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A look at North American equities heading in both directions

On the rise

JPMorgan Chase & Co. (JPM-N), the biggest lender in the United States, said on Friday it set aside US$1.4-billion in anticipation of a mild recession, even as it beat forecasts for quarterly profit on the back of a strong performance at its trading unit.

Shares in JPMorgan closed up 2.5 per cent as it kicked off quarterly earnings for corporate America that are expected to fall for the first time since the third quarter of 2020.

UBS analysts said in a note that JPMorgan’s guidance on net interest income (NII)- the money the bank gets from interest payments - of US$74-billion, excluding markets, was below expectations. They signaled the markets component of NII will be a drag on the income segment. “While this is a warning shot for the entire industry and we expect some conservatism to have been considered in this outlook, JPM was a crowd favorite heading into earnings. We expect the shares to be weak today,” it said.

Chief Executive Jamie Dimon said consumers were still spending excess cash and businesses remained healthy, but he listed a number of uncertainties facing the economy.

“We still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation... and the unprecedented quantitative tightening.”

The bank flagged a modest deterioration in its macroeconomic outlook, “reflecting a mild recession in the central case.”

JPMorgan’s investment banking unit continued its poor run in the quarter, with revenue down 57 per cent as corporate executives battened down the hatches to prepare for a potential recession instead of spending on deals.

JPMorgan’s profit for the three months ended Dec. 31 was US$11-billion, or $3.57 per share, compared with US$10.4-billion, or US$3.33 per share a year earlier.

Excluding items the company earned US$3.56 per share, beating the average analyst estimate of US$3.07.

Wells Fargo & Co (WFC-N) turned positive and finished 3.3 per cent higher after it reported a 50-per-cent decline in profit for the fourth quarter, missing analysts’ estimates, as the bank racked up more than US$3-billion in costs related to a fake accounts scandal and boosted loan loss reserves for a potential economic slowdown.

The fourth-largest U.S. lender reported a profit of 67 US cents per share for the quarter ended Dec. 31, compared with US$1.38 per share a year earlier. On an adjusted basis, the bank earned 61 US cents per share, compared with analysts’ estimates of 66 US cents per share, according to Refinitiv IBES data.

Provision for credit losses was US$957-million in the quarter, compared with a US$452-million release a year earlier.

Provision for credit losses in the quarter included a US$397-million increase in the allowance for credit losses primarily reflecting loan growth, as well as a less favorable economic environment, the bank said.

Though Wells Fargo’s operating losses were “one-offs” related to litigation and regulatory and customer remediation, its results were disappointing, said Thomas Hayes, chairman and managing member at Great Hill Capital.

“Of the major banks, Wells is the weakest of the reports today,” he said. “They continue to underwhelm.”

Banks are building up rainy day funds as U.S. Federal Reserve policymakers decide on the future path of interest rates.

Citigroup Inc. (C-N) was up 1.7 per cent despite reported a 21-per-cent fall in quarterly profit on Friday, missing forecasts, as the bank increased provisions to prepare for a worsening economy and investment banking revenue declined due to a sharp drop in dealmaking activity.

Fears of a potential recession prompted Citi to add US$640-million to its reserves in the fourth quarter, compared with a release of US$1.37-billion from its reserves in 2021 when pandemic-related loan losses failed to materialize.

“Our base case is still a mild recession in the latter part of 2023,” Chief Financial Officer Mark Mason said on a media call, adding consumer and corporate balance sheets remain strong and core inflation “appears to be very sticky.”

On an adjusted basis, Citi earned US$1.10 per share for the fourth quarter ended Dec. 31, falling below estimates of US$1.14 a share, according to Refinitiv.

The U.S. Federal Reserve last year raised its interest rate by 425 basis points from the near-zero level to tame inflation, raising fears of an economic downturn, and thus, forcing many firms to forecast slower growth in revenue and profit.

The Fed’s tightening helped Citi post a 61-per-cent surge in net interest income by charging higher interests on loans to customers.

Still, the U.S. central bank’s aggressive stance, coupled with the war in Ukraine and growing economic uncertainties, roiled financial markets and slowed dealmaking activity last year. This saw Citi’s investment banking revenue plunge 58 per cent.

CFO Mason indicated that overall the bank continues hiring, but it is also slowing down headcount additions in some areas. “We’re also repacing (hiring) where it makes sense in light of the environment that we’re in,” he said, adding bonuses in investment banking are likely to reflect a slowdown in deals.

Meanwhile, elevated market volatility led traders reposition their portfolios, helping Citi’s markets business and driving a 6-per-cent rise in the bank’s revenue to US$18-billion.

“Markets had the best fourth quarter in recent memory,” said Citi Chief Executive Officer Jane Fraser.

