CHINA: The Numbers Are In

The Chinese economy experienced a surge last quarter, with consumers increasing their spending on items ranging from dining and drinks to vehicles. This surge counteracted the economic challenges presented by the property downturn, positioning Beijing on track to achieve its yearly growth target.

The GDP for the quarter ending in September grew by 4.9% compared to the same period last year and by 1.3% from the prior quarter. This growth rate surpassed what many economists had anticipated, reflecting the positive impact of the government's stimulus measures. 

The robust growth in retail sales last month, which marked the most significant rise since May, contributed to these figures. Additionally, the unemployment rate dropped to its lowest in nearly two years.

Key Figures:

• Industrial output rose 4.5% in September from a year earlier, above the median estimate of a 4.4% increase

• Retail sales expanded 5.5% in September; median forecast was 4.9%

• Fixed-asset investment increased 3.1% in the first nine months of the year compared to the same period in 2022, lower than the median forecast of 3.2%

• Property investment fell 9.1% in the January-to-September period, worse than projections

• The jobless rate was 5% at the end of September, improving from August

^{Source: Bloomberg}

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EARNINGS: Morgan Stanley

Morgan Stanley beats profit and matches revenue estimates. Morgan Stanley’s trading operations helped offset wealth management and investment banking revenue misses. The bank’s bond traders produced $1.95 billion in quarterly revenue, roughly $200 million more than Wall Street estimates, while equity traders produced $2.51 billion in revenue, $100 million more than expected.

The biggest question moving forward for Morgan Stanley is its CEO succession plan. James Gorman will officially retire in May, and the Wall Street bank still does not have his replacement. Gorman has been the key figure behind Morgan Stanley’s acquisition strategy for their wealth and asset management division. It is rumored that there are three possible internal replacements.

Earnings:

• Earnings per share: $1.38, vs. expected $1.28

• Revenue: $13.27 billion, vs. expected $13.23 billion

💰 See who is reporting earnings for the rest of the week here.

UNITED AIRLINES: War Hurts

United Airlines has informed its shareholders that the ongoing Israel-Hamas conflict has prompted the suspension of flights to Tel Aviv, adversely affecting its financial results for the current quarter.

The extent of the financial impact will be determined by the duration of the war and the flight suspension. Rising airport jet fuel costs, which have increased by nearly 25% since the onset of summer, have also been cited by United as a factor affecting profits. However, United reported third-quarter earnings and revenue that exceeded analysts' predictions.

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A Real Estate Empire

What if we told you that McDonald’s isn’t a fast food restaurant but one of the world's largest commercial real estate companies?

The McDonald’s brothers opened their first restaurant in 1951, but they eventually sold the McDonald’s Corporation to Ray Kroc for pennies on the dollar. Kroc had a brilliant idea for the company that would eventually transform everything.

Instead of the typical franchise model, McDonald’s would buy the land and rent out the building to the franchisees selling the actual burgers. The rent was often 10% of the restaurant’s sales each month. McDonald’s would receive a royalty for using their name, image, and likeness.

Franchising serves as a model enabling fast food chains to achieve rapid and efficient expansion, utilizing investments from individual entrepreneurs. Ray Kroc refined franchising methods to facilitate the corporation's substantial growth while maintaining rigorous product control. During this period, CFO Sonneborn devised the real estate strategy McDonald's continues to employ.

With more than 40,000 locations worldwide, ~15% are directly owned and operated by the McDonald's corporation, while franchisees manage the majority. McDonald's retains ~82% of the total revenue generated by its franchisees, in contrast to a mere 16% of the revenue from its company-operated restaurants. The ability to collect rental income provides a safeguard against fluctuations in the burger-flipping business, as rental payments are a consistent obligation.

McDonald's is a prime illustration of how diversification fosters business income growth and mitigates financial risks. Today, McDonald’s owns some of the best real estate locations in the world. In fact, their portfolio is worth over $40 billion, and most of their profits come from the rent they collect.

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The author, publisher or insiders of the publisher may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.