Morning in Arizona

Morning in Arizona

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Thursday, April 27, 2017

A Deluge and an Eclipse

Financial Review

A Deluge and an Eclipse


DOW + 6 = 20,981
SPX + 1 = 2388
NAS + 23 = 6048 (record high close)
RUT – 2 = 1417
10 Y – .02 = 2.29%
OIL – 1.01 = 48.61
GOLD – 5.50 = 1264.50

Today brought a deluge of earnings.

Google parent Alphabet posted a 29 percent rise in quarterly profit, driven by a surge in advertising on mobiles and its popular YouTube video service. Alphabet’s net income rose to $5.43 billion. The company’s consolidated revenue rose 22 percent to $24.75 billion.

Google’s ad revenue, which accounts for a lion’s share of its business, rose 18 percent to $21.4 billion in the first quarter. Revenue from its Google Other unit, which includes Pixel smartphone, Play Store and cloud business, rose 49 percent to $3.10 billion.

Alphabet sales from its moonshots projects like Fiber and Nest also grew to $244 million in the quarter, up from $165 million a year earlier. However, Google’s loss for these ambitious projects ticked up slightly to $855 million. Up 5% in after-hours trade.

Also, after the closing bell, Amazon reported revenue of $35.7 billion, versus Wall Street estimates of $35.3 billion. A nice beat. This compares to $29.1 billion a year ago. EPS of $1.48, versus estimates of $1.13 per share. A big beat.

Analysts were also closely watching the performance of Amazon’s cloud computing unit, Amazon Web Services. AWS reported $3.66 billion in sales, and 43% percent growth, which is not quite as strong as the growth seen in the past 3 quarters but it is still a big beat. Amazon up almost 5% in after-hours trade.

Microsoft net income rose to $4.8 billion, or 61 cents per share, from $3.7 billion, or 47 cents per share, a year earlier. That was an earnings miss. Revenue climbed 6 percent to $23.5 billion, missing estimates.

Microsoft said LinkedIn, which it bought for about $26 billion, contributed $975 million in revenue in the quarter. Revenue from Microsoft’s personal computing unit, its largest by revenue, fell 7.4 percent. Demand for its cloud computing services failed to offset weak growth in its personal computing division. Microsoft down about 2% in after-hours.

Intel reported lower-than-expected revenue for the first quarter. Intel still gets most of its revenue from selling PC chips, a business that returned to growth in 2016 due to stabilizing demand in the second half of the year.

Revenue from Intel’s higher-margin data center business rose 6 percent to $4.2 billion in the quarter, missing analysts’ expectations. Revenue from client computing rose 6 percent to $8 billion. Intel’s net income rose to $2.96 billion, or 61 cents per share, from $2.05 billion, or 42 cents per share, a year earlier. That was a miss of 4 cents per share. Intel dropped about 3.5% after-hours.

Starbucks reported fiscal second-quarter profit of $652 million, or 45 cents per share – in line with estimates. Revenue of $5.29 billion was a slight miss. Comparable-store sales rose 3%, below analysts’ forecast for 3.6%.

United Parcel Service reported a higher-than-expected quarterly net profit as revenue grew across its domestic and international package delivery segments and as well as freight and supply chain operations.

Often seen as a bellwether of US economic activity, UPS said revenue increased to $15.3 billion in the first quarter from $14.4 billion in the year-ago period. Revenue beat estimates. Net income rose 2.4% to $1.15, also beating estimates.  During the quarter, UPS invested to expand its new Saturday deliveries, with $35 million in increased costs.

Ford Motor’s first-quarter profit fell 35% from a year earlier to $1.6 billion, down from $2.5 billion in 2016’s first period, when strong demand for a newly redesigned F-150 pickup truck helped Ford post its best quarterly operating profit in history.

Earnings per share were 39 cents in the latest quarter, beating analysts’ consensus of 36 cents. Revenue for the first quarter rose 4% to $39.1 billion, driven by a favorable mix of pickup trucks and sport-utility vehicles. Ford plans to cut $3 billion in costs this year and expects profit to rebound in 2018, driven by continued strength in the pickup-truck market.

American Airlines Group has a healthy track record with respect to earnings. The company has delivered positive earnings surprises in three of the last four quarters, with an average beat of 20%. The first quarter down 60% from the year ago quarter but it was another beat. Adjusted earnings per share came in at 61 cents per share, beating estimates of 57 cents. American shares dropped about 5% today.

