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October 18th, 2019

Earnings Season Is On

By PRATTE
 Netflix EN

Trade negotiations have largely dominated the markets in the last months. However, this week, investors were more focused on the start of earnings season and the results were eagerly awaited by analysts. The big American banks were the first to report with performances surpassing expectations. Here is what happened in the markets this week.

Market Brief

Markets started the week in the red, closing the session down on Monday. Investors remained cautious regarding trade talks between China and the United States, despite a renewed optimism last week. “If we had real doubts, the markets would be much less well oriented. They still continue to live on the hope of an agreement, “says Gregori Volokhine of Meeschaert Financial Services. Several stocks retreated on Monday; Boeing yielded 0.46% and General Motors lost 0.20%. Facebook’s stock dropped 0.49% at the end of the session Monday after Visa, Mastercard, eBay and Stripe Visa, Mastercard, eBay and Stripe had announced their withdrawal from the Libra association.

Wall Street was back in the green on Tuesday, supported by the latest corporate earnings. The Dow rose 117.91 points, the NASDAQ climbed 37 points and the S&P 500 advanced 12.99 points. “It’s a busy morning and for once, it is not dominated by the news around the trade negotiations but by the one around the results of companies,” observes Patrick O’Hare of Briefing. The three leading US indexes closed on the rise on Tuesday, supported by the latest earnings. Shares of JP Morgan (+ 3.01%), Goldman Sachs (+ 0.31%), Citigroup (+ 1.40%) and Wells Fargo (+ 1.7%) rose after the publication of their earnings.

US markets opened lower on Wednesday shaken by the unexpected drop in US retail sales after six months on the rise. “These numbers confirm our belief that economic growth is slowing and could fall to 1% year-over-year in the fourth quarter, forcing the Fed to once again lower interest rates by a quarter of a percentage point in December,” said Michael. Pearce from Capital Economics. This poor performance continued throughout the session while Wall Street finished slightly lower. The Dow was down 0.08%, the NASDAQ was down 0.30% and the S&P 500 was down 0.20%.

Wall Street opened higher on Thursday, lifted by the announcement of a Brexit agreement and the latest earnings results. Netflix’s stock continued its rally, up 6% at the open while Morgan Stanley gained 3%. However, the adoption of the latest Brexit text remains unclear. “The approval by the British Parliament is, however, far from gained, because the (North Irish unionist party) DUP has already expressed its disagreement with the compromise proposal, like the Labor Party,” notes Patrick O’Hare of Briefing.

Stocks were slightly lower at the open on Friday. The Dow was down 46 points while the S&P 500 and the NASDAQ slid 0.1% each.

The Toronto Stock Exchange was closed Monday for Thanksgiving. The TSX ended Tuesday’s session slightly higher at 3.23 points, despite a decline in the materials and energy sectors. The health sector ended the session with gains of 3.2%, helped by Aphria up 15.5% after posting earnings surpassing expectations. CannTrust’s stock jumped 51.7% after the company announced that it was going to destroy 77 million cannabis plants and cannabis products in hopes of complying with Health Canada regulations. The TSX opened slightly higher Wednesday, gaining 21 points early in the day. This performance continued throughout the session as the TSX finished higher for a second consecutive day thanks in part to Aritzia’s stock up 16% after posting solid earnings. It was a pretty stable session for the Toronto index on Thursday, who ended the day down 0.88 points. The health sector jumped 3.74% at close on Thursday and materials advanced 1.19%. The TSX opened slightly higher on Friday, helped by energy stocks but concerns about slowing growth in China capped gains.

Us Bank earnings.

The big six unveiled their earnings this week in a third trimester dominated by falling interest rates. Goldman Sachs posted mixed results while net profit rose 17.8%. Its quarterly turnover, for its part, decreased by 5.6%. Its stock was down 2.18% at the open on Tuesday.
J.P. Morgan, meanwhile, announced better than expected results as its net profit rose 8.35% to $9.08 billion, while revenue grew 7.3% to $29.3 billion, exceeding the $28.49 billion forecast. “The consumer remains healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels,” CEO Jamie Dimon said in the earnings release. “This is being offset by weakening business sentiment and capital expenditures mostly driven by increasingly complex geopolitical risks, including tensions in global trade.”

