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“Let that sink in!”, cried Elon when storming Twitter HQ with an actual sink.
While meme lord Elon hauling porcelain was made to be a visceral example that the new boss was in town, we’re going to talk about this household appliance in a new idiom. The term “Kitchen Sink.”
There’s a popular saying, “everything but the kitchen sink” which means: nearly everything one can reasonably imagine; many different things, often to the point of excess or redundancy.
Wall Street Analysts refer to Kitchen Sink numbers when a company comes out and in their forecast, they “throw everything out but the kitchen sink.” This means that the company will provide a dire outlook with the worst-case scenario outlined.
The reason a company may do this is to rip off the bandaid and allow the market to recalibrate expectations so that they can form a more realistic view of future earnings.
Over the course of many 2023 outlooks, everyone got extremely defensive. Mr. Market continues to do whatever will prove the most people wrong and went straight up in January.
A concern for forecasters was that this earnings period will be a kitchen sink moment, where there will be a lot of companies providing guidance that earnings will fall off a cliff.
This has (so far) not been the case at all.
What we instead got was more along the lines of beats in Q4/22 and guide-downs to a moderate degree for 2023 rather than a full Kitchen Sink.
Let’s go over what we’ve seen so far in select company earnings and why it matters. we’ll Then preview next week which will be action-packed.
This week, in <5 minutes, we’ll cover earnings so far:
Software 👉 Microsoft, ServiceNow
Consumer Financials 👉 Visa, Mastercard
Homebuilders 👉 DR Horton
Semiconductors 👉 TSMC
Telecom 👉 AT&T
Energy 👉 Chevron
Coming Up 👉 Earnings Agenda For Next Week
Let’s get started!
1. Software 👉 Microsoft, ServiceNow
Software saw the most drastic multiple compression across any subindustry. This is most prevalent when looking at the breakdown by growth cohort
As you can see, these names saw their multiples contract over 70%! Ouchtown – population software. These companies were really on the receiving end of decades of low interest rates and floods of capital into VC companies. Now they’re entering the earnings confessional to see how well they can improve operating margins now that growth at all costs is no longer a viable strategy.
Microsoft
By The Numbers
Topline: Revenue of $52.8B (+2.2% YoY) inline with consensus of $52.9B, while operating income of $21.6B (41% margin) comes in ahead of consensus of $21.0B. EPS also slight beat, at $2.32 vs consensus of $2.30.
Segments: Azure growth of 38% (c/c) came in 1% ahead of expectations, but Q3 guided down to 30-31% (2-3% below expectations). PC segment down 16% (c/c), below consensus, impacted by Surface, Windows Commercial, and Search. Productivity and Business Processes up 13% (c/c) driven by Office Commercial.
Key Graphic
The Most Important Thing
Cloud growth was the main focus here. This is the main driver for MSFT going forward. This metric powers so many other dynamics within the software space as the cloud component is largely seen as the TAM for the theme of digital transformation. Although cloud growth was soft, this was not a disaster number.
ServiceNow
By The Numbers
Revenue of $1.9B (+25.5% c/c), subscription revenue grew 22% (27.5% cFX and ~50 bps ahead of guidance), and cRPO of $6.94B grew 22% (25.5% cFX and 50 bps below guidance)
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The Most Important Thing
RPO in software means remaining performance obligations and is equivalent to what the “pipeline” looks like. This number looked a bit soft, causing some hesitation at first, especially since the CEO went on CNBC and said everything was great and they aren’t laying anyone off. All in – a solid print that bodes well for the overall software infrastructure square.
2. Consumer Financials 👉 Visa, Mastercard
Credit card processing companies are a great way to gauge spending patterns as they are a toll collector on all transactions in the consumer economy.
Visa
By The Numbers
Gross Revenue of $10.7B (+14%), ahead of consensus of $10.5B. EPS increased 21% YoY to $2.18, ahead of consensus of $2.10. Net Revenue of $7.9B (+15% YoY) beat consensus as well, driven by strength in cross-border volume and payments volume. Operating income of $5.5B (+11%) also beat consensus.
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The Most Important Thing
Solid print across the board, driven a lot by cross-border revenue as consumers continue to travel and spend. Still healthy signs for the consumer which is contradictory to all the calls for recession. Spending may pull back but Visa is clearly saying that today is not that day, as we’re seeing an uptick in processed transaction growth.
Mastercard
By The Numbers
Net revenue of $5.81 billion (+17% c/c) slightly better than consensus of $5.78B. Adjusted EPS of $2.65 (+19% YoY c/c) versus consensus of $2.57. Gross revenue of $9.4B was innline. Adjusted OI of $3.2B (+13%) was in line while margins expanded 80 basis points to 55%.
Key Graphic
The Most Important Thing
The main difference between Visa and Mastercard is geographical. Mastercard is more international while Visa is dominant in the US. As go spending patterns in different geographies, so goes the difference between these two. With a China reopening, it might be prudent for a pair trade that favours MA.
3. Homebuilders 👉 DR Horton
Homebuilders are at the intersection of a lot of interest trends: economic slowdown, commodity price volatility, higher rate environment, WFH adoption, and so on… the homebuilders index XHN has gotten off to a dynamite start, up 11%, outpacing the 6% gain of the S&P500. When the individual builders print, it gives you insight into the commodity and labour markets on the cost side, as well as end demand when showing new orders. Let’s take a look at the biggest and baddest player in the space.
