Market Snapshot
briefing.com
| Dow | 30333.24 | -192.59 | (-0.63%) | | Nasdaq | 10632.69 | -139.56 | (-1.30%) | | SP 500 | 3682.20 | -37.85 | (-1.02%) | | 10-yr Note | -31/32 | 4.13 |
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| | NYSE | Adv 733 | Dec 2355 | Vol 914 mln | | Nasdaq | Adv 1232 | Dec 3394 | Vol 4.9 bln |
Industry Watch
| Strong: Energy |
| | Weak: Real Estate, Consumer Discretionary, Utilities, Health Care |
Moving the Market
-- Minneapolis Fed President Kashkari (2023 FOMC voter) said he could see fed funds rate going above 4.75%
-- 10-yr Treasury note yield breaches 4.10%, keeping pressure on stocks
-- Better-than-expected earnings news
-- Rising oil prices
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Closing Summary
19-Oct-22 16:25 ET
Dow -99.99 at 30425.84, Nasdaq -91.89 at 10680.36, S&P -24.82 at 3695.23
[BRIEFING.COM] Today's trade was somewhat choppy. The major averages spent some time in positive territory this morning, but were in the red most of the session, ultimately closing off session lows. Price action for equities was driven by price action in the Treasury market as yields lifted to fresh highs for the year.
The 10-yr note yield rose 13 basis points to 4.13%, its highest level since 2008, and the 2-yr note yield rose 12 basis points to 4.56%. These moves followed an admission late yesterday by Minneapolis Fed President Kashkari (2023 FOMC voter) that he could argue for the fed funds rate to go above 4.75% if he doesn't see any improvement in underlying or core inflation.
Earnings since yesterday's close were generally better than expected, but were not able to offset the concerns about rising interest rates. Netflix (NLFX 272.38, +31.52, +13.1%), Travelers (TRV 174.17, +7.40, +4.4%), United Airlines (UAL 39.10, +1.85, +5.0%), and ASML (ASML 424.02, +25.03, +6.3%) were among the more notable standouts closing with sizable price gains after reporting quarterly results.
Rising oil prices also kept pressure on investors' sentiment. WTI crude oil futures rose 2.6% to $84.38/bbl following an announcement that President Biden is authorizing the release of an additional 15 million barrels from the Strategic Petroleum Reserve for December delivery.
The move in oil prices boosted energy stocks, leaving the S&P 500 energy sector (+2.9%) alone in positive territory by the close. Sector component Baker Hughes (BKR 25.65, +1.47, +6.1%) was the best performer with a big earnings-driven gain. Exxon Mobil (XOM 103.79, +2.99, +3.0%) was another standout for the group after it was upgraded to Buy from Hold at Jefferies
The remaining ten sectors all logged losses on the day. The information technology sector (-0.3%) exhibited a slimmer loss than the S&P 500 (-0.7%) thanks to some relative strength in the semiconductor space. The PHLX Semiconductor Index closed up 0.8%.
Market participants received the Fed Beige Book today, which showed that employment and economic activity remained strong, but varied, across Districts. The report also showed that outlooks grew more pessimistic amid growing concerns about weakening demand.
Ericsson (ERIC), AT&T (T), American Airlines (AAL), Dow (DOW), Nucor (NUE), and Freeport-McMoRan (FCX) are set to report earnings ahead of Thursday's open.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 233,000; prior 228,000), Continuing Claims (prior 1.368 mln), and October Philadelphia Fed survey (Briefing.com consensus -5.0; prior -9.9)
- 10:00 ET: September Leading Indicators (Briefing.com consensus -0.3%; prior -0.3%) and September Existing Home Sales (Briefing.com consensus 4.70 mln; prior 4.80 mln)
- 10:30 ET: Weekly natural gas inventories (prior +125 bcf)
Reviewing today's economic data:
- Weekly MBA Mortgage Application Index declined 4.5% after a 2.0% decline
- Total housing starts declined 8.1% month-over-month in September to a seasonally adjusted annual rate of 1.439 million units (Briefing.com consensus 1.465 million). Building permits rose 1.4% month-over-month to 1.564 million (Briefing.com consensus 1.550 million).
- The key takeaway from the report is that there was ongoing weakness in starts and permits for single-family units, which were down 4.7% and 3.1% month-over-month, respectively. The downturn corroborates the adverse impact sharply higher mortgage rates have had on buyer demand and builder sentiment.