American Airlines announced it was increasing pilot and flight attendant salaries an average of 6.5 percent, or by a total of $930 million through 2019. A JPMorgan analyst described it as a “wealth transfer” to labor groups. American CEO Doug Parker described the higher wages as a correction to years of “incredibly difficult times” for airline employees. American employees had been underpaid compared to other airline employees. Parker called the pay hikes an “investment” in better service.

Southwest Airlines dropped about 2%, after the air carrier reported first-quarter profit and revenue that missed expectations. CEO Gary Kelly announced that Southwest will no longer overbook its flights, ending a practice that sometimes leaves paying passengers without a seat.

It’s impossible for an airline to guarantee it will never have to bump a passenger. Carriers still must transport other pilots and crew members to work, and an air marshal could also need a seat. But ending overbooking does make it less likely.

Comcast beat expectations ahead of the bell and jumped 3%, while Abbvie performed similarly. Those companies were joined by railroad company Union UNP, which also gained 3% in early trade, and another pharmaceutical giant, Bristol-Myers Squibb + 3.5%. Other post-earnings gainers included KKR +5% and Domino’s Pizza, up 2.5%.

European markets closed slightly lower Thursday. The European Central Bank kept interest rates unchanged. ECB President Mario Draghi surprised some investors by explicitly recognizing the bloc’s economic recovery.

The euro initially reached the day’s peak of $1.0930 as Draghi struck an optimistic tone when answering questions from reporters. The ECB maintained a deposit rate of -0.4% for banks, a base interest rate of 0.0%, and a quantitative easing (QE) program of up to €60 billion per month.

President Trump said he’ll give the re-negotiation of the North American Free Trade Agreement a “good, strong shot” but reiterated he would “terminate” U.S. participation if he doesn’t get what he called a fair deal. He said he decided to have talks since pulling out would be a “shock to the system.”

House Speaker Paul Ryan said he’s confident Congress will pass a “short-term extension” of current government funding that would keep operations going past Friday. Ryan did not give a time for a vote.

A gauge of pending home sales declined in March as inventory continued to tighten. The National Association of Realtors’ index fell 0.8% to a reading of 111.4. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed.

Thanks to a strong first quarter, the Realtors forecast sales in 2017 to rise 3.5% compared to 2016. But supply isn’t keeping up with demand. There were 3.8 months of supply in March, and properties stayed on the market an average of only 34 days. A balanced market is usually thought to have 6 months of supply.

West Virginia is coal country. Chris Beam, president of Appalachian Power, the state’s largest utility, is not a coal guy. Beam told the West Virginia Gazette-Mail he had a recent conversation with the governor of West Virginia, who asked him to burn more coal.  Beam responded, “That’s not going to happen.” And the reason is customers don’t want it.

Beam says the debate over climate change, and the role of coal in it, is essentially over. Appalachian Power’s parent company AES believes the regulation of carbon dioxide is inevitable. In the coming decades, renewable energy and natural gas are poised to dominate the fuel mix. Appalachian Power’s residential and industrial customers are now asking about switching to 100% renewables.

To get out in front of this growing demand, the utility, which serves more than a million customers across the US mid-Atlantic region, has begun preparing power plans that would allow customers to stop using fossil fuels. Appalachian Power estimates it will reduce its coal capacity from 60% of its energy mix to about 50% by 2020.

At the same time, wind and solar will rise from about 4% of capacity to 20% by 2031. And yes, West Virginia trails most of the rest of the country in its switch to renewables.

And we finish with a special note for the philatelists among us. The Postal Service will debut a new shape-shifting Forever stamp in June ahead of a rare solar eclipse set for Aug. 21. The new issue will transform from an image of a total solar eclipse into an image of the moon when you press it with your finger. The back will feature a U.S. map tracking when the eclipse will appear across the country.

It’s the first time a stamp will make use of thermochromic ink, which is sensitive to body heat (and changing temperatures — which means stamps should be kept away from direct sunlight). The stamp’s photo of the eclipse was taken in Libya in 2006 by an Arizona-based astrophysicist, Fred Espenak, aka Mr. Eclipse, of Portal, AZ.

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