There’s a lot of drama in the steel industry right now. With the possible acquisition of US Steel on the horizon. Most recently, Cleveland Cliff’s has signed a NDA and Standstill agreement with US Steel. We’re also seeing news of outside bidder come into the picture with the likes of Nippon Steel and Arcelor Mittal.

One thing to remember is that during the pandemic and the supply chain glut that followed, the US companies saw a lot of momentum because of near-shoring. They had pricing power and could charge what they needed to sell. That situation has now reversed and we’re likely going to see the impact unfold in H2, 2023 and 2024. Apart from this though, what we want to look for is:

• Price of steel rebounding - Cleveland Cliffs has recently increased pricing which got them a improved analyst rating from Citi. But, Nucor has reduced guidance based on pricing.

• Volumes - Steel volumes are likely to take a hit with everyone talking about a slowdown in the economy in 2024. We’re also of the opinion that with higher for longer, capital projects will slow down. In fact, we’ve seen manufacturing slow down significantly in the US and globally, and this should also affect volumes negatively.

Estimates:

• Cleveland Cliff - EPS $0.43 (+48% YoY); Revenue $5.57B (-1.3% YoY) reports Mon Oct 23, 2023 AMC

• Nucor - EPS $4.29 (-34.1% YoY); Revenue $8.36B (-20.3% YoY) reports Tue Oct 24, 2023 BMO

• US Steel- EPS $1.12(-42.4% YoY); Revenue $4.39B (-15.6% YoY) reports Thu Oct 26, 2023 AMC

A few more names to look out for this week:

• GM: We all know that the UAW strikes will be front and center during this earnings call. I expect analysts will have a whole host of questions on the impact of these strikes, how long they may last, what the game plan is and what resolution looks like. EPS estimates revised lower to $1.87 (-16.9% YoY) and Revenues at $42.482B (+1.4%YoY).

• HCA Healthcare: They are one of the largest hospital groups in the US. Last quarter they delivered decent results with in-patient volumes increasing. Q3 is usually their best quarter but EPS has been revised lower sequentially to $3.98 (+1.2% YoY) while revenues remain stable at $15.82B (+5.7%) YoY. One reason for EPS to be revised lower is likely the impact of the workforce and this is something I would be keen to hear about. During the pandemic, staff left because of burnout, forced vaccination. Now, aggregate weekly hours have fallen off and employees are demanding higher pay which could contribute to a slowdown again in the healthcare sector.

• Archer-Daniel Midland & Bunge: Both companies are involved in the supply and transportation of agricultural commodities. A shortage of commodities because of weather patterns and the El Nino phenomenon has been putting upward pressure on prices and these companies will be best placed to tell us what’s going on in that space.