- Weekly EIA Crude Oil Inventories showed a draw of 1.73 million barrels versus a build of 9.88 million last week
Dow Jones Industrial Average: -16.3% YTD
S&P Midcap 400: -19.1% YTD
S&P 500: -22.5% YTD
Russell 2000: -23.1% YTD
Nasdaq Composite: -31.7% YTD
Looking ahead to Thursday
19-Oct-22 15:30 ET
Dow -151.94 at 30373.89, Nasdaq -125.95 at 10646.30, S&P -31.97 at 3688.08
[BRIEFING.COM] The market is stuck in a fairly narrow range ahead of the close.
After the close, Tesla (TSLA), IBM (IBM), Lam Research (LRCX), Alcoa (AA), and Las Vegas Sands (LVS) headline the earnings reports.
Ericsson (ERIC), AT&T (T), American Airlines (AAL), Dow (DOW), Nucor (NUE), and Freeport-McMoRan (FCX) are set to report earnings ahead of Thursday's open.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 233,000; prior 228,000), Continuing Claims (prior 1.368 mln), and October Philadelphia Fed survey (Briefing.com consensus -5.0; prior -9.9)
- 10:00 ET: September Leading Indicators (Briefing.com consensus -0.3%; prior -0.3%) and September Existing Home Sales (Briefing.com consensus 4.70 mln; prior 4.80 mln)
- 10:30 ET: Weekly natural gas inventories (prior +125 bcf)
Market little changed; energy complex futures settle mixed
19-Oct-22 15:05 ET
Dow -192.59 at 30333.24, Nasdaq -139.56 at 10632.69, S&P -37.85 at 3682.20
[BRIEFING.COM] The major indices are little changed in the last half hour.
Tesla (TSLA 221.05, +0.89, +0.4%) and Lam Research (LRCX 328.68, +6.49, +2.0%) both sport a gain ahead of their earnings reports.
Separately, energy complex futures settled in mixed fashion. WTI crude oil futures rose 2.6% to $84.38/bbl while natural gas futures fell 4.8% to $5.45/mmbtu.
Economic activity expanded modestly on net, Beige Book finds; some cooling in labor demand shown
19-Oct-22 14:25 ET
Dow -139.85 at 30385.98, Nasdaq -101.57 at 10670.68, S&P -28.63 at 3691.42
[BRIEFING.COM] The major averages bounced modestly higher following the release of the Fed's October Beige Book, the S&P 500 (-0.77%) now slightly off session lows; in short, the report showed that national economic activity expanded modestly on net since the previous report; however, conditions varied across industries and Districts.
Other key excerpts from the report included that employment continued to rise at a modest to moderate pace in most Districts. Several Districts reported a cooling in labor demand, with some noting that businesses were hesitant to add to payrolls amid increased concerns of an economic downturn.
Additionally, price growth remained elevated, though some easing was noted across several Districts. Looking ahead, expectations were for price increases to generally moderate.
The report also showed that outlooks grew more pessimistic amidst growing concerns about weakening demand.
Gold pressured by higher yields, stronger dollar
19-Oct-22 13:55 ET
Dow -259.29 at 30266.54, Nasdaq -156.32 at 10615.93, S&P -44.74 at 3675.31
[BRIEFING.COM] The major averages have moved mostly sideways near lows which were reached in the previous half hour, the tech-heavy Nasdaq Composite (-1.45%) still at the bottom of the standings.
Gold futures settled $21.60 lower (-1.3%) to $1,634.20/oz, an almost three-week low, owing largely to a stronger dollar and higher yields in the face of the recent 20-year treasury auction.
Meanwhile, the U.S. Dollar Index is up about +0.8% to $112.97.
As a reminder, the Fed's October Beige Book is due out at the top of the hour.
Winnebago plummets despite upbeat Q4 numbers as the near term looks increasingly difficult (WGO)
Shares of Winnebago (WGO -12%) are plummeting today despite the RV maker posting a double-digit earnings beat while also topping revenue expectations in Q4 (Aug). WGO also remained bullish on long-term RV trends, commenting that the increasing interest in the outdoors by a growing range of consumers should last over the long haul.
