Windshield
The glory. The cruelty. All readers of a certain age will remember that skier from Wide World of Sports. The "agony of defeat." We don't remember anything else from the show's intro, do we? I have played sports all of my life. Still run fairly competitively. In my age group. Still train as if it somehow matters. Played hockey most of my life. Scored a lot of goals, Had a lot of fun. Can't remember any of it. Know what I do remember? College varsity away game. Packed rink. Losing badly to a better team. My left defense man leads me with a pass over our blue line, As the puck meets my stick, and I turn to skate.. Pow!! Like a bug hitting a windshield. An opposing player had lined me up, and timed the hit perfectly. Stick gone. Gloves flew off. Helmet? Who knows where. Laid out. The crowd gave their triumphant player a standing ovation.
Ever have a fairly large crowd give someone a standing ovation for absolutely crushing you? Less than optimal. At least one of my guys went right after whatever it was that hit me. That's what I remember most from my playing days. That and all of the broken ribs and dislocated shoulders. This is why so many companies lower the bar for earnings expectations. They don't want to be the guy who gets laid out in front of the crowd. Take youth sports for that matter. I coached my own children in baseball and soccer. Baseball is the greatest sport in the world, but only if you're good. If you're not... everyone at every game watches as you strike out, or drop an easy fly ball. Everyone's eyes follow the ball. Soccer, still great if you're good. Best sport in the world if you are not. Nobody notices the kid who never gets near the ball, and they still cheer the kids who do. Far better for a slower developing type kid to remain unnoticed until better prepared. Again, sounds like earnings.
Seasons Greetings
A couple of weeks ago, as those of us who play this game for a living prepared to hear from the nation's largest banks, according to FactSet, expectations for Q1 earnings (for the S&P 500) were for negative growth, at -4.7% year over year. A week ago, after some names had reported, the blended expectation (blended because it includes data that has already been put to the tape) had improved to -3.9%.
We Know Nothing
Great piece on the FacSet website written by John Butters on Wednesday. We "knew" that earnings would contract for Q1. This would be the first year over year contraction for aggregate S&P 500 earnings since Q2 2016. We also worried about a negative print for the second quarter which, if built upon a minus sign for the first, would then create a textbook earnings recession. As former quarterback, football coach, and commentator Lee Corso might say... "Not so fast, my friend."
Butters states some facts in his piece. Over a window covering the past five years, S&P 500 constituents have reported EPS that beat expectations by an average of 4.8%, while over the same time frame 72% of these firms have beaten individual consensus. This has resulted in an earnings growth rate that has increased by 3.7% throughout the season. The author here did some interesting homework. By simply applying those averages to the rest of earnings season, the season will end with an earnings rate just barely below zero, far from the original -4.7%.
Now, doing a little more work.. so far this season, 78% of S&P 500 firms are beating estimates, not 72%, and they are beating by an average of 5.7%, not 4.8%. Butters questions, and though not convinced just yet, his argument does merit consideration... can the S&P 500 turn in a positive aggregate number for Q1 earnings growth?
As we have seen so far, in terms of market reaction, there is great reward at the point of sale in beating expectations. Far better to be the unnoticed kid on the pitch until the ball comes one's way, than to be the guy trying to make a play while looking for the puck behind him.
Fink Beats The Stomach
It just doesn't matter. That's the takeaway. I have been critical of Facebook (FB) management in the past. That said, nothing erases a stain upon reputation like does solid performance. What doesn't matter it seems would be the $3 billion charge that the firm took against earnings as a provision to cover the possibility of perhaps the largest civil penalty ever imposed by the Federal Trade Commission against a technology firm. This charge forced a gap of $1.04 between the reported non-GAAP and GAAP versions of earnings per share.
Though the firm warned that this potential fine could be as high as $5 billion, and that the "matter remains unresolved", investors were highly impressed that the firm had taken a large step toward removing the cloud of uncertainty from future financial consideration. Oh, and advertising. Investors surely noticed the $15.08 billion in total revenue for the quarter, a mere $14.9 billion of that number coming from advertising. Mobile advertising, in turn provided 93% of that $14.9 billion. Hmm.
By virtue of that $3 billion charge, expenses for the quarter popped 80%, forcing a 39% decrease in operating margin. The firm has $11 billion in cash and equivalents along with $34 billion in marketable securities on the balance sheet. The year that Fink beats the Stomach? It just doesn't matter.
What Was That?
For those who tune out at 4 pm...
Lam Research (LRCX) ... Wow! KLA Tencor (KLAC) reports on 6 May, Applied Materials (AMAT) on 15 May.
Microsoft (MSFT) ... Shazam! The cloud! Azure! No kidding. Demand for the commercial cloud +41%. I gave you my target price of $132 on Wednesday. The stock traded above $130 overnight.
Chipotle Mexican Grill (CMG) ... Deelish! I gave up on this name last year. That was stupid.
ServiceNow (NOW) ... Oh yeah, did I mention the cloud? 25 transaction with >$1 million in net new annual contract value. Just a heads up. I am long this one. My target price is 253. Looks like it may open there. If it does, I take a little something off of my fastball. Capeesh?
Tesla (TSLA) ... Jeeze Louise. Very difficult to lose that much dough on 33% revenue growth. $920 million repayment of convertible notes. I won't be buying this name, but I certainly will not be surprised if a whole lot of others do.
Creature of The Night
Intel (INTC) , Starbucks (SBUX) , Ford Motor (F) . Sure. I think that the cloud remains in focus this evening, as Amazon (AMZN) goes to the tape with what should be something like 17% revenue growth. A number like that could actually disappoint. For me, like I explained to you on Wednesday with Microsoft, my focus will be on the firm's business cloud AWS more than anything else. Not just expansion, but margin as well. My target price for AMZN remains $2100 for now. I currently have the name under review for an upgrade. You should probably read Doug Kass at Real Money Pro if Amazon is of interest to you.
In addition to cloud computing, look for Amazon's continued prime enforced dominance in e-commerce, and after those Facebook results, growth in advertising revenue, given this business is not merely social media but comes complete with consumers already looking to spend money. I also want to hear something tonight regarding the Pentagon's JEDI cloud computing program for the military.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 199K, Last 192K.
08:30 - Durable Goods Orders (Mar): Expecting 0.6% m/m, Last -1.6% m/m.
08:30 - ex-Transports (Mar): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - ex-Defense (Mar): Expecting 0.2% m/m, Last - 1.9% m/m.
08:30 - Core Capital Goods (Mar): Expecting 0.1% m/m, Last -0.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last 92B cf.
11:00 - Kansas City Fed Manufacturing Index (Apr): Last 10.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (MMM) (2.50), (ABBV) (2.07), (MO) (.93), (CMCSA) (.68), (FCX) (.09), (HSY) (1.47), (RTN) (2.48), ROP (2.79), UPS (1.43), WM (.93)
After the Close: AMZN (4.73), F (.27), INTC (.87), SBUX (.57)
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