Dunks Update

Earnings season is in full swing, and the numbers have been coming in fast and furious. It can be an overwhelming time with many companies reporting and plenty of new information.  Investors must evaluate several important metrics including EPS, operating margins, revenue and forward “guidance.” Adding to the complexity: Sometimes, the way stocks react to news doesn’t add up, especially when good absolute numbers lead to a company’s stock price going down while another announces a weak report that leads to a surge higher.  Have you ever caught yourself thinking, “I don’t understand why company XYZ’s stock did that after seeing its earnings results?”  Well, you’re not the only one to feel that way from time to time. 

In today’s note, I wanted to accomplish a few things:

1. Reiterate my newly changed macro/market view;
2. Provide a quick update of the earnings results of the Dunks list that have reported; and
3. Remind subscribers to be on the lookout for my monthly Sector Update that will be released early next week. 

New Macro/Market View:  As I’ve mentioned in recent notes, I’m changing from 1H22 market turbulence and 2H22 resumption of bull market to outright cautious/turning bearish 1H22 and 2H22 uncertain and concerned.  Please note my view is now diverging from my colleague Tom Lee, who is more constructive than my work shows. But it’s safe to say we both are expecting additional turbulence over the next couple of months. Our differing thoughts lies in the degree of potential volatility and amount of downside risk.

My key indicators are suggesting the odds of a clear price break of the February/March lows for the S&P 500 is rising each day that we do not have a Russia/Ukraine peace deal, which does not appear to be anywhere near getting done.  In contrast, Tom’s work leads him to believe the lows for the year are in place and negativity is already at high levels (i.e. my concerns may already be priced into markets).  We have had some interesting internal debates but remain divergent, and I’m sure we’ll have many more as things evolve over the next several months.  Stay tuned for how we both read the equity market tea leaves going forward. 

From my perspective, there are two primary legs of what was my longstanding bullish outlook: Accommodative Fed and broadly supportive earnings estimate revisions have both turned unfavorable based on my work.  Therefore, I’m recommending that investors be cautious, mindful of their risk exposures and weightings, and remain alert and nimble. I believe the equity market hasn’t fully priced in the shift from dovish to hawkish that has occurred within the FOMC, and the earnings revisions for many cyclical companies will likely be lowered by the Street in the coming two months. 

Quick Recap of the Earnings Season for the Dunks List.  We wanted to update you on our picks and provide some color and updates on their earnings. But first, let’s take a step back and examine the results of the overall market, which in my view generally have been quite healthy. Despite strong numbers, investors now appear more focused on the tone of the forward “guidance” that company managements have provided, which have been quite conservative. The combination of less confidence in the future by Corporate America and the upcoming start of the Fed tightening process will likely cause Wall Street analysts to begin lowering profit expectations, especially in areas that are cyclically oriented.  I’ll address this in more detail in our upcoming publications. 

Now, shifting our attention to the names on the Dunks List that have reported their earnings results.  Please see a brief write up of each name below. 

Active Play List

Dunks

Raytheon reported earnings on April 26^th and beat EPS expectations of $1.02 by posting $1.15 for the quarter. The company narrowly missed on revenue which came in at $15.72 bn compared with $15.83bn mainly because of Russian sanctions, which accounted for about 1.5% of the company’s sales.  The EPS for 2022 is expected to be within the range of $4.60 to $4.80.

Earnings Scheduled for May 5

Earnings Scheduled for May 3

Earnings Scheduled for May 5

Earnings Reported April 28

Mid-Range Jumpers

Phillip Morris International beat the consensus estimates for revenue and earnings on April 21^st. The impact from Russia and Ukraine was not severe or significant. Despite having to pull out of Russia, which the company had considered a key growth market, the growth in other geographies was impressive. The full-year outlook was a cause for disappointment though and the company cut its EPS estimates from a range of $6.12 — $6.30 to $5.45 to $5.56 per share.

The company’s healthier alternative to cigarettes, referred to as “heated tobacco” products have been enjoying strong growth in Japan and other growth markets. On the surface, there may be some further headwinds from exiting the Russia business, but it appears the impact may be quite modest and already in the price of the stock. 