So why are shares taking a beating today? We think it has to do with multiple factors. For one, WGO's earnings beat was nowhere near the triple-digit beat it posted last quarter. Secondly, obvious headwinds, such as rising interest rates and inflation dampening discretionary spending, are hurting the retail RV demand environment. This is illuminated by a sizeable 33% drop in Towable unit shipments in Q4 as WGO pulled back on production and shipments in response to high dealer inventory levels. Finally, shares were roaring back from September 23 lows, gaining nearly 18% leading into today's earnings report. As a result, investors are quickly taking profits off the table.
Meanwhile, WGO did not offer very optimistic numbers for the new year, projecting RV shipments to likely trend closer to a range of 400,000-410,000 for CY23, lower than the latest Recreational Vehicle Industry Association (RVIA) forecast of 419,000 units. On a side note, with rival Thor Industries (THO) not providing many details last month on what it expects to ship in CY23, its price action resembles WGO's today as investors speculate a similar downbeat number of shipments.
- Digging deeper into WGO's Q4 report, adjusted EPS still climbed 14% yr/yr to $3.02 despite a 30 bp contraction in gross margins yr/yr to 17.8%. The margin decline resulted from high material and component costs coinciding with lower Towables volume.
- Despite Towable volume nosediving, company-wide sales still shot up 13.8% yr/yr to $1.18 bln, led by WGO's Motorhome segment, which gained 23.8% yr/yr.
- Meanwhile, Motorhomes margins expanded nicely, with adjusted EBITDA margins tacking on 270 bps yr/yr to 13.9%, highlighting the combination of solid unit sales despite WGO's continual price hikes.
Bottom line, although WGO and the RV industry are not looking to repeat past mistakes, such as overproducing during a lackluster 2018, the near term is not looking very favorable. Even though Motorhomes performed well in the quarter, the segment's backlog decreased by 26.1% sequentially, a possible sign of dealers adjusting their appetite to what they predict in terms of future retail demand. Meanwhile, the considerable drop-off in Towable shipments raises concerns that demand is waning rather quickly. As a result, it may be best to employ a wait-and-see attitude toward WGO, as its Q4 results added a bit more uncertainty to the company's ability to thrive in the short run.
Netflix streams sharply higher on Q3 upside and a return to positive net adds (NFLX)
Netflix (NFLX +14%) is streaming sharply higher after reporting Q3 results last night. It beat handily on EPS, revenue and operating margin. The guidance for Q4 was below expectations, but much of that is due to significant FX headwinds. Netflix gets a lot of revenue from overseas and converting that back into US dollars (which has strengthened significantly) takes a chunk out of that. Also, Q4 is typically NFLX's highest quarter for content and marketing spend, so we think investors are giving NFLX a pass on the guidance.
- Besides the headline numbers, the other standout metric was global streaming paid net adds. Not only did it return to positive territory after three declines in Q1-Q3, but at +2.41 mln, it was more than double the +1.00 mln prior guidance. Also, the Q4 guidance at +4.50 mln was quite good. Unfortunately, Q4 will be the last time NFLX guides for net adds. In 2023, it wants investors to focus on broader metrics like revenue and profitability, especially as revenue diversifies with its ad-supported tiers.
- A big reason for the strong net adds in Q3 was its content slate being especially strong. It kicked off the quarter with Stranger Things Season 4, NFLX's biggest season of an English language series ever. This was followed in August by The Sandman, season five of fan favorite Cobra Kai and the Dahmer series, which has become its second largest English series.
- The other big news is that we got an update on its ad-supported tier. It will launch in 12 markets in Q4, including the US on November 3. We like that NFLX is keeping it simple with one low-priced ad plan -- Basic with Ads -- at a 20%-40% discount from its current starting price. So in the US, for example, Netflix will now start at $6.99/mo (vs $9.99 today). The Basic with Ads plan will have ~5 minutes of ads per hour. The reaction from advertisers has been extremely positive.
- We also got an update on NFLX's approach to monetize account sharing, which will start rolling out in early 2023. NFLX will allow "borrowers" to transfer their Netflix profile into their own account, and for "sharers" to create sub-accounts ("extra member") if they want to pay for family or friends. Briefing.com thinks this softer approach is the right way to do it. Rather than a hard cutoff, NFLX wants to coax these people into becoming paying subscribers. Briefing.com thinks this will could be a big tailwind to revenue next year.
