US Reporting - Microsoft & eBay - Week 2

Week 2 of US earnings is now complete and we are starting to see a fuller picture of earnings.

With two weeks of data, we now have 40% of the S&P 500 having reported. Last week saw some of the big tech names start to report, including names such as Microsoft and Ebay plus the conclusion of the large US banks with investment banks reporting.

As of Friday, 126 companies representing 40% of S&P earnings have reported. S&P 500 bottom-up EPS climbed to $29.20 from a $28.62 the prior week. Consensus earnings growth is -4% YoY.

SOME KEY TAKEOUTS:

Earnings are running 2% ahead of analyst expectations coming in.

Better than expected tech results and the remaining investment banks led the better than expected earnings last week.

So far, 62% of companies have beaten on EPS, 50% have beaten on sales and 37% have beaten on both

A big improvement in surprise stats vs. the prior week.

Health Care has seen the most top-and bottom-line beats.

More beats from multinationals: Nearly 70% of stocks with the highest foreign exposure have exceeded analysts’ earnings expectations so far, compared to just over half of the purely domestic stocks.

Multinationals have benefitting from fading headwinds from oil (which climbed $10 during 2Q and was -21% YoY on avg. vs. -31% in 1Q) and the trade-weighted US dollar (which was down slightly YoY on avg. vs. +4% in 1Q).

Wage pressure starting? Last week Chipotle cited a 6% rise in labor costs and a 9% increase in hourly wages—the highest increase our restaurants team has heard of thus far—and Starbucks announced a 5-15% wage hike for employees this autumn.

This week is “hump week” with a massive 38% of total earnings across nine sectors (Energy and Utilities are the biggest sectors by percentage) of their sector. expected to report (see below), which will largely wrap up reporting season in the USA, at which point they retire to the beach in the Hamptons until the end of August!

STOCKS THAT ARE IN OUR PORTFOLIO:

Week 2 was a relatively quiet week for our portfolio, with only three stocks reporting, namely 2 remaining bank stocks and one fund manager. This coming week is a LOT busier with 12 stocks reporting.

Cohen and Steers (CNS US):

The good: In a sector where inflows are hard to find, CNS continues to receive inflows, with Assets under Management inflows of $2.3bn and AUM rising 7% to $58.7bn. Margins expanded and costs are under control
The Bad: Part of the beat in earnings came from non-operational gains, which the market won’t pay for.
The Ugly: There wasn’t any!

CNS is the largest real estate focused fund manager in the USA with a large share of REIT funds.
In a world of low or even negative interest rates, managers such as CNS are well positioned to receive inflows into their products
With earnings growing 40% over the next two years, paying 22x earnings, whilst not cheap, we believe offers good value, with a dividend yield of 2.6%

Signature Bank of New York (SBNY)

The Good: Grew their team size for deposit gathering and grew their loan book
The Bad: Quite poor result, driven by lower underlying Net Income Margin (NIM), elevated provisioning, below expectation non-interest income.
The Ugly: reducing provisioning for real estate exposure at the same time as expanding provisions on their Taxi medallion business, whilst not material, isn’t a great look.

SBNY is a medium sized bank based in New York City that specialises in providing banking services to high net worth individuals. It uses that money to lend out against property developments in the region.
With very low cost of deposits, from its low branch numbers, it can operate at very higher margins. It has consistently grown faster and been more profitable than its peers.
The biggest issue in the last 6 months has been that they have historically lent against taxi medallions in New York and Chicago, and the arrival of Uber has meant that these value have been marked down. Whilst it is a relatively small part of the business, it garners a lot of attention.

Western Alliance Bancorporation (WAL)

The Good: Excellent organic deposit growth of $1.1bn (with very little pricing pressure), deployed into high yielding loan portfolio purchased from GE.
The Bad: 40 year subordinated debt at 4% current yield increases the overall cost of funds, fully priced only from the next quarter.
The Ugly: Management flagged lower overall asset growth in H2 ’16 (but still healthy “low double digit” organic growth). Really not much “ugly” here…

Market liked the result, outperforming the industry index (KBE US). We don’t think 13.7x PE for a business generating 14.7% ROE fully appreciates the growth trajectory.
In fact, our main worry is that the stock is not expensive enough for the management to fund value accretive acquisition with script!