Here’s our third-quarter earnings report card for all 33 stocks in the portfolio
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The third quarter was a turning point, yanking us out of an earnings recession that put up three straight quarters of negative growth. Supply chains loosened up, allowing more orders to be fulfilled and converted to sales. And the U.S. economy — at the consumer and corporate levels — proved to be more resilient than many thought possible in a world of higher interest rates. Top-line strength was provided by the communication services, financials and consumer discretionary sectors, with 82%, 76% and 71%, respectively, of companies beating consensus sales estimates. Bottom-line beats were largely driven by technology and communication services (again), with both sectors seeing 91% of their companies exceed Wall Street’ earnings projections. Next was industrial, where 84% of companies beat profit estimates. At an aggregate sector level, consumer discretionary earnings came in 18.3% higher than the Street consensus, followed by communication services (9.2% above) and financials (9% higher). The quarter was not without its headwinds. Oil prices, a major input cost for nearly all companies, were up, eating into corporate profits. Meanwhile, the strong U.S. dollar hurt those companies selling into foreign markets as it makes U.S. goods more expensive (and less attractive) to foreign buyers. The good news is that both headwinds seem to have weakened in the current quarter, which should bode well fourth-quarter results. As always, we’re wrapping up the season with a review of results for all 33 of our Club holdings. These quarterly report cards are not the end-all, be-all for analysis. But we believe stock prices ultimately follow the underlying business fundamentals of companies and having an idea of which companies did well and which didn’t can help when thinking about which stocks to pick at first in a pull back, or let go of in a broad-based rally. Similar to prior quarters, we grouped company results into one of four categories. The companies in each category are listed in alphabetical order. The Great The Good The Not So Bad The Ugly The Great Amazon reported better-than-expected results but shares went on a rollercoaster ride anyway, first popping and then falling on perceived weakness in the key AWS cloud unit. But CEO Andy Jassy quickly put concerns to bed, commenting on the post-earnings call with investors that the e-commerce giant had signed several large deals shortly after the quarter ended that weren’t reflected in the results. Costco gave investors a very nice surprise this earnings season: In addition to reporting beats on the top and bottom lines, management announced a $15-per-share dividend. The results further demonstrated how the big box retailer shines in a challenging macroeconomic environment, while many of its retail peers struggle. Salesforce put up a great set of results as better-than-expected sales, earnings cash flow and margin performance were compounded by a strong earnings guide for the current quarter. Though sales missed the mark, Coterra Energy had a great quarter because the results were strong where it mattered most: free cash flow. Additionally, though cash flow guidance missed expectations, that’s purely a function of oil prices and out of management’s control. Instead, the upward revision on full-year production targets and a reiteration of the capital expenditure target point to strong execution on management’s part. GE HealthCare Technologies delivered better-than-expected top and bottom line results , and raised the low end of its full-year outlook. The company continues to see strong global demand for its medical equipment and consumables technology. Industrial gas giant Linde once again demonstrated that it is a consistent, double-digit percent EPS grower. While the top-line sales figure was light, Linde’s strong operating margin expansion in the quarter more than made up for it. The backlog increased $300 million sequentially and management raised its outlook for the full year. Eli Lilly sales and earnings both outpaced expectations , with performance from key drug Mounjaro coming in well above expectations. Management did cut its earnings outlook, but it’s not a reason to rate the quarter good instead of great because the downward revision reflects Lilly’s recent string of acquisitions. In the third quarter alone, that included Dice Therapeutics, Versanis Bio, and Emergence Therapeutics. The adjustment was simply a matter of accounting. The full-year sales outlook was left unchanged. Microsoft reported one of the strongest results of the season, beating on the top and bottom lines and generating more cash than expected. Perhaps most importantly, it grew revenues at its Azure cloud unit faster than expected. It was a thing of beauty and compounding the reported strength on every line item was a forward outlook that was ahead of expectations for all three reporting segments. Nvidia delivered incredibly strong earnings results , driven