American Tower is the second biggest REIT in the S&P 500 and it had earnings before the bell on 4/27. The company slightly beat expectations for Funds from Operations (FFO). The company has beat FFO expectations for the last four consecutive quarters. The bottom line improved by 3.7% on a YoY basis. It also exceeded revenue expectations as well. This company is a key beneficiary of the switch to 5G and it primarily makes money by leasing multi-tenant communications sites. Additionally, AMT benefits from pricing power and high switching costs. The company has an impressive operating profit in property operations of 64%.

American Tower upped its projections for total property revenues in 2022 by about 14% from the midpoint of the prior guidance. Adjusted EBITDA was also increased by about 10.5%; again midpoint to midpoint from prior ranges.

Intuitive Surgical is a leader in AI/Automation and brings the exciting technology to one of the most delicate tasks performed by humans, surgery. The company beat EPS expectations of $1.08 coming in at $1.13. It surpassed revenue estimates of $1.43 billion by posting sales of $1.49 billion. Unfortunately, despite handily beating estimates, the stock suffered because management didn’t raise guidance as much as expected. The company did raise guidance for procedure growth from a range of 11-15% growth to 12%-16% growth. It appears that the guidance may have been purposely conservative given the uncertainty on the horizon, although if there isn’t a major COVID-19 wave in the coming months it should be easy to surpass as the healthcare system’s burden from the virus becomes less acute.

The Chicago Mercantile Exchange is one of the largest clearing houses in the world and is at the center of the burgeoning derivatives business. The company tends to benefit from higher interest rates, equity, and energy contract volumes during periods of volatility. 1Q22 was certainly no exception and CME handily beat expectations. First quarter earnings rose by 24% on YoY basis while their adjusted earnings per share of $2.11 easily surpassed the consensus estimate of $2.00. Revenue came in higher than consensus as well. Another positive note in the report was that expenses were decreasing, and operating income increased significantly.

Earnings Scheduled for May 5

HOLD

Dunks

General Motors beat Street expectations for earnings by over 25%. The consensus was $1.67 and the company was able to deliver $2.09. GM’s first-quarter revenue slipped 3% from a year earlier, but the auto maker strongly reiterated its full year 2022 earnings forecast as management expects strong pricing power to offset elevated costs and potential supply chain instability. GM reported $35.98 billion in revenue ($37.01 billion expected) and it reaffirmed plans to produce 25% to 30% more vehicles this year than last year. The company also increased its adjusted earnings per share guidance for the year to between $6.50 and $7.50 per share, up from between $6.25 and $7.25. General Motors CEO Mary Barra said demand for the company’s products were more than compensating for higher input costs from inflation and supply chain kinks.

PayPal Holdings reported earnings per share and met consensus expectations of 88 cents a share this week. The company beat on revenue reporting $6.48 bn on expectations of $6.4 bn. However, the big news of the report was that the company significantly cut guidance for 2022. It changed its forecast for adjusted profit per share to $3.81 to $3.93 which is significantly down from the $4.60 to $4.75 per share projected earlier. The company also cut net revenue expectations to a range of 11% to 14% down from earlier guidance of 15% to 17% as the company told investors to brace for lower payment volumes. 

PYPL has struggled and not acted in line with my model over the last few months. As I noted earlier this month, this has been frustrating, and I am evaluating this name to be removed.

Mid-Range Jumpers

Taiwan Semiconductor Corporation delivered $1.40 EPS compared to an estimate of $1.27. Revenue also beat street forecasts coming in at $17.57 billion compared to estimates of $16.74. The company also raised its full year guidance. The company is the dominant player in the global foundries business and accounts for 55% of the total market. TSM manufactures an even larger share of the world’s leading-edge chips—around 90%. While many analysts have been waiting for evidence of a supply glut, they didn’t find it at TSM.

The company expects secular demand for the leading-edge chips which are around 50% of its wafer revenue to remain strong in artificial intelligence (AI), autonomous vehicles, 5G and smartphones to remain high for the remainder of 2022. One specific bright spot is that TSM’s revenue from Apple, a flagship and preferred customer, is expected to grow 25% over the year.

Earnings Scheduled for May 3