Jump Into Earnings
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This is one of the busiest weeks for earnings reports, so let’s jump in with both feet.
IBM delivered its 12th straight quarter of declining revenue, but they beat earnings expectations because they proved that even if they aren’t the masters of technology, they are masters of financial engineering; one way to boost earnings per share – reduce the shares outstanding with stock buybacks. At some point the strategy has a flaw, but that is for another day.
We’ve known that a stronger dollar would hurt US companies doing business overseas, but we rarely think about reversing that equation. The weaker euro boosted revenue at German business software maker SAP in the first three months of the year and drove operating profit up 15 percent. First-quarter revenue rose 22 percent to 4.5 billion euros, at the top of market forecasts. At constant exchange rates sales rose 10 percent. First-quarter operating profit, excluding special items, rose to 1.06 billion euros ($1.13 billion), matching estimates. Excluding the effect of currencies, SAP’s operating profit dropped 2 percent.
Chip designer ARM Holdings supplies Apple’s iPhone. Arm said first quarter profits rose 24%, beating forecasts. Chief executive Simon Segars said: “As the world becomes more digital and more connected, we continue to see an increase in the demand for Arm’s smart and energy-efficient technology, which is driving both our licensing and royalty revenues.” Another way to look at this is a sidebar play on Apple.
DuPont, the chemical company, posted fiscal first quarter adjusted earnings of $1.34 per share, down from $1.58 a share in the year-earlier period. Revenue fell to $9.2 billion from $10.1 billion a year ago. Earnings were a little better than estimates, revenue was a little lower than estimates. DuPont earnings were hit hard by a stronger dollar, but the company responded with aggressive cost cutting.
United Technologies reported first-quarter 2015 net income of $1.4 billion or $1.58 per share, up from $1.2 billion or $1.32 in the year-ago quarter. The increase in earnings was driven by rise in aerospace sales and lower operating costs. Total revenue for the first quarter decreased 1.0% year over year to $14.5 billion. CEO Gregory Hayes said: “We had a good start to the year, despite headwinds from a stronger U.S. dollar. The fundamentals of all of our businesses remained solid, continuing to drive strong organic sales growth and allowing us to increase EPS by 13 percent on a constant currency basis, excluding the impact of gains and restructuring. … Although commercial aerospace aftermarket growth was slower in the quarter than we anticipate for the year, the commercial building business in the U.S. is looking better and I’m encouraged by the signs of growth that we’re seeing in Europe.”
Verizon reported earnings per share of $1.02, beating estimates of 95 cents. Revenue of $32 billion rose 3.8%, from last year, falling just short of expectations of $32.3 billion. Wireless revenues rose 7% to $22.3 billion, with 565,000 net new subscribers added. That brings Verizon’s total wireless retail subscribers to 108.6 million. The wireless industry is embroiled in a price war. While great for smartphone users, it’s not great for companies selling wireless connectivity. The average revenue per user across the industry fell 4 percent in the fourth quarter of last year. Verizon reported that it had lost 138,000 cell phone customers in the last three months. CFO Francis Shammo said: “If the customer who is just price-sensitive and does not care about the quality of the network—or is sufficient with just paying a lower price—that’s probably the customer we’re not going to be able to keep.” Which sounds a lot like good riddance; not exactly the most customer friendly approach. I’m reminded of an old saying: “Even when money is no object, price is always a consideration.”
The outgoing Credit Suisse CEO delivered his last set of earnings this morning. Net income in the first quarter rose 23 percent as increased trading activity boosted the securities unit but the stock is having its worst day since January after the bank said a key measure of financial strength dropped, raising concerns the bank may have to boost capital.
Lockheed Martin, the world’s biggest defense contractor, reported Q1 sales amounted to only $10.1 billion, down 5% year over year and about 1% below estimates. Operating profits dropped a similar 5%, and net earnings for the company were down 6% at $878 million. Lockheed ended the March quarter with a $77 billion backlog, down 4.4% from Dec. 31, but it left its full-year order and sales guidance unchanged. Sales were down, earnings were down, but earnings per share did not reflect the profits because Lockheed spent more than $600 million during the quarter, buying back 3 million of its own shares.