by the two most important segments: data center and gaming. Guidance was also better than expected. The only problem really was the expectations were so high coming into the print that even the beat and raise couldn’t move the stock higher. Nonetheless we don’t see the demand abating anytime soon and continue to see further upside in 2024. Stanley Black & Decker delivered the quarter we have been waiting for. Slightly weaker sales than expected was more than offset by further improvement to inventory levels. Earnings also outpaced expectations thanks to robust margin expansion, and cash generation was stronger than expected. The team also bumped up the earnings target for the full year. Wells Fargo beat Street estimates on earnings and sales, along with a better-than-expected efficiency ratio and return on tangible common equity (both important metrics for bank stocks). The results allowed management to raise its full-year 2023 guidance. Eaton produced very strong results. We bought the industrial name shortly after the release so that should tell you something. During its post-earnings call, Eaton management said there has been a big increase in new projects. On top of backlog growth, management raised its full year outlook for organic growth, adjusted earnings and cash flow. The Good Apple reported strong September quarter results with sales, earnings and gross margin performance all coming in better than expected. However, a slight miss on guidance keeps it out of the great camp, though we did tell members to look past the weak guide and focus instead on the acceleration in services sales. Broadcom stock initially took a hit after reporting results, as its gross margin, sales in the semiconductor solutions segment and free cash flow all came up short. But we argued the weakness was an opportunity to buy more shares as the underlying trends continued indicate that Broadcom will prove an artificial intelligence winner. With the VMWare acquisition finalized, the company is set up for a strong 2024. Caterpillar CEO James Umpleby highlighted expectations for “another good year” in 2024 due in part to U.S. infrastructure spending initiatives. But investor concerns around fourth-quarter guidance dinged shares. We viewed the sell-off as a buying opportunity, prompting us to upgrade shares to a 1 following the release. We were most impressed by Danaher ‘s ability to meet its bioprocessing expectations and put an end to the string of outlook cuts that have plagued the company. The order trend — which is a sign of future revenue — didn’t bottom yet, but management expressed confidence that this year will be the bottom. The life sciences guide down was a new wrinkle and something to monitor, but the main driver of the stock is bioprocessing. Mixed results at entertainment giant Disney , with sales falling short but earnings coming in much better than expected. Nonetheless, we were happy with better-than-expected Disney+ core subscriber additions, and the continued strength at theme parks. Free cash flow, key to strengthening the balance sheet, was strong. Foot Locker numbers were better than feared , which was more than enough to propel shares more than 15% higher on the release. It’s a theme we have discussed, where C students becoming B students is more than enough to make some money. It’s one we’ll look to play out more in 2024. Humana reported solid results , with its overall benefits expense ratio — a key measure for insurers — coming in lower (better) than expected. However, the benefits expense ratio in the key insurance segment was a tad higher (not good) than expected and with shares performing strong ahead of the print, that proved enough to ding the stock. Nonetheless, we said members should stick with Humana as the strong underlying fundamentals are well intact. Meta Platforms reported beats on the top and bottom lines, as well as on cash flow. Though management’s current quarter sales outlook was a tad light, citing volatility in ad spending at the start of the quarter due to the war in the Middle East, we didn’t think it a reason for panic as underlying trends remain strong. Moreover, expense management continues to be a bright spot with the outlook coming in below expectations. Morgan Stanley reported better-than-expected sales and earnings results . However, a miss in wealth management caught investors off guard. Investment banking performance was also weak, but that less a surprise given the current dearth of mergers and acquisitions and a still-frozen market for initial public offerings. We trimmed our price target following the release, but stuck with the stock on the belief that investment banking will return in 2024. In addition, we are still being compensated by the safe, roughly 3.6% dividend payout. Results at Palo Alto Networks were strong, but a miss on billings and mixed guidance prevents it from being great. Nonetheless, we got a beat on sales and earnings (adjusted and GAAP). Combine that with strong cash generation, low customer churn and positive remaining performance obligation