The first week of earnings season brought a mixed bag but on the whole the numbers released by some of the most watched companies were in-line or better than expected. I thought that I'd do something different this week and give you a flavor of what some of the biggest companies said this past week.
Last week in the stock market as has often been the case lately, Europe stepped in to help ruin the Dow's party at the end of the week. More specifically, Spain played the role of official party-pooper, with the country's benchmark 10-year bond yields rising above 7%, a level that's unsustainable. The country's Valencia region announced that it will ask the Spanish government for help refinancing its debt, and Spain lowered its 2013 full-year GDP estimate, saying it expects GDP to contract in 2013 by 0.5%. As a result the market sold-off on Friday and it appears that today is going to show a big decline of up to 200 points on the Dow with Greece also joining the party with its PM warning that a great depression is a possibility.
So here we go again. The same bad news being said in another way. As Al Pacino said in the Godfather "Just when I thought I was out, they pulled me back in!" Just when it seemed Investors were trying to put aside the Euro worries for a while to get back to fundamentals a dose of reality hits and we are sucked back into the European macro headlines. We had a run in the market so now it's time to give back. Several traders I have talked to have told me that when the S&P gets above 1360-1370 they sell the market. When it gets back to 1280-1300 they buy the market. Currently the S&P is at 1362 so if that holds we could be in for a little decline. Let's watch.
Below are the results for 4 bellweather stocks, Coke, Intel, American Express and General Electric. Note that I am not recommending buying or selling these companies but since these are multinationals I think they give a good read-thru on what's going on worldwide.
Coca Cola (KO $76.87) Coke started the week off on a good note by reporting earnings and revenue ahead of consensus due to better volume growth in certain international markets. Regarding trends in the US, Coke noted that consumption trends began weakening later in May citing the economy as a reason. The pricing environment was stable to good allowing the company to grow without price discounts. Headwinds looking forward include FX due to a stronger dollar and challenging worldwide macro conditions. KO mentioned that the situation in Europe is affecting consumer demand as volume declined 4% and they also cited a deceleration of growth in China. Overall Coke's exposure to markets around the world is a good barometer of consumer spending. It has a diverse geographic footprint and overall it is seeing some markets do well while others are not. Although the company is thought to be resistant to weakening economic growth it is not immune. However, with pricing stable and volume still growing in key markets, KO is in good position to weather the storm.
Intel (INTC $25.58) is the world's largest semiconductor chip company. The company reported good results for the 2nd quarter but guided estimates down going forward due to the macro environment. I also note that its inventory level increased to 90 days which is bow 15 days above its historical average. With inventory higher and demand slackening there could be an inventory correction is demand doesn't pickup. As a read-thru for other companies, you should keep an eye on inventory levels to be sure companies aren't stuffing the channels to get product out the door. On a positive note for others in the industry, INTC expects to capital expenditures to increase 16% as the company is building 2 new fabs. The company noted strength in the Americas and China with weakness in Europe. Intel believes the macro slowdown is modest and expects second half shipments to exceed 1H due to numerous ongoing trends and the upcoming Windows 8 launch in October.
American Express (AXP $55.81) AXP stock fell 3.7% on the week even after reporting upside to earnings as investors were concerned that customer credit card spending increased 7% a slowdown from recent quarters. Charge-offs and delinquencies remained low a positive sign amid macro uncertainty. International billed business grew only 3% mostly due to sluggish Europe and a stronger US dollar. Overall basic card spending was up 5% and card loans up 4%, a slowdown from prior quarters. So in terms of a read-thru on a macro level, consumer and business spending is growing but at a slower level. International spending slowed more significantly as expected and the stronger dollar is a translation headwind. Another potential upcoming positive for AXP and other multinational companies, comps begin to get easier in Europe at the end of the summer as companies lap a year of weakness. AXP also exhibited good expense control as it often does to manage its earnings. Key risks include further regulation, litigation risk, a slowdown in the global economy, and credit deterioration.
General Electric (GE $19.87) As a multi-industry conglomerate GE touches many parts of the worldwide economy with business in Industrial, Energy, Finance, Aviation and Health Care as well as other sectors. Overall industrial revenues grew 10% while margins improved modestly. There are so many moving parts at GE that I will not go thru each business line but some key takeaways are as follows. Energy pricing improved, industrial margins were stable and backlog is at a record $204 billion. Although GE is affected by macro sluggishness and FX, many of its businesses are late/long cycle so short-term fluctuations have a smaller affect on those businesses. Another positive sign is that GE's Real Estate segment posted solid net income as it continues to distance itself from the credit crisis. There were some negatives in the quarter as well including a 1% industrial order decline (vs a tough 33% increase last year) as Oil & Gas equipment sales were flat and Aero sales suffered in Western Europe. Healthcare decelerated to flat revenues and US orders while Euro orders fell 13%. China orders grew 26% and overall China sales climbed 24%. GE Capital turned in a solid quarter and it resumed dividend payments to the parent with a $3 billion payment. So overall, with its diverse portfolio of businesses GE seems to be well positioned to weather the macro storms but we should keep an eye on the company to get a great read on the industrial economy.
In summary, each of the multinational companies mentioned had their plusses and minuses. The recurring theme for many multinational companies will be FX headwinds, macro concerns, pricing and margins. Pockets of strength will be needed to offset a weak Europe and a slowing US and China.
Existing Home Sales Fell 5.4% in June to an Annual Rate of 4.37 Million Units. Existing home sales fell in June but still remain up 4.5% from a year ago.
Housing Starts Increased 6.9% in June, Up 23.6% Versus a Year Ago and the highest level since October 2008. Single-family starts increased 4.7% and are up 21.7% from a year ago; multi-family starts increased 12.8% in June and are up 28.5% from a year ago.
In other news new claims for unemployment insurance increased 24,000 last week to 386,000. The increase comes after a sharp decline the prior week and both large moves are related to shifts in the timing of retooling at auto plants
Industrial production rose .4% in June. Manufacturing, which excludes mining and utilities, rose a very strong 0.7%. Industrial production is up 4.6% from a year ago, growing more than twice as fast as real GDP.
NOTE: The above is an excerpted summary of the Forza Weekly Newsbrief. To subscribe for free to the newsletter go to www.forzainvestment.com
Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtained from ForzaInvestment.com
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