The stock is booming today. We think that is because investors were just too negative on the name in recent months. People were overreacting to the negative net adds in recent quarters, thinking the sky was falling. As such, we think NFLX is right to stop providing net add guidance as there is too much focus on that metric. The stock reacts too much to it. The reality is that revenue and profits are the true measure of success, especially with NFLX making some big changes in 2023 with ads and cracking down on account sharing.
Intuitive Surgical surging as acceleration in procedure growth fuels beat-and-raise report (ISRG)
Shares of Intuitive Surgical (ISRG) have gone under the knife this year, down by about 45% year-to-date, but the stock is recovering nicely today following a solid beat-and-raise Q3 earnings report. A combination of supply chain constraints, rising interest rates, and COVID-related headwinds (hospitalizations in U.S., lockdowns in China) have led to some disappointing results lately -- including a top and bottom line miss last quarter -- making this quarter's turnaround a welcomed surprise.
Encouragingly, the primary catalyst driving the stronger performance was an upswing in da Vinci system procedure growth to 20%, indicating a strengthening of demand as COVID-related disruptions dissipate. For some context, ISRG's compound annual growth rate for procedures since 3Q19 is 16%.
In Q2, lockdowns in China, which is ISRG's second largest market, caused procedures to increase at a more modest rate of 14%. Although ISRG is still contending with some regional lockdowns there, the situation has improved, as reflected in China's procedure growth slightly outperforming its global average.
Similarly, while supply chain challenges are still an issue, they are easing from their pandemic heights. The supply chain progress comes at a good time because procedure demand in the U.S. accelerated to 18% from 11% last quarter. Taking each of these positive developments into account, ISRG felt confident enough to raise its FY22 procedure growth guidance higher to 17-18% from 14.0-16.5%.
The enhanced procedure growth outlook is the key behind today's rally.
- ISRG implements a razor-razor blade business model in which it sells very expensive robotic systems (~27% of Q3 revenue) and the instruments and accessories (~56% of Q3 revenue) needed to operate those systems. Those instruments and accessories need to be replaced as more procedures are conducted. Therefore, rising procedure activity leads to more replacement orders, driving sales higher.
- The company also generates revenue from service contracts (~17% of Q3 revenue) and that amount is tied to the number and types of procedures conducted by surgeons. When people delayed elective surgeries during the pandemic, ISRG's revenue from services and from instruments/accessories plunged.
- In 2Q20, those categories experienced yr/yr declines of 35% and 25%, respectively.
- This quarter, services revenue increased by 12% yr/yr to $260 mln, while instruments and accessories revenue was up by 15% to $872 mln.
- This bullish development for procedure growth is more than offsetting a 9% decline in da Vinci system placements in Q3. Given that this equipment has a price tag that can exceed $2.5 mln, financing is often required to purchase it. Rising interest rates, the strengthening dollar, and inflationary pressures are making the equipment even costlier.
- Due to these macroeconomic headwinds, ISRG is taking a more cautious approach with spending and hiring. Specifically, the company added about 530 employees in Q3, lower than the 700+ employees it has added in each of the past three quarters. ISRG also cut its FY22 capex guidance lower to $600-$700 mln from $700-$800 mln, which is receiving a positive response from investors as profit growth remains a top priority.
The main takeaway is that the unexpected acceleration in procedure growth is fueling this strong rebound in ISRG shares. ISRG's challenges (COVID lockdowns, supply chain issues, rising rates) haven't completely disappeared, but the pickup in procedure demand and system utilization is an encouraging sign for its business going forward.
Procter & Gamble shares look to turn the tide on decent Q1 earnings (PG)
Proctor & Gamble (PG +3%) has not been riding the crest of a wave lately, with shares slipping around 13% since its underwhelming Q4 (Jun) earnings in late July. However, the consumer household goods giant is looking to turn the tide today following its top and bottom-line upside in Q1 (Sep). PG also reaffirmed its FY23 organic sales and earnings growth guidance, expecting +3-5% and flat to 4% yr/yr, respectively.
Still, foreign exchange (FX) headwinds forced PG to lower its FY23 net sales outlook to negative 3% to negative 1% growth yr/yr from flat to positive 2% growth. Inflationary pressures also remain elevated.
Nevertheless, with shares down over 20% on the year as of yesterday's close, plenty of negativity has been priced in, leading investors to mostly shrug off weak points from Q1. It also helped that PG announced plans to buy back $6-8 bln of its shares in FY23, representing around 2.0-2.6% of its outstanding shares.
