Companies need cash to pay dividends

Stocks had a mixed close yesterday as investors, once again, tried to better understand the implications of earnings releases. Bond yields bubbled higher as investors priced in another hike.

On the margin. Every earnings season has its nuance. Many investors incorrectly assume that stocks that beat earnings estimates are in the clear. To be clear on being in the clear, that is simply not the case. There is statistical data that shows that an earnings estimate beat is a positive factor in a stock’s near-term health. However, one has to remember that statistics are formed by collecting lots of data and attempting to find a recognizable and repeatable pattern. That said, to say that a positive earnings beat will always lead to higher stock prices would be patently incorrect.

By now you are probably, and correctly, thinking that just looking at whether or not a company meets, exceeds, or misses an analyst’s estimate is simply not enough to determine the health of a company. That is true and it is even more critical to dig deeper during market climates such as the current one.

Earnings season “officially” began last Friday, and I am sure that you have seen some of your favorite stocks appear to have had a fantastic Q1, handily beating EPS and Revenue estimates. The stock initially climbs only to languish and fall in the regular session. Initial responses are what many would expect with beats causing rallies and vice versa. Often times, the greater scrutiny that comes during the regular session will cause a stock to reverse direction, and that has been happening a lot lately.

So, what is different in this earnings season? Remember that an analyst’s EPS target is formed based on information that comes from a company’s own forward guidance. Of course, that analyst does lots of… er, analysis beyond guidance to prove, disprove, or amend company-supplied data, but generally speaking companies have a big influence over analyst estimates. Knowing this, companies are careful not to set their stock’s up for failure, almost engineering profit beats. So, in times like this when the economy is slowing, inflation is high, and there is much uncertainly, companies and analysts set the bar low.

With that said, it becomes increasingly critical to look at companies’ margins to get a better understanding of what is happening behind the curtain. Prices are high and consumer confidence is weakening. We also know that retail sales are lower, particularly on goods. That would cause revenue growth to decline… and it has. Companies tackle that problem either by raising prices or cutting expenses. Well, we all know what companies did initially. Why, of course, they raised prices. With prices already high, companies are left with no alternatives but to cut expenses. That is where layoffs come into play, and we have been hearing a lot more about that recently. The net result is that companies, through price hikes and expense cutting have maintained healthy and, even in some cases delivered record margins. But that can only take a company so far. That is precisely why many analysts are focusing on margins this quarter.

A good example of that is Tesla which released its Q1 numbers last night. If you have been paying attention to the company, you would have seen that the company has been systematically lowering its prices on vehicles. If you were looking to purchase a Tesla in 2020, 2021, or early 2022, you would know that the prices of the vehicles were rising faster than the hair on your neck during a horror movie. Eventually, those higher prices led to a decline in demand, crimping sales growth. As in most cases, companies are quick to raise prices, but not so fast to lower them. Tesla was one of the exceptions, faced by growing competition the company began to lower its price points to maintain demand. As consumers, we should applaud Musk, but as shareholders of the stock, we would be concerned about Tesla’s margins. You can see that graphically in the following chart. Yes, Tesla continues to post impressive vehicle delivery numbers, but lowering price points leads to lower margins. Tesla’s stock is down in the premarket as a result of declining margins. You can see that there is very little incentive for companies to lower prices, especially when it comes to the price of its stock… but who watches stock prices anyway. Be diligent and read the fine print.

WHAT’S SHAKIN’ THIS MORNIN’

AT&T Inc (T) shares are lower by -4.57% in the premarket after the company announced earnings. What concerns investors is that the company had a Free Cash Flow of $1 billion when analysts were expecting $3.02 billion. Free cash flow is what companies can use to pay dividends, which is why many investors purchase the stock. Dividend yield: 5.63%. Potential average analyst target upside: +12.1%.

Las Vegas Sands Corp (LVS) shares are higher by +5.46% in the premarket after it announced that it beat EPS and Revenue estimates by +68.84% and +16.08% respectively (those are not typos if you were wondering). IN the past 30 days 52% of analysts have changed their price targets, 8 up, 1 down, and 8 unchanged. Potential average analyst target upside: +14.6%.

ALSO, this morning: Fifth Third Bancorp, Comerica, Blackstone, Virtu, and Huntington Bancshares all beat on EPS and Revenues. Truist, KeyCorp, AutoNation, Philip Morris International, and American Express came up short.

YESTERDAY’S MARKETS

Stocks had a muted, mixed close as investors attempted to read the tea leaves on the bottom of earnings’ cups. The S&P500 slipped by -0.01%, the Dow Jones Industrial Average lost -0.23%, the Nasdaq Composite Index gained +0.3%, and the Russell 2000 Index advanced by +0.22%. Bonds fell and 10-year Treasury Note yields gained +1 basis point to 3.59%. Cryptos slid by -4.65% and Bitcoin lost -0.74%.

NEXT UP

• Initial Jobless Claims (April 15^th) are expected to come in at 240k, slightly above last week’s 239k claims.
• Existing Home Sales (March) are expected to have slipped by -1.8% after jumping by +14.5% last month.
• Leading Economic Index (March) may have slipped by -0.7% after falling by -0.3% in February.
• Fed speakers scheduled for today: Waller, Mester, Bowman, Logan, Bostic, and Harker.
• After the closing bell earnings: Union Pacific, CSX Corp, Knight-Swift Transportation, and PPG Industries.