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U.S. Earnings Analysis – Projections & Insights

By  Takao Hirose (Contextual Investments, LLC)   11 October 2018  |  News
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US Equity Market

Delta Air Lines, Inc, Citigroup Inc, JPMorgan Chase & Co., Wells Fargo &Co. are going to report their earnings this week.

Summary

1.  Delta Air Lines, Inc. will report earnings before market open on October 11th, Thursday.

2.  Citigroup Inc.will report earnings before market open on October 12th, Friday.

3.  JPMorgan Chase & Co. will report earnings before market open on October 12th, Friday.

4.  Wells Fargo & Co. will report earnings before market open on October 12th, Friday.

5.  PepsiCo, Inc. cut the guidance from foreign exchange rate impact.

6.  Lennar Corporation reported better than expected earnings, but the company cut down guidance due to hurricane.

7.  Constellation Brands, Inc. reported better than expected earnings.

1. Delta Air Lines, Inc.

Delta Air Lines (NYSE: DAL) is going to report its earnings before market opens on October 11th.

Consensus EPS is $1.78 for this quarter and Consensus Revenue is $12 billion.

For the second quarter, EPS was $1.77, which was higher than expected EPS of $1.72. And revenue was $11.78 billion compared with estimation of $ 11.73 billion, revenue growth was +9.1 percent year on year.

The total unit revenue increased 4.6% driven by strong demands across all entities and improved yields.

Passenger revenue available seat mile (CASM) cost increased 2.9% than last year, which was one point improved from March quarter.

Delta blamed a $2 billion increase in its projected 2018 fuel bill due to rising fuel cost. Delta cut the guidance of EPS for 2018 financial year from $6.35-$6.70 to $5.35-$5.70. The market consensus of EPS for 2018 financial year is $5.69.

Delta raised 15% of its dividend to 35¢.

(Delta Air Lines one year price chart as of Oct. 11, source from yahoo finance)


2. Citigroup Inc.

Citigroup Inc. (NYSE: C) is assuming to report its earnings before market opens on October 12th.

Consensus EPS is $1.67 for this quarter and Consensus Revenue is $18.48 billion.

For the second quarter announced in July, EPS was $1.63, which was higher than expected EPS of $1.63. But revenue dropped to $18.47 billion from estimation of $ 18.52 billion, revenue growth was +1.7 percent year on year. Sales from consumer banking and institutional clients contributed large to the revenue while the wind-down of legacy assets still impacted.

Geographic Segment Revenue

・North America: 1% down year over year to $8.5 billion

・EMEA: 6% increased to $3.04 billion year over year

・Latin America: 6% increased to $2.54 billion year over year

・Asia: 6% increased to $3.8 billion year over year

・Others: 20% dropped to $0.53 billion year over year

Net income rose 16 percent to $4.5 billion driven by a lower effective tax rate, while the credit cost was higher.

Efficiency ratio was 58%. Citigroup's operating expenses remained largely unchanged at $10.7 billion.

ROE was 9.2% and ROTCE was 10.8%.

Dividend payout ratio was 75%.

Citigroup's end of period loans were $671 billion as of quarter end, up 4% from the prior-year period.

Markets and Securities Services contributes revenues of $4.5 billion decreased 1%, as strong revenue growth in Equity Markets was more than offset by a decline in Fixed Income Markets. Fixed Income Markets revenues of $3.1 billion in the second quarter 2018 decreased 6%, driven by a more challenging market environment. Equity Markets revenues of $864 million increased 19%, with benefit of continued higher market volatility.

Book value per share was $71.95, and tangible book value per share was $61.29.

(Citigroup one year price chart as of Oct. 11, source from yahoo finance)


3. JPMorgan Chase & Co.

JPMorgan Chase & Co.(NYSE: JPM) is going to report its earnings before market opens on October 12th.

Consensus EPS is $2.28 for this quarter and Consensus Revenue is $27.46 billion.

For the second quarter announced in July, EPS was $2.29, which was higher than expected EPS of $2.22. And revenue climbed to $27.8 billion from estimation of $27.28 billion, revenue growth was +9.1 percent year over year.

JP Morgan posted record second-quarter profit in July driven by broad growth and the strong performance across most of its businesses. Especially under good economic growth in the U.S., where consumer and business sentiment is high, whole sale business showed strong growth in the second quarter.

Profit jumped 18% to $8.32 billion year over year, although this was 5% down from March quarter. ROE was 14%.

Average core loan grew +7% year over year and +2% than March quarter.

The company's revenue increased 6 percent to $28.4 billion. Net interest income rose 9 percent to $13.6 billion because of higher interest rate and rising loan deposit. Net interest margin shrinking 2bps to 2.46% for 2018 financial year and the company forecast a higher interest margin in long term.

Strong loan growth backed by more M&A activities loan arrangement by the company also contributed huge.

Non-interest income jumped +4% to $14.7 billion, which is highly prompted by investment banking division fees and auto lease income. Card net interchange income, which includes a rewards liability adjustment of approximately $330 million lowered the Non-interest income.

The rising of rewards program cost does not come from competition with other companies, but J.P. Morgan wanted to stick to its campaign with its Sapphire Reserve card.

Markets revenue of $5.4 billion, up 13%, reflected healthy performance across products.

Fixed Income Markets revenue increased +7% year over year to $3.5 billion. Equity Markets revenue was $2.0 billion, up 24%.

Noninterest expense was $16.0 billion, up 8%, driven by higher compensation expense, investments in technology, auto lease depreciation.

The company reported overhead ratio of 56%, and 55% for last year over year period.

The provision for credit losses was $1.2 billion, flat compared with the prior year. Book value per share was $68.85, up 4%, and tangible book value per share was $55.14, up 3%.