Chipotle Mexican Grill delivered a mixed report after the closing bell. Earnings topped estimates but revenue fell just shy of forecasts as did a key restaurant industry sales metric. Chipotle stock dropped 5 percent after the report. Net income rose to $122 million, or $3.88 per share, from $83 million, or $2.64 per share in the year-ago period. Revenue increased to $1.09 billion from $904 million a year ago. Comparable restaurant sales, a key industry metric, rose 10.4 percent during the quarter, missing estimates.
Yum Brands reported first-quarter earnings of 80 cents per share on revenue of $2.62 billion. Yum Brands same-store sales were forecast to tick 0.4 percent lower system wide. Its Taco Bell unit was expected to perform the best, with projections calling for a 5.4 percent jump.
Yahoo also reported after the close; first quarter results missed expectations on both lines. Yahoo posted adjusted earnings of 18 cents a share, missing estimates by three cents. Meanwhile, sales, excluding traffic acquisition costs, of $1.04 billion also came in short of expectations of $1.06 billion. Yahoo is supposed to be a turnaround story, but so far it isn’t turning.
So, what have we learned about earnings at this point in the reporting season? Well, Americans love Mexican food. Also, the strong dollar is hurting sales and companies compensate with stock buybacks and other tricks. Almost 73 percent of the S&P 500 components that have reported so far have beat profit expectations, but just 42 percent beat expectations for revenue. FactSet expects first-quarter earnings for the S&P 500 to decline 4 per cent and revenues to drop 3 per cent. But it expects both earnings and revenues to be down 10 per cent for companies that generate less than half their sales in the US. A mitigating factor for dollar-related pain is that the negative expectations have already been baked into the cake. The next consideration is whether earnings have peaked for the year.
Moving on. Teva Pharmaceuticals is offering to buy Mylan for $82 a share in cash and stock in a deal valued at $40 billion. Mylan, based in the Netherlands, already had an offer in for Perrigo, an Irish drug maker. Perrigo rejected that offer today. In the red hot market for pharmaceutical deal-making it’s either eat or be eaten.
General Electric is in early-stage talks with Wells Fargo about selling its entire $74 billion U.S. commercial lending and leasing portfolio as part of its plans to continue dismantling its banking business. GE is also in talks with other bidders. Wells, along with Blackstone was the buyer of nearly $30 billion of real estate-related assets from GE eleven days ago.
The global economic environment is still the same. Chinese real estate development companies are going into default and the Chinese government is trying to stimulate the economy. Greece is broke. Time and money is running dry and Greek government bonds have been falling off a cliff. The yield on the 3-year note climbed above 29% this morning for the first time since 2012. The European Central Bank says the beatings will continue until morale improves. The IMF says the beatings will continue until they get paid.
The situation in the Middle East remains a mess, although Saudi Arabia announced a cease fire in Yemen; which doesn’t mean the fighting has stopped; more like a pause to assess the impact of dropping bombs, and then…, reload. The US Navy has positioned an aircraft carrier off the coast of Yemen to protect the free flow of commerce in the Gulf of Aden and the Red Sea, while also keeping an eye on a flotilla of Iranian boats that Iran says is delivering humanitarian aid to Yemen, but one man’s humanitarian aid is another man’s gun. Meanwhile, the collateral damage from Syria, Libya, and Sudan continue to wash up on the shores of Malta and Rhodes. While we try to tend to earnings reports and economic data, we are often reminded of the truly perilous.
Remember years ago, when we talked about the future, the dream was that one day we would all be driving around in flying cars? It never happened. Instead we have flying trains. Central Japan Railway Co. set a new world speed record of 603 kilometers per hour (375 miles) on a test run just outside of Tokyo. The next-gen train technology relies on magnetic power to float the cars above ground, eliminating the friction of steel tracks. The trains start off running on wheels until they’re going fast enough for the magnets to kick in and create lift. In theory, maglev train technology could redefine city-to-city travel in dramatic ways. The 4,200-kilometer journey from New York to San Francisco, with no stops, could be covered in seven hours at this speed. This new train technology is expensive. Japan has plans to build its high-speed maglev line from Tokyo to Nagoya and Osaka at a cost of more than $120 billion. California is struggling to lay tracks for an $86 billion high-speed line after Congress cut off funds for such projects.
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