- Although net sales climbed only 1.3% yr/yr to $20.61 bln, 6 pts were clipped due to adverse FX impacts. On an organic basis, sales jumped 7%, driven by broad-based strength extending across each of PG's product categories.
- FX headwinds showed up across many of PG's metrics in the quarter, such as operating margins, which dipped 70 bps yr/yr but expanded by 10 bps on a currency-neutral basis. PG is forecasting FX headwinds to only worsen going forward, upping its estimate to a 6-pt headwind to all-in sales growth in FY23, twice as high as its prediction in Q4.
- Volumes did drop 3% yr/yr, an acceleration from Q4 when volumes fell by just 1%. The decline also marked PG's second consecutive quarter of sliding volumes, underscoring the looming threat of private labels as PG continues hiking prices. However, PG noted that more than 2 pts of its sliding volumes were a direct result of lower shipments in Russia -- recall in March, PG significantly lowered its portfolio in the country.
- Still, PG acknowledged the effects inflation has on consumers, stretching purchasing cycles and being more careful with quantity, but commented that it is still growing sales and holding share at this point. PG also offers value products within its portfolio, where consumers are trading down. Many of PG's peers, such as Clorox (CLX) and Church & Dwight (CHD), have also witnessed this trade down within their portfolios. CLX added in early August that consumers are also trading up to larger sizes to get a better price per ounce.
The main takeaway is that headwinds are not weakening; freight costs, material costs, and adverse FX impacts are expected to remain elevated in FY23, totaling $3.9 bln, up from the $3.3 bln predicted last quarter. However, PG's Q1 numbers illustrate its ability to wade through these choppy waters, posting only a minor volume decline despite prices having a positive 9 pt impact on net sales. We think PG's brands will prove the differentiating factor during the current inflationary environment, especially given PG's size and scale, which will provide it with an advantage in marketing, a necessity to differentiate its products from the competition, including off-brand substitutes.
Winnebago plummets despite upbeat Q4 numbers as the near term looks increasingly difficult (WGO)
Shares of Winnebago (WGO -12%) are plummeting today despite the RV maker posting a double-digit earnings beat while also topping revenue expectations in Q4 (Aug). WGO also remained bullish on long-term RV trends, commenting that the increasing interest in the outdoors by a growing range of consumers should last over the long haul.
So why are shares taking a beating today? We think it has to do with multiple factors. For one, WGO's earnings beat was nowhere near the triple-digit beat it posted last quarter. Secondly, obvious headwinds, such as rising interest rates and inflation dampening discretionary spending, are hurting the retail RV demand environment. This is illuminated by a sizeable 33% drop in Towable unit shipments in Q4 as WGO pulled back on production and shipments in response to high dealer inventory levels. Finally, shares were roaring back from September 23 lows, gaining nearly 18% leading into today's earnings report. As a result, investors are quickly taking profits off the table.
Meanwhile, WGO did not offer very optimistic numbers for the new year, projecting RV shipments to likely trend closer to a range of 400,000-410,000 for CY23, lower than the latest Recreational Vehicle Industry Association (RVIA) forecast of 419,000 units. On a side note, with rival Thor Industries (THO) not providing many details last month on what it expects to ship in CY23, its price action resembles WGO's today as investors speculate a similar downbeat number of shipments.
- Digging deeper into WGO's Q4 report, adjusted EPS still climbed 14% yr/yr to $3.02 despite a 30 bp contraction in gross margins yr/yr to 17.8%. The margin decline resulted from high material and component costs coinciding with lower Towables volume.
- Despite Towable volume nosediving, company-wide sales still shot up 13.8% yr/yr to $1.18 bln, led by WGO's Motorhome segment, which gained 23.8% yr/yr.
- Meanwhile, Motorhomes margins expanded nicely, with adjusted EBITDA margins tacking on 270 bps yr/yr to 13.9%, highlighting the combination of solid unit sales despite WGO's continual price hikes.
Bottom line, although WGO and the RV industry are not looking to repeat past mistakes, such as overproducing during a lackluster 2018, the near term is not looking very favorable. Even though Motorhomes performed well in the quarter, the segment's backlog decreased by 26.1% sequentially, a possible sign of dealers adjusting their appetite to what they predict in terms of future retail demand. Meanwhile, the considerable drop-off in Towable shipments raises concerns that demand is waning rather quickly. As a result, it may be best to employ a wait-and-see attitude toward WGO, as its Q4 results added a bit more uncertainty to the company's ability to thrive in the short run.
