As noted last Friday, this was a busy week for earnings reports, especially the mega-cap technology leaders. Below is a very brief synopsis of what occurred, and more importantly how the stocks reacted. I am happy to discuss in detail if anyone wants more color. I will note, this is NOT a recommendation to buy or sell any of the below stocks.
Microsoft#: Another solid quarter from the Windows behemoth but the stock slid ~7% following its earnings report. Revenues, which are approaching $200B on an annual basis, are still growing double digits but at a declining rate. While the weakness in personal computing was expected, management’s outlook was worse than hoped for with respect to forward looking PC sales. Recall that most families ramped up demand for laptops and computers during the lockdowns. Now sales are down 18%, hurting Windows revenues. Tack on Microsoft’s cloud hosting business growth rates gradually coming down from 50% to 35% and you have a less than stellar future. Going from hyper growth to stable growth causes growing pains. At 23x next year’s estimates and a paltry 1.1% dividend yield, the stock is hardly cheap or expensive here.
Alphabet (Google)#: Here is another mega-cap story where growth has clearly peaked and is coming back down to earth, helping to cause a 9% drop following their earnings announcement. Google continues to spend money hand over fist and is one of the few companies that is still expanding headcount. Subsequently margins suffered, as did YouTube ads. When economies slow and belts tighten, marketing budgets are slashed. Earnings estimates are being reduced for 2023. That puts the stock at 18x 2023 revisions but the company continues to expect double-digit EPS growth over the coming years. Hardly cheap or expensive as well, and it does not pay a dividend.
Texas Instruments#: This semiconductor leader has been through dozens of economic cycles. Their product lineup touches almost every sector of the market. Expectations for the use of analog chips over the coming years is quite positive. However, the supply/demand scenario is very much tied to global GDP expanding in the near-term. No longer a boom or bust cyclical structure like a few decades ago, but there remains volatility. The company noted, for the first time this cycle, some unexpected industrial-end market weakness. The stock opened down ~7%. Fortunately, longer-term buyers stepped in, helping bring the stock to a smaller loss. TXN trades at 20X next year’s earnings and carries a respectable 3.1% dividend yield.
Amazon#: Last quarter, all bad news was priced in and Amazon surprised with better profits and controlled spending. The stock rose back to the $140’s. Fast forward to last night and they are back below $100. Consumer spending on goods has hit a wall and their Cloud hosting services growth is also on a downward trajectory, albeit still up 25%. Amazon spent billions of dollars building warehouses and hiring employees and drivers during Covid. Clearly, Bezos overdid it during the lockdown boon times. New CEO Andy Jassy is left trying to control costs without disrupting service. He is also running into a recession in many parts of their end markets. Guidance was well below what the street expected and the stock is down 12% pre-market. The street expects 50% EPS growth over the coming years. They are a behemoth in 2 massive industries. Amazon still trades at 40x forward estimates and pays no dividend.
Apple#: The big winner as far as mega-cap technology showed no movement post earnings. Demand for anything Apple related continues to defy macro pressures with iPhones, wearables, services and Macs at all-time revenue highs. Services revenue is approaching an $80 billion run rate. This hardly existed a few years ago and is very high margin. Still, they note revenue growth will decelerate from here. Earnings per share growth is like a strong consumer staple stock at ~7% and the stock trades in line at 23x forward estimates. The only thing missing is a strong divided yield from the 0.6% currently offered.
Coca Cola#: Not a tech name, but a $250B market cap means they are important to the major averages. While sugary drinks are not as popular anymore, Coke has repositioned into zero sugar, water, juices and even some alcoholic beverages. Anyone who goes to the grocery store sees a much higher bill, especially when buying soda when compared to last year. Similar to Pepsi’s report a week ago, Coke’s pricing power is phenomenal. Earnings came in handily ahead of the street with more growth expected. The stock is up 6% this week alone and is flat on the year. Safety names have caught a bid, putting Coke’s P/E up to 22x next year’s estimates while also sporting a 3% dividend yield.
McDonald’s#: Another solid quarter from Ronald as the stock increased 4% yesterday and approached all-time highs. Not many companies can say that in 2022. Consumers are trading down but still going out to eat. Pricing power exists here as well as pristine management with a clear focus on reducing costs, buying back stock and maintaining high free cash flows. As with Coke, valuations are elevated, trading at 26x forward estimates along with a 2.3% dividend yield.
Energy stocks: A few of the larger players’ results are out this morning, and to no surprise they are impressive. Exxon Mobil just announced their strongest quarter ever. They have made more in profit this year than Proctor & Gamble, Tesla and Amazon combined. When revenues grow over 50%, good things tend to happen! Permian shale players are finally realizing years of investments into fracking, while demand overseas rises due to the Russia crackdown. Many of these stocks are single-digit P/E’s and still 3%+ dividend payers.
Meta Platforms (Facebook)#: Saving the most disappointing for last. It seems that Mark Zuckerberg and his total voting control over Meta could care less what the market wants. Investors were expecting some sense of expense reduction in what is clearly becoming a recessionary environment, especially for advertisers. He went the other way and plans to press the pedal on metaverse and artificial intelligence investments causing the stock to drop 24%. Absent that, the news was fine. Monthly average users reached a new high. Reels is taking share back. WhatsApp monetization is rapidly expanding. Revenues were in-line with estimates. The company has $130B in annual revenues at very high margins which allows $20B in annual share buybacks when expenses are normalized. Similar to the Government, they have a spending problem not a revenue problem. 2023 earnings estimates are all over the place, but the average yields a 10 P/E and no dividend support.
While these previous leaders have a heavy influence on the S&P Index, there was plenty of other, much more positive, action seen in the “old economy.” Caterpillar#, Comcast#, Visa#, Honeywell#, Synchrony# and many others reported solid results, bringing forth generous gains. Banks and a lot of other low P/E, high dividend yielding stocks are seeing rebounds of 10% – 20%+. The average stock is taking the baton from yesteryear’s leaders. The equal weight S&P 500 is up ~4% this week, while the market-cap weighted S&P is only up half that. A small cap index, the Russell 2000, is up 5% this week as well. New leaders emerge from bear markets. Old school value, high free cash flow, generous dividend yield and low debt level companies are trying to pull us out of this bear market. That does not mean that every FANGMAN stock is trash, especially after these valuation adjustments. Figuring out which one will rebound like Netflix# will be the hard part.
Time will tell if the Fed can beat inflation without producing a moderate to severe recession. We will get another jobs update next Thursday that could help position the December rate increase. Next week is chock full of more earnings reports as well. Volatility remains in place.
A busy birthday! Bill Gates turns 67 today, Caitlyn Jenner is 73, and Julia Roberts is now 55. Matt Smith, starring in the new House of Dragons prequel to Game of Thrones, turns 40 today. Joaquin Phoenix is 48. Nolan Gould, better known as Luke Dunphy on Modern Family, is 24. Country star Brad Paisley turns 50. Lastly, Jawed Karim, co-founder of YouTube, is now 43 years old.
James Vogt, 610-260-2214