Thursday, January 25, 2024

Morning Note: From Tech to Plane Tickets, From Homebuilders to Booze, etc. -- A Mixed Bag of Company Commentaries

With earnings season now in full force we thought it timely to offer up some highlights from company commentaries.

I color-coded the text to express our view of the messaging therein.

As you'll see, it's quite the mixed bag out there.

While the attitudes of the execs of the companies featured hold different degrees of economic relevance, if we were to nevertheless treat them equally, and score the below like an index, +100 to -100, it would come in at a mere +4.17, with 33% of the comments scoring economically positive, 29% negative and 38% neutral.

Texas Instruments: "Our results reflect increasing weakness in industrial and a sequential decline in automotive as customers work to reduce their inventory levels... First, the industrial market was down mid-teens as we saw that increasing weakness. The automotive market was down mid-single digits after 3 1/2 years of very strong growth. Personal electronics was about flat. And, next, communications equipment was down low single digits. And, lastly, enterprise systems grew low single digits."

"And, as the guide would suggest, we believe that we'll just continue to operate in a weak environment, and one where customers are continuing to rebalance their inventories overall."

"Our healthy top line growth reflects the benefits of paid sharing, our recent price changes and the strength of our underlying business driven by a strong slate."

Dupont: “As we finished 2023, we saw additional channel inventory destocking within our industrial businesses as well as continued weak demand in China. We are seeing similar trends continue and expect sequential sales and earnings to decline in the first quarter of 2024, driven by these factors.”

“As we start 2024, the macro environment remains muted, similar to what we saw in the fourth quarter. On an adjusted basis, we anticipate organic full year growth of flat to plus 2%... We continue to see demand in industrial end markets remaining mixed. 

Full year 2024 industrial production forecast is currently expected to be at approximately 2% worldwide, with the US being flat. This business is not only impacted by general industrial manufacturing, but also production activity in automotive and electronics end markets…Automotive unit volume production is forecast to be down slightly y/o/y.”

With the consumer, “organic sales are expected to be down low single digits as discretionary spending is expected to remain muted, especially in the US.”

Procter & Gamble: “Continued volume acceleration in North America and Europe focused markets was offset by softer shipments in greater China, Eastern Europe and Middle East/African regions due to local issues in select markets.”

“We expect the pricing contribution to top line growth to reduce by an additional 1 to 2 points in the back half of the year.” “We estimate commodities will be a tailwind of around $800mm after tax in fiscal ’24 based on current spot prices. This is consistent with the outlook we provided last quarter.” “We continue to see wage inflation in our own operation as well as in our supply chain flowing through.”

“We expect the environment around us to continue to be volatile and challenging from input costs to currencies to consumer, retailer and geopolitical dynamics,” though they maintain expectations for 4-5% organic sales growth.”

"The US continues to be very solid…with a very smooth transition from pricing, annualizing, and overall consumption coming up in terms of volume…We continue to see trade up within our propositions, so as consumers come in, maybe at a lower tier and a lower value proposition, they continue to trade up in the US…So some consumers will look for value in private label, but an equal if not higher amount of consumers find better value in our propositions as we drive continued superiority via innovation.”

DR Horton: “Based on current market conditions, mortgage rates, and continued affordability challenges, we expect our incentive levels to remain elevated in the near term. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share.”

“On a per square foot basis, home sales revenues were down 1.5% in the quarter, and lot costs increased 1.5%, while stick and brick costs decreased 1%.”

PPG: “Our YoY sales volume trend improved compared to recent quarters, decreasing less than 1% year over year. We continue to experience lower global industrial production along with soft US and European architectural demand, especially for DIY-related products.” 

“Notable for us during the quarter was China, where despite a lethargic general economy, we achieved high single-digit percentage volume growth, reflecting our strong mix of businesses in the country.”

“We remain confident that we will deliver positive sales volume in 2024, including benefits from China, India, and Mexico. We've delivered share gains in several businesses, including auto refinish, packaging, and the protective and marine coatings businesses.” 

HB Fuller: “From an overall global economic standpoint conditions remain subdued. While real GDP measures have been slightly positive, sentiment, particularly within the manufacturing sector remains weak and cautious. As a result, we continue to plan for a mild manufacturing recession in fiscal 2024 and our expectations for the year ahead reflect this scenario.”

“Since November of 2022, so for 14 consecutive months, we've seen a sub-50 PMI that when you operate very heavily in the industrial space, that's a big deal for you. Back to 1970, it's happened 6 times that it's been sub-50 for an extended period of time, most recent being the Great Recession in the '08-'09 timeframe. But it's a pretty tough period.”

“Our customers re main cautious; they remain fairly tight with their spending. I will say that I think that when I asked the leadership about what their customers are saying about 2024, I would say that the forward-looking statements are probably, on balance, more optimistic than the current statements.”

JPMorgan: “I think it's uncontroversial that the economic outlook has evolved to include a significantly higher probability of a soft landing.” 

 “A very strong labor market means, all else equal, strong consumer credit. So, that's how we see the world.” 