Netflix streams sharply higher on Q3 upside and a return to positive net adds (NFLX)
Netflix (NFLX +14%) is streaming sharply higher after reporting Q3 results last night. It beat handily on EPS, revenue and operating margin. The guidance for Q4 was below expectations, but much of that is due to significant FX headwinds. Netflix gets a lot of revenue from overseas and converting that back into US dollars (which has strengthened significantly) takes a chunk out of that. Also, Q4 is typically NFLX's highest quarter for content and marketing spend, so we think investors are giving NFLX a pass on the guidance.
- Besides the headline numbers, the other standout metric was global streaming paid net adds. Not only did it return to positive territory after three declines in Q1-Q3, but at +2.41 mln, it was more than double the +1.00 mln prior guidance. Also, the Q4 guidance at +4.50 mln was quite good. Unfortunately, Q4 will be the last time NFLX guides for net adds. In 2023, it wants investors to focus on broader metrics like revenue and profitability, especially as revenue diversifies with its ad-supported tiers.
- A big reason for the strong net adds in Q3 was its content slate being especially strong. It kicked off the quarter with Stranger Things Season 4, NFLX's biggest season of an English language series ever. This was followed in August by The Sandman, season five of fan favorite Cobra Kai and the Dahmer series, which has become its second largest English series.
- The other big news is that we got an update on its ad-supported tier. It will launch in 12 markets in Q4, including the US on November 3. We like that NFLX is keeping it simple with one low-priced ad plan -- Basic with Ads -- at a 20%-40% discount from its current starting price. So in the US, for example, Netflix will now start at $6.99/mo (vs $9.99 today). The Basic with Ads plan will have ~5 minutes of ads per hour. The reaction from advertisers has been extremely positive.
- We also got an update on NFLX's approach to monetize account sharing, which will start rolling out in early 2023. NFLX will allow "borrowers" to transfer their Netflix profile into their own account, and for "sharers" to create sub-accounts ("extra member") if they want to pay for family or friends. Briefing.com thinks this softer approach is the right way to do it. Rather than a hard cutoff, NFLX wants to coax these people into becoming paying subscribers. Briefing.com thinks this will could be a big tailwind to revenue next year.
The stock is booming today. We think that is because investors were just too negative on the name in recent months. People were overreacting to the negative net adds in recent quarters, thinking the sky was falling. As such, we think NFLX is right to stop providing net add guidance as there is too much focus on that metric. The stock reacts too much to it. The reality is that revenue and profits are the true measure of success, especially with NFLX making some big changes in 2023 with ads and cracking down on account sharing.
Intuitive Surgical surging as acceleration in procedure growth fuels beat-and-raise report (ISRG)
Shares of Intuitive Surgical (ISRG) have gone under the knife this year, down by about 45% year-to-date, but the stock is recovering nicely today following a solid beat-and-raise Q3 earnings report. A combination of supply chain constraints, rising interest rates, and COVID-related headwinds (hospitalizations in U.S., lockdowns in China) have led to some disappointing results lately -- including a top and bottom line miss last quarter -- making this quarter's turnaround a welcomed surprise.
Encouragingly, the primary catalyst driving the stronger performance was an upswing in da Vinci system procedure growth to 20%, indicating a strengthening of demand as COVID-related disruptions dissipate. For some context, ISRG's compound annual growth rate for procedures since 3Q19 is 16%.
In Q2, lockdowns in China, which is ISRG's second largest market, caused procedures to increase at a more modest rate of 14%. Although ISRG is still contending with some regional lockdowns there, the situation has improved, as reflected in China's procedure growth slightly outperforming its global average.
Similarly, while supply chain challenges are still an issue, they are easing from their pandemic heights. The supply chain progress comes at a good time because procedure demand in the U.S. accelerated to 18% from 11% last quarter. Taking each of these positive developments into account, ISRG felt confident enough to raise its FY22 procedure growth guidance higher to 17-18% from 14.0-16.5%.
The enhanced procedure growth outlook is the key behind today's rally.
- ISRG implements a razor-razor blade business model in which it sells very expensive robotic systems (~27% of Q3 revenue) and the instruments and accessories (~56% of Q3 revenue) needed to operate those systems. Those instruments and accessories need to be replaced as more procedures are conducted. Therefore, rising procedure activity leads to more replacement orders, driving sales higher.