momentum — a truer sign of demand than billings — and we see further upside following a period of consolidation. Procter & Gamble turned in a strong fiscal 2024 first quarter , demonstrating once again its ability to execute consistently in an economic environment full of obstacles. More importantly, it was able to grow profitability without sacrificing much in the way of sales volume. Despite a miss internationally, Starbucks posted beats on sales and earnings overall. It was an important quarter for the company following a small comparable sales miss in North America in the previous quarter. This showed us the power of Starbucks’ brand in driving strong traffic and sales growth despite the uncertain economy. In addition to the top-and-bottom-line beat, operating income at Constellation Brands came in ahead of expectations , with the company’s overall operating margin expanding about 90 basis points over last year. Management also raised its full-year guidance. When shares sold off on the release, we used it as an opportunity to upgrade the stock. TJX Companies reported better-than-expected third-quarter results , while again raising its outlook for the full fiscal year — prompting us to upgrade the stock. Sales and earnings outpaced expectations and were compounded by much strong same-store sales performance. That said, conservative guidance prevents us from calling it an outright great quarter. Wynn reported good results , beating expectations on the top and bottom line while producing better-than-expected operating income. However, a top-line miss at Wynn Macau, a key property given much of the investment thesis is reliant on a rebound in China, prevents us from calling it a great quarter. The Not So Bad Bausch Health put up decent results . However, as has been the case for several quarters, the results take a back seat to the company’s legal battle over Xifaxan and the uncertain timeline regarding the monetization of BCH’s Bausch + Lomb stake. DuPont reported mixed results with positive positive earnings but weaker sales. The real kicker, however, was guidance, which came in below what the Street’s consensus and prevented us from calling it a good quarter. It was a disappointing quarter from Ford as results came up short on both the top and bottom lines as warranty costs ate into profits. Moreover, management pulled its full-year outlook to deal the fallout from the work stoppage by the United Auto Workers union strike. What keeps Ford out of the downright ugly section? Our view that management is aware of some of the main issues plaguing profitability and working to address them by leaning into the production of high-demand, higher-margin ICE and hybrid vehicles while moderating its pace of investment and production in electric vehicles. Alphabet beat expectations on both the top and bottom line. While we were pleased to see revenue growth acceleration and beats at its search and YouTube businesses, a miss on Google Cloud and lack of margin improvement at the unit was a cause for concern. There was also some noise around cash flow performance with a large outflow coming right after the quarter ended, serving to negate any credit investors may have been given the company. Results at industrial Honeywell weren’t great. Though earnings were better than expected, sales missed as aerospace was the only segment to outperform expectations. Moreover, guidance for the remainder of the year was mixed: Sales are expected to be better than we thought, but earnings and free cash flow forecasts came up a bit short at the midpoint (though did bracket expectations). Still, we chose to stick with the stock on the view that shares were trading at a discount to historical levels. This was an example of where the commentary was better than the earnings since management was upbeat about some of its businesses bottoming and returning to growth next year. Share performance since the report has us feeling pretty good about that call. The Ugly Estee Lauder disappointed yet again with its quarterly results . Though the company did do better than expected on the bottom line, turning a profit when the Street was expecting a loss, sales came up short. But more important than any of the results, management once again demonstrated an inability to properly forecast the path ahead. We were expecting a bad quarter, but we were led to believe it would be the last bad quarter. That made the horrendous downward revision delivered by Estee Lauder’s management team extremely disappointing. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Microsoft CEO Satya Nadella speaking with CNBC on Nov. 15th, 2023.
CNBC
The third quarter was a turning point, yanking us out of an earnings recession that put up three straight quarters of negative growth. Supply chains loosened up, allowing more orders to be fulfilled and converted to sales. And the U.S. economy — at the consumer and corporate levels — proved to be more resilient than many thought possible in a world of higher interest rates.
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