ROTCE was 17%, compared with year over year of 14%, and 19% for the first quarter for 2018 financial year. ROE was 14%, compared with year over year of 12%, and 15% for the first quarter ended by March.

Common equity Tier 1 ratio was 11.9%.

(JPMorgan one year price chart as of Oct. 11, source from yahoo finance)


4. Wells Fargo & Co.

Wells Fargo & Co. (NYSE: WFC) is going to report its earnings before market opens on October 12th.

Consensus EPS is $1.18 for this quarter and Consensus Revenue is $21.79 billion.

For the second quarter announced in July, EPS was $1.08, which was lower than expected EPS of $1.12. And revenue fell to $21.55 billion from estimation of $21.64 billion, revenue was 3.1 percent down year over year.

Average total interest-bearing deposits were $944.1 billion and 1% less than the same period last year.

Efficiency ratio was 64.9%, compared with 60.9%.

Net interest margin soared 9bps to 2.93%.

Mortgage origination for Q2 was $50 billion, a little higher than Q1 of $43 billion. However, the origination activity in the U.S. mortgage industry was weak due to rising interest rate. Total mortgage banking fees fell to $770 million compared with $1.15 billion the same period last year.

Auto loan, home equity loan and consumer lending trend are all down than last year, the total loan slid 2.3% to $441.2 billion for second quarter.

The bank added $2 billion operating losses for second quarter, included $619 million because of the non-litigation expenses for previously disclosed issues, such as mortgage and auto loan violations that resulted in customers paying extra fees. Besides this $619 million, the bank set aside a net discrete income-tax expense of $481 million, which the U.S. Supreme Court determined states can tax purchases made from out-of-state sellers.

Wells Fargo recruited two thousands more employees to its risk management department.

ROTCE for second quarter was 12.62%, and ROA was 1.1%.

(Wells Fargo one year price chart as of Oct. 11, source from yahoo finance)


5. PepsiCo, Inc.

PepsiCo (NYSE: PEP) announced its Q3 earnings on October 3rd. The actual EPS was $1.59 higher than estimated EPS of $1.57, and revenue was $16.48 billion while the expected revenue of $16.38 billion.

Both snacks and beverages showed strong demands from emerging countries.

North American beverage business fell, due to increased price of aluminum as well as rising transportation and commodity costs.

For 2018 fiscal year, the company cut down EPS estimation in the new guidance from $5.70 to $5.65-$5.70 due to strong dollars. Also, the company expects to achieve the full-year organic revenue growth of 3%.

(PepsiCo one year price chart as of Oct. 11, source from yahoo finance)


6. Lennar Corporation

Lennar Corporation (NYSE: LEN) announced Q3 earnings. They announced EPS of $1.61 compared with expected EPS of $1.37. Revenue was $5.67 billion while estimation was $5.62 billion. Revenue growth was 73.9% year over year.

Also, backlog/construction in progress write-up and the purchase accounting related to acquisition and integration costs are excluded from the EPS of $1.61.

For this quarter, 12,613 homes were delivered, which is 66% up year over year. Also, the company got 12,319 homes of new orders, 62% up year over year. New orders value of $5.1 billion, 73% up year over year. There are still backlog of 19,220 homes, 88% up than year over year, and values $8.4 billion, which is 105% up year over year.

The company cut down guidance for Q4 EPS from $2.10-$2.20 to $2.06, reflecting the impact of Hurricane Florence and also to reflect the sluggishness in the market. Also, the company cut down Q4 home deliveries guidance from 15,000 to 14,500. But they still insist on the guidance of gross margin as 22.5%-22.75%.

For 2019 financial year, Lennar forecast 530,000 (+15% year over year) of home deliveries, and gross margin of 21.75%-22%.

Since lumber prices have dropped, the average cost for a typical 2,500 square foot home is supposed to drop from $7,000 to $4,000. This profit will reflect in the financial data in first half year of 2019.

(Lennar Corporation one year price chart as of Oct. 11, source from yahoo finance)


7. Constellation Brands, Inc.

Constellation Brands Inc. (NYSE: STZ) reported beat expected Q2 earnings. Actual EPS of $2.87 against expected EPS of $2.61. Revenue of $2.3 billion against expected of $2.25 billon. Revenue growth was +10.1% year over year.

The Modelo and Corona brand families drove strong portfolio performance in beer segment with revenue of $1.53 billion (+10.5% year over year). Shipment volumes rose 8.7%, and profit rose 10.8% year over year. Profit margin hit record of 41.3%.

For the wine and spirits segment, Meiomi, Kim Crawford, Simi, and The Prisoner brand contributed strongly to the revenue, revenue was 9.3% up year over year as of $772 million. Shipment volumes were 8.8% up and profit before tax was 8.5% up year over year. The wine and spirits business operating margin decreased 20 basis points to 26.1%, due to increased grape and transportation costs.

The company raised its full-year EPS outlook to $9.60-$9.75, up from a prior view of $9.40-$9.70. Also, for fiscal 2019, the beer business is targeting net sales and operating income growth to be 9%-11% growth, and for the wine and spirits business, the company expects net sales and operating income growth to be in the range of 2%-4%.The management sees $2.45 billion of operating cash flow and $1.2-$1.3 billion of free cash flow for fiscal 2019.

(Constellation Brands Inc one year price chart as of Oct. 11, source from yahoo finance)




This report was contributed by Takao Hirose, Contextual Investments, LLC., published on 5/10/2018.

The content of this article is given for general information only. As general information, no consideration or evaluation is given to the investment objectives or financial situation of any particular person. Trading and investing involve substantial financial risk. All readers of this article should make their own evaluation of the merits and suitability of any financial products and/or advice or seek specific personal advice as to the appropriateness of engaging in any activity referred to in this article in light of their own particular financial circumstances and objectives. 



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