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Summary
- We are only two days in, but we are already getting a useful read on how Q2 earnings season may play out.
- Industrials appear to be on hold – keeping busy but not in robust growth mode.
- Pepsi (PEP) successfully jammed through another massive price hike on its many offerings, but other indications are that consumers are simply buying less food and other staples. Many consumers are hurting.
- People with money are prioritizing destination vacations, preferably by flying there, and momentum is still rising.
- Banks have been in the doghouse since the Silicon Valley Bank collapse, but results from three too-big-to-fail banks suggest that the pessimism was overdone.
Market Implications
- This will likely be a stockpicker’s earnings season – one where surprises are richly rewarded – but a rising tide to lift all boats never quite arrives.
- We still like holding the airline ETF JETS and the regional bank ETF KRE.
A Quick Read on Thursday’s Earnings Reports
Industrials Are on Hold
- Fastenal (FAST), maker of fasteners, screws, bolts and all sorts of odds and ends that manufacturers need to make stuff, hit expected EPS, missed slightly on revenue, and offered a tepid outlook. Companies either need less stuff or are drawing down bloated inventories they took on to counter supply-chain problems.
- Cintas (CTAS), maker of uniforms, restroom and breakroom materials, and various promotional goods, posted solid beats on revenue and earnings but a softer-than-expected outlook.
Bottomline – the industrial sector appears to be stable, but not in growth mode, if FAST and CTAS results are anything to go by.
Consumer Staples Companies Are Selling Less Stuff
- Pepsi (PEP) came through again with blockbuster price increases – this time, up 15% year over year (CPI ex food and energy was up 4.8%). In Europe, pricing was up 20%. PEP is getting hit a bit on volume but most consumers still seem to be sticking with PEP’s Gatorade, Quaker Oats, salty snacks and, of course, soft drinks. PEP raised its revenue and earnings projections for 2023 more than expected.
- Packaged food conglomerate Conagra (CAG) was less upbeat. It reported that consumers are not trading down to cheaper brands – they are simply buying less – albeit at higher prices. CAG said volumes are down a massive 7.7%, but revenue still climbed 2% on higher prices. Its outlook was also tepid.
As always, there are winners and losers. We think as earnings season gains momentum, CAG will have a lot of company in the loser’s corner.
Vacation Time Means Airtime
- Delta Airlines (DAL) reported strong results and upped its forecast for travel volume. Demand for flying seems to be the most popular discretionary spending category these days.
- We still like the JETS ETF, which should benefit as airlines return to sustained and sustainable profitability.
Those Big Bad Banks Are Still Minting Money
- Banks have been in the doghouse since the Silicon Valley Bank (SIVB) collapse in early March, on concerns about their loan books and likely regulatory changes.
- We think the pessimism is overdone – which earnings this morning from JP Morgan Chase (JPM) and Citigroup (C) appear to confirm.
- Next week will be a parade of regional banks. We expect many will surprise to the upside.
- We still like the regional bank ETF KRE.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
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