Strong earnings support surge in US stocks
It’s hard not to be impressed by the sight of the world’s largest economy coming to life after Covid-induced sleep, but recent estimates that S&P 500 company profits could increase an average of 33% this year after. a solid third quarter. gives credit to fears that all this frenetic economic activity, combined with acute constraints on supply chains, will ultimately lead to a much higher inflationary environment.
There is also the unanswered question of whether many of the earnings gains are the result of industries reporting decades of low inventory and inventory levels. However, for now, at least, investors don’t seem too confused by ideas like the S&P 500 and other US indices have hit new highs as the reporting season has kicked in starting with the big ones. banks.
Boost in depreciation for banks
Improving the overall economic environment has been a boon for domestic lenders Wells fargo (US: WFC), where the right people from almost every small and mid-sized town in America do their banking. The release of capital held as provisions for impairment continued at a steady pace with over $ 1.7bn (Â£ 1.2bn) of funds set aside to cover bad debts potential accruing to the income statement during the quarter. This made the results look decidedly flattering, as the earnings helped boost several of Wells Fargo’s key numbers. For example, return on equity increased from a barely credible 54% to 11.1% compared to the same period in 2020, largely due to favorable releases of capital reserves.
A greyhound bus ride from Main Street to Wall Street saw the big New York banks reporting similar benefits from the release of depreciation reserves. JPMorgan Chase (US: JPM) reported net income of $ 1.5 billion, which was more than 12% of the net income it reported for the quarter.
However, JPM and Wells Fargo have reported a significant drop in home loans. At JPM, home loans were 18% lower year on year, suggesting Americans are taking a conservative approach to spending as the country emerges from the pandemic. Taking home equity has traditionally been how American consumers have funded spending on big-ticket items.
Pure play investment banks also had an interesting quarter. Goldman Sachs (US: GS.) Clearly benefited from a mergers and acquisitions market that remained buoyant for most of the quarter. The investment bank’s net income grew 88% year-on-year to $ 3.7 billion, with the lender raking in $ 1.64 billion in M&A advisory fees from $ 507 million at the same time last year. Its status as an investment bank, rather than primarily a lender and acceptor of deposits, meant that the releases of provisions for impairment were largely negligible to its bottom line.
The valuations of US banks appear rich after a much longer re-rating period than those of their UK counterparts. The average net asset value per share ratio, a key value indicator for banks, is now 1.5, compared to just 0.6 in the UK.
The defensive ladder is everything
Giant of durable consumer goods Procter & Gamble (US: PG) has illustrated the earnings season paradox so far, in that higher costs are clearly starting to affect business results, but this can be offset by the size of a business. P & G’s operating margin was impacted 3.7% in the quarter by a substantial increase in raw material costs. However, the sheer scale of its operations meant that manufacturing efficiency recouped one percentage point, with price increases increasing an additional 0.5 percentage point. The PG share price has drifted widely sideways over the past 12 months and has lagged behind the underlying S&P 500 index. Perhaps this is a measure of how hard even large companies are. Durable consumer goods meet to pass base cost increases on to the consumer, although this has not stopped companies like Unilever (ULVR) to force price increases.
Durable consumer goods groups generally face resistance to cost increases because their customers, usually supermarkets, themselves have considerable leverage when it comes to determining prices and can negotiate on the cheap. decline with their suppliers. Yet PG shares are currently trading at around 20 times the company’s free cash flow – similar to the peaks reached before the financial crisis in 2007-8 – so either Americans really like their consumer durables or a partial rotation to defensive actions may already be underway. under the surface of the index finger.
Another interesting part is the quasi-stablemate Johnson & johnson (US: JNJ), which has defensive consumer characteristics similar to Procter & Gamble, with the addition of a pharmaceutical division. Its third quarter results showed the advantages, under specific circumstances, of being a broadly diversified conglomerate. For example, the weighting of the fastest growing pharmaceutical business, which contributed $ 13 billion out of $ 23.3 billion in quarterly sales, held up the company’s results after more modest growth in both in consumer health and medical devices – although apparently more sales – pain and respiratory drugs have performed well, unsurprisingly, perhaps, given the pandemic backdrop. The company also reported a large bill for legal fees, which rose nearly $ 600 million to $ 2.1 billion for the quarter, which J&J, like other drug companies, tends to capitalize on. on the balance sheet. J & J’s PE ratio of 17 times the consensus forecast for this year is comparable to that of US pharmaceutical and durable goods companies. Much like PG, stocks have not seen a dramatic change and have only risen 6% since the start of the year.
Tokens are still falling
The widespread semiconductor shortage affects everyone from automakers to tablet producers, and has put pressure on the chipmaker’s revenue. Intelligence (United States: INTC). The company’s shares are down 2.8% year-to-date after production capacity issues led to serious supply issues for itself and its customers around the world. The Customer Computing Group (CCG) business segment, which powers laptops, was hit the hardest by the shortages, with sales down 2% to $ 9.7 billion. The company is heading towards full-year EPS of $ 4.50 per share, although it has warned that prediction with nearly two pages of potential reasons why it might not be achieved. There does not appear to be any apparent sign of the ongoing chip shortages easing, mainly because the industry’s capacity is taking so long to develop. For example, the company just opened two new production facilities in Chandler, Arizona, which were announced in March.
IBM (US: IBM) typically wins the annual award for the business accounts most likely to carry one-time charges at any given time, and its third quarter results did not disappoint on that score. Reported EPS was impacted by $ 2.85 by a variety of intangible asset write-downs, decommissioning fees and transaction costs related to the separation of the Kyndryl infrastructure services business. The most interesting aspect, however, was a $ 7 billion drop in overall debt, with IBM now carrying just $ 54 billion in debt. The reality is that IBM is a mature company with stable sales and operating profits for several years, which is why its current PE ratio of 14 times consensus profits is more akin to food. core industry than a racy tech company.
A new start for Facebook?
Few stocks divide investors as much Facebook (US: FB) after a terrible quarter of bad press related to its business practices highlighted by a corporate whistleblower, and the feeling that social media more generally is becoming the target of more and more regulatory intervention more important. On the other hand, the stock has strong supporters, including investors such as Fundsmith luminary Terry Smith. Judging by the third quarter results, it’s hard not to be impressed with the lucrative power of the platform. With a light capital base, the company generated sales growth of 33 percent in the quarter, with operating margins up 36 percent. For a pure growth investor, that ticks all the boxes and yet questions remain about their corporate culture.
Meanwhile, the other megalith of Silicon Valley, Alphabet (US: GOOG), parent company of Google (US: GOOGL), reported an astonishing 41% increase in sales to $ 65.1 billion. The company appears to generate more cash than it can ever invest profitably, with more than $ 142 billion in cash and cash equivalents on the balance sheet. Most notable is the constant 15% return the company makes on capital employed. Overall, it’s hard to argue with quality, but with stocks currently trading over seven times their book value, you’ll pay dearly for the privilege of owning them.
We continue our review of the US earnings season next week, when investors have a chance to see how food producers, vintage car makers and Warren Buffett are doing.