 “The consumers find all of the relevant metrics are now effectively normalized. And the question really, in light of the fact that cash buffers are now also normal but that means that consumers have been spending more than they're taking in, is how that spending behavior adjusts as we go into the new year in a world where cash buffers are less comfortable than they were.”

Citigroup: “2024 looks to be similar to 2023 in terms of the macro environment, with moderating rates and inflation. We expect to see growth slowing globally, with the US well positioned to withstand a run-of-the-mill recession should one materialize.”

Bank of America: “The YoY growth rate in spending from the beginning of '23 started declining. It went from in the early part of '23 over the early part of '22, from a 9% to 10% growth rate to this quarter's 4% to 5% growth rate, and that's where it stands here early in 2024. That growth rate of 4% to 5% is more consistent with the 2% GDP environment in a lower inflation environment.”

United Airlines: “In summary, we expect strong unit revenue performance on domestic and Atlantic capacity in early 2024 with weaker results in Asia as we absorb 2023 growth. And in Latin America due to record industry capacity growth levels. While we expect international RASM (revenue per available seat mile) will grow slower than domestic for a period, we also expect that international flying will have materially higher margins for United vs domestic.”

“During the entire recovery US outbound has been a stronger component of the traffic, really across the board, across the entire globe. And that continues today.”

On business travel in Q4, “It wasn’t spectacular in any way. But as we started January and the new budget season for all of our big corporate clients, we did notice a significant step-up.”

Delta Airlines: “Delta carried more travelers this holiday season than any other time in our history. To put that in context, we carried a record 9 million customers on 60,000 mainline flights over the holiday period, with fewer than 40 cancellations in aggregate.” 

“We expect demand to remain strong, particularly for the premium experiences that Delta provides. Consumer spend is continuing to shift from goods to services, and our customer base is in a healthy financial position with travel remaining a top priority. And corporate travel continues to improve with demand accelerating into year-end.” 

“Domestically, supply and demand are coming into better balance as the industry adjusts to rising costs of production, and we are seeing a positive inflection in domestic unit revenue growth. Internationally, we expect another strong year as we optimize our network and leverage our global JV partners.”

“Retail customers in the United States are under stress and making deliberate choices to seek value, evidenced in our own brands up 90 basis points in the quarter, while demand for seasonal and discretionary categories remains weak.” 

“Customers continue to pull back on discretionary spending and actively seek out promotional opportunities. As a result, we saw an approximately 90 basis points impact from weaker holiday seasonal sales.”

FedEx: “Looking at the US, market conditions remained soft with Q2 demand lower than we anticipated. The industry has now experienced 10 consecutive quarters of decline in US domestic average daily volume. Additionally, international market pressure continued.”

Costco: “In terms of Q1 comp sales metrics, traffic or shopping frequency increased 4.7% worldwide and 3.6% in the United States. Our average transaction was down 9/10 of a percent worldwide and down 1.6% in the US.” 

“E-comm sales in Q1 ex-FX increased 6.1%, the first quarterly YoY increase in five fiscal quarters and trended well during the three reporting periods of September, October, and November. E-comm showed strength in several areas. Food, things like eGift cards, pet items, snack items, we're up in the mid-teens. Appliances, we're up YoY in the mid-20s. TVs was actually in the high singles despite the challenges with other aspects of consumer electronics like computers. Tires were up in the low teens. So, overall, a pretty good showing there.”

Brown-Forman: “We remain cautious due to the current macroeconomic volatility and the potential impact of inflation on consumer spending.”

HT Peter Boockvar and Bespoke Investment Group

Stay tuned...

Asian equities leaned green overnight, with 9 of the 16 markets we track closing higher.

Europe, on the other hand, is leaning red so far this morning, with 11 of the 19 bourses we follow trading down as I type.

US equity averages are up to start the session: Dow by 74 points (0.20%), SP500 up 0.34%, SP500 Equal Weight up 0.62%, Nasdaq 100 up 0.42%, Nasdaq Comp up 0.37%, Russell 2000 up 0.71%.

As for yesterday's action, US equity averages were mixed: Dow down 0.26%, SP500 up 0.08%, SP500 Equal Weight down 0.52%, Nasdaq 100 up 0.55%, Nasdaq Comp up 0.36%, Russell 2000 down 0.61%.

This morning the VIX sits at 13.23.

Oil futures are up 1.88%, nat gas futures are down 0.18%, gold's up 0.43%, silver's up 0.91%, copper futures are down 0.24% and the ag complex (DBA) is down 0.56%.

The 10-year treasury is up (yield down) and the dollar is up 0.19%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 26 -- led by AT&T, XLRE (REITs), SLV (Silver), Range Resources, and XLC (communication stocks) -- are in the green so far this morning... The losers are being led lower by EIDO (Indonesia equities), URNM (uranium miners), DBA (ag futures), Dutch Bros and XLV (healthcare stocks).

Couldn't agree more!
"Fund managers (who, in essence, are operating in a fiduciary role for their clients) should view themselves first and foremost as risk-managers"

--Gautam Baid: The Joys of Compounding, The Passionate Pursuit of Lifelong Learning 

Have a great day!

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