DR Horton
By The Numbers
Operating EPS of $2.76, strongly beat consensus of $2.25. Driving the upside was higher homebuilding revenues (led by closings down 6% vs. guidance for down 10-18%), higher rental property income ($110 million vs. our $60 million estimate) and higher gross margins (23.9% vs. guidance of 23- 24%). Importantly, orders fell 38%, below our -31%E and guidance of down 25-35%.
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The Most Important Thing
What to watch here are orders, and boy are they coming down. The impact of rates on housing will be felt hard-core by homebuilders, putting them firmly in the unloved bucket. In brighter news – 30yr fixed mortgage rates are finally showing some signs of retreat and there are some green shoots in some housing data.
4. Semiconductors 👉 TSMC
Semiconductors are everywhere. They are the brains behind nearly every critical digital device and piece of infrastructure that we use, and there is no bigger giant in semis than TSMC. Semis are seen as highly cyclical in nature, and with broad expectations of a massive drop in YoY unit growth across everything from PC, networking equipment, autos, and smartphones, semis will take this on the chin.
TSMC
By The Numbers
Revenues of $19.9B (-2% Q/Q and +27% c/c YoY) missed consensus estimates of $21.0B, and came in at the low-end of guidance of $19.9B-20.7B based on end-market softness and customer inventory adjustments. Gross Margins of 62.2% were above the high-end of the guide (59.5-61.5%) and up 180bps Q/Q on favorable FX (~140bps tailwind) and continued cost improvements offsetting lower utilization rates. GMs were guided to 53.5-55.5% in 4Q, or down nearly 8pts at the midpoint due to lower utilization rates and less favorable FX
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The Most Important Thing
Chip stocks are widely expected to experience a slowdown, but just how much of this is “priced in” is anyone’s guess. We’ve got a massive rally YTD but many doubt the longevity of this rally as we will see a cyclical trough as production capacity falls off this year. Timing these things is difficult.
5. Telecom 👉 AT&T
Boring is cool again. Telecom stocks are widely seen as defensive utilities because as downturns come to the market, very few people will cut their internet/cell phone service. Because of the extensive capital required to build out infrastructure, Telcos have historically grown through large debt issuances. While rising rates more heavily strain encumbered balance sheets, Telcos are looking like a bright spot here.
AT&T
By The Numbers
Revenue of 31.3B came in below expectations of $31.5B, while EPS of $0.61 was ahead of consensus of $0.57. FCF for the quarter came in at $6.1B, also ahead of expectations of $5.9B.
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The Most Important Thing
AT&T has narrowed its business to focus on mobile and broadband in a bid to achieve more stable and predictable growth, a move that's starting to yield results. The Mobility segment (50%+ of sales) continues to post steady service-revenue gains on solid postpaid net additions. These trends are likely to continue now that AT&T has boosted its network capacity and deployed mid-band spectrum to 150 million people, which should enable it to compete more effectively in 5G.
6. Energy👉 Chevron
Energy has taken center stage in the topics of geopolitical turmoil as well as inflation. With the Russia/Ukraine war showing no signs of slowing down as we just got more tank orders to Ukraine, this issue will not be resolved over the shorter term. Chevron is smack in the middle of this and just produced a record profit year so let’s take a look.
Chevron
By The Numbers
EPS of $4.09 missed consensus estimates of $4.32. Operating cash flow of $11.5B missed consensus of $12.3B. Record profit of $36.5B for all of 2022, beating the previous record in 2011 by over $10B.
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The Most Important Thing
On the back of record profits in 2022, earlier this week Chevron announced a 6% increase in its quarterly dividend to $1.51/sh as well as a new buyback authorization of $75B starting April 1. This is all at the same time when the stock is on an absolute tear. While we’re in the middle of an energy crisis, you’d think this money would be put back into increasing production…nope… 2023 guidance is for production to be flat to +3% for the year. We can thank government hurdles for that one…
7. Coming Up 👉 Earnings Agenda For Next Week
Monday: NXP Semiconductors
Tuesday: Pfizer, McDonald’s, Marathon Petroleum, Spotify, Samsung, UPS, Exxon, AMD, Match Group, Canadian Pacific Railway, WDC, Amgen
Wednesday: Boston Scientific Group, Waste Management Inc, Meta Platforms, T-Mobile, McKesson
Thursday: Apple, Alphabet, Amazon, Merck, ConocoPhillips, JD.com, Eli Lilly & Co, Atlassian, Starbacks, Gilead
Wrapping Up…
The adage of the last decade has been: As go the tech megacaps, so goes the market. While I don’t believe that will be the case over the next decade, tech stock earnings are still extremely important over this period as they make up a majority of major North American indices.
Next week we have Apple, Google, Amazon, and Meta earnings as well as an FOMC meeting all in the course of less than 24hrs.
Buckle up.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
What else we Grittin’ On?
M2. The M2 money supply YoY growth rate was negative in December. That means the money supply shrank for the first time ever.
PMIs. US business activity shrank in January. It's the 7th consecutive month of contractions.
PRIME. Amazon is launching a drug subscription for Prime members. Rx Pass will offer generic drugs and cost $5 a month.
SWIFT. Signature Bank will no longer process >$100k SWIFT transactions. The bank is reducing its crypto exposure.
RENT. Twitter was sued again for failure to pay rent. This time it was for payments on its London offices.
Sources:
https://www.rbcinsightresearch.com/ui/main/report/3d421266-744e-4217-95e1-50806f02f385
https://evercoreisi.mediasterling.com/document/C877B63C-4398-4B51-8F59-6D076A559B61
https://markets.jpmorgan.com/research/email/26e46rig/CEr5L7iMWZeuka6vB_8dDQ/GPS-4315486-0
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