- The company also generates revenue from service contracts (~17% of Q3 revenue) and that amount is tied to the number and types of procedures conducted by surgeons. When people delayed elective surgeries during the pandemic, ISRG's revenue from services and from instruments/accessories plunged.
- In 2Q20, those categories experienced yr/yr declines of 35% and 25%, respectively.
- This quarter, services revenue increased by 12% yr/yr to $260 mln, while instruments and accessories revenue was up by 15% to $872 mln.
- This bullish development for procedure growth is more than offsetting a 9% decline in da Vinci system placements in Q3. Given that this equipment has a price tag that can exceed $2.5 mln, financing is often required to purchase it. Rising interest rates, the strengthening dollar, and inflationary pressures are making the equipment even costlier.
- Due to these macroeconomic headwinds, ISRG is taking a more cautious approach with spending and hiring. Specifically, the company added about 530 employees in Q3, lower than the 700+ employees it has added in each of the past three quarters. ISRG also cut its FY22 capex guidance lower to $600-$700 mln from $700-$800 mln, which is receiving a positive response from investors as profit growth remains a top priority.
The main takeaway is that the unexpected acceleration in procedure growth is fueling this strong rebound in ISRG shares. ISRG's challenges (COVID lockdowns, supply chain issues, rising rates) haven't completely disappeared, but the pickup in procedure demand and system utilization is an encouraging sign for its business going forward.
Procter & Gamble shares look to turn the tide on decent Q1 earnings (PG)
Proctor & Gamble (PG +3%) has not been riding the crest of a wave lately, with shares slipping around 13% since its underwhelming Q4 (Jun) earnings in late July. However, the consumer household goods giant is looking to turn the tide today following its top and bottom-line upside in Q1 (Sep). PG also reaffirmed its FY23 organic sales and earnings growth guidance, expecting +3-5% and flat to 4% yr/yr, respectively.
Still, foreign exchange (FX) headwinds forced PG to lower its FY23 net sales outlook to negative 3% to negative 1% growth yr/yr from flat to positive 2% growth. Inflationary pressures also remain elevated.
Nevertheless, with shares down over 20% on the year as of yesterday's close, plenty of negativity has been priced in, leading investors to mostly shrug off weak points from Q1. It also helped that PG announced plans to buy back $6-8 bln of its shares in FY23, representing around 2.0-2.6% of its outstanding shares.
- Although net sales climbed only 1.3% yr/yr to $20.61 bln, 6 pts were clipped due to adverse FX impacts. On an organic basis, sales jumped 7%, driven by broad-based strength extending across each of PG's product categories.
- FX headwinds showed up across many of PG's metrics in the quarter, such as operating margins, which dipped 70 bps yr/yr but expanded by 10 bps on a currency-neutral basis. PG is forecasting FX headwinds to only worsen going forward, upping its estimate to a 6-pt headwind to all-in sales growth in FY23, twice as high as its prediction in Q4.
- Volumes did drop 3% yr/yr, an acceleration from Q4 when volumes fell by just 1%. The decline also marked PG's second consecutive quarter of sliding volumes, underscoring the looming threat of private labels as PG continues hiking prices. However, PG noted that more than 2 pts of its sliding volumes were a direct result of lower shipments in Russia -- recall in March, PG significantly lowered its portfolio in the country.
- Still, PG acknowledged the effects inflation has on consumers, stretching purchasing cycles and being more careful with quantity, but commented that it is still growing sales and holding share at this point. PG also offers value products within its portfolio, where consumers are trading down. Many of PG's peers, such as Clorox (CLX) and Church & Dwight (CHD), have also witnessed this trade down within their portfolios. CLX added in early August that consumers are also trading up to larger sizes to get a better price per ounce.
The main takeaway is that headwinds are not weakening; freight costs, material costs, and adverse FX impacts are expected to remain elevated in FY23, totaling $3.9 bln, up from the $3.3 bln predicted last quarter. However, PG's Q1 numbers illustrate its ability to wade through these choppy waters, posting only a minor volume decline despite prices having a positive 9 pt impact on net sales. We think PG's brands will prove the differentiating factor during the current inflationary environment, especially given PG's size and scale, which will provide it with an advantage in marketing, a necessity to differentiate its products from the competition, including off-brand substitutes.
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