Bank of America announced Wednesday a 21.3% drop in its profit for the last quarter. This drop is due to a $2.1 billion charges tied to the end of a partnership with First Dat. However, the bank posted good quarterly results. Indeed, its activity in terms of assets has increased and its turnover is up 0.36%. Its stock ended Wednesday’s session up 1.3%.

Citigroup reported earnings that exceeded expectations, announcing a 6.3% increase in net income. While Wells Fargo saw its earnings decline, weakened by legal fees related to numerous scandals regarding shady business practices and by falling interest rates.

Finally, Morgan Stanley, the last of the six major US banks, published its quarterly results announcing better than expected earnings. The bank posted a net profit of 2.17 billion dollars, up 2.9% year-on-year, while its turnover has increased by 1.62% to 10.03 billion dollars, well above the anticipated 9.6 billion. The performance was welcomed by Wall Street, boosting its stock by 4% Thursday in the pre-session trade.

Investors were nevertheless pleased with the good performance of the major US banks, as they had anticipated the worst because of multiple negative factors were surrounding the banking sector, starting with low interest rates. Indeed, the rate cut by the US Federal Reserve allows consumers to borrow money at low prices. Geopolitical uncertainties and trade tensions is worrying the business community and therefore reducing investments.

Netflix

Netflix posted strong earnings, managing to add 520,000 subscribers, after a slump in the second quarter as the streaming platform had lost more than 130,000 subscribers. Its turnover reached $5.24 billion, while analysts had expected revenues of 5.25 billion. These earnings were more than welcome by Wall Street investors just weeks before the launch of Apple TV + and Disney + platforms. However, the company announced a more difficult fourth quarter as it will remain cautious regarding the arrival of new competitors. Despite this, Netflix only evokes “modest headwinds in the short run”. “In the long term, we believe that we will continue to grow, thanks to the strength of our service and the opportunities offered by this huge market,” the group said in a statement.

“Many are focused on the ‘streaming wars,’ but we’ve been competing with streamers (Amazon, YouTube, Hulu) as well as linear TV for over a decade,” the company said. “The upcoming arrival of services like Disney+, Apple TV+, HBO Max, and Peacock is increased competition, but we are all small compared to linear TV. While the new competitors have some great titles (especially catalogue titles), none have the variety, diversity and quality of new original programming that we are producing around the world.” Following the news, Netflix’s stock jumped 10%, allowing its shares to make up for its losses in the second quarter. Netflix’s shares had lost more than 21.8% in the last three months.

Coca-Cola

Coca-Cola reported better than expected earnings on Friday. Coke declared a third-quarter net income of $2.6 billion up from $1.8 billion, a year earlier. Net sales are also up 8% while organic revenue rose by 5%, helped by higher prices as customers are buying more expensive drinks. The company now expects sales to grow by 5%, despite the appreciation of the dollar and especially the trade tensions affecting global growth. As US consumers are less incline to drink soda, Coca-Cola has been focusing lately on drinks with less sugar in smaller packaging. For example, sales of its 7.5-ounce mini cans of soda are up 15%.

“Our performance gives us confidence that our strategies are taking hold with our consumers, customers and system,” CEO James Quincey said in a statement. Coke shares were up 2.9% in early trading on Friday while the stock has gained 14% this year.

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
The information contained in this report is derived from sources believed to be reliable, but the accuracy and completeness of this information can not be guaranteed and, in providing the information, the author and Pratte Portfolio Management assume no liability whatsoever. This information was current as of the date indicated in this bulletin, and neither the author nor Pratte Portfolio Management assumes any obligation to update it or to report any new developments with respect to this information. This report is intended for distribution in jurisdictions where the author and Pratte Portfolio Management are registered for trading in securities. Any distribution or diffusion of this report in another territory is forbidden. The author, Pratte Portfolio Management, its affiliates and their respective directors, officers and employees, and the companies with which they are associated may, from time to time, hold securities referred to in this report.
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