Bank of America Corp. (BAC-N) increased 2.2 per cent after it reported a bigger-than-expected fourth-quarter profit on Friday, helped by a surge in net interest income as the U.S. Federal Reserve raised rates through most of last year.

The ‘higher-for-longer’ rate environment to battle decades-high inflation has underpinned profits at consumer banks, with analysts expecting those gains to peak in 2023 and help offset sluggish dealmaking as well as bigger loan loss provisions.

Bank of America’s net interest income (NII), which reflects how much money the bank makes from charging interest to customers, jumped 29 per cent to US$14.7-billion in the quarter.

Its profit applicable to common shareholders rose 2 per cent to US$6.9-billion, or 85 US cents per share. Analysts, on average, had estimated a profit of 77 cents per share, according to Refinitiv IBES data.

Though four-decade-high inflation rates are testing U.S. consumers, spending trends have still largely been positive, bolstering Bank of America’s profit in its key consumer banking unit.

“The consumer still remains in pretty good shape,” Chief Financial Officer Alastair Borthwick told reporters. “There’s a lot of pent-up demand,” especially for travel, he said.

Net income at the bank’s consumer banking unit jumped 15 per cent to a record US$3.6-billion in the quarter. Combined credit and debit card spending rose 5 per cent to US$11-billion.

Even as the economic environment weakens, consumers “still have plenty of cushion left” in their bank accounts, Chief Executive Brian Moynihan told analysts on a conference call. “And while their spending remains healthy, we continue to see the pace of that year-over-year growth slow.”

Activist investor Nelson Peltz’s hedge fund Trian Fund Management said on Friday it will not pursue a takeover of hamburger chain Wendy’s Co. (WEN-Q).

Shares of Wendy’s were higher in Friday trading.

From Thursday: Activist investor Nelson Peltz kicks off battle for Disney board seat

In May 2022, Wendy’s largest shareholder Trian was considering a potential bid for the burger chain almost two decades after Mr. Peltz invested in the company.

On Friday, Wendy’s separately announced a new US$500-million share buyback plan and doubled its quarterly dividend to 25 US cents per share.

The hedge fund in a filing said the company’s move to return additional capital to shareholders through share repurchases and increased cash dividends “was the appropriate path to enhance shareholder value at this time.”

Shares of BlackRock Inc. (BLK-N), which is currently the world’s largest asset manager, finished flat after reporting an 18-per-cent drop in fourth-quarter profit on Friday, hit by a global market rout that squeezed fee income, but registered US$146-billion of long-term net inflows in the quarter as stocks and bonds rebounded.

Financial markets were thrown into turmoil last year by a swift rise in interest rates and recession fears, hitting businesses such as BlackRock, which makes most of its money from fees on investment advisory and administration services.

“We ended the year with strong momentum, generating $114-billion of fourth-quarter net inflows, representing 3-per-cent annualized organic base fee growth, reflecting continued strength in ETFs and significant outsourcing mandates,” Larry Fink, BlackRock chairman and chief executive, said in a statement.

The firm’s adjusted earnings were US$1.36 billion, or US$8.93 per share, in the three months to Dec. 31, down from US$1.65 billion, or US$10.68 per share, a year earlier.

Analysts on average had expected a profit of US$8.11 per share, based on IBES data from Refinitiv.

Assets under management (AUM) stood at US$8.59-trillion at the end of the fourth quarter, down from a little more than US$10-trillion a year earlier but up from US$7.96-trillion in the third quarter.

“We believe the strength in fixed income is just the beginning of a multi-year trend of money flowing back into bond products,” said Kyle Sanders, senior equity research analyst at Edward Jones.

“Given the rise in interest rates during 2022, fixed income products are now offering investors the most attractive yields in over a decade,” he said.

On the decline

Cogeco Communications Inc. (CCA-T) dropped 10.7 per cent after it reported its first-quarter profit and revenue rose compared with a year ago, but the company trimmed its guidance for its full financial year.

The cable company says it now expects revenue for its 2023 financial year to grow in a range of 0.5 to two per cent on a constant currency basis compared with earlier expectations for growth between two and four per cent.

Cogeco Communications also says its adjusted earnings before interest, taxes, depreciation and amortization is now expected to grow between 0.5 and two per cent on a constant currency basis compared with earlier guidance for growth between 1.5 and 3.5 per cent for its full year.

The revised guidance came as the company reported its profit attributable to owners of the corporation totalled $111.5-million for the quarter ended Nov. 30, up from $106.8-million a year earlier.

The profit amounted to $2.44 per diluted share for the quarter, up from $2.27 per diluted share a year earlier.

Revenue for the quarter totalled $762.3-million, up from $718.5-million, an increase of 6.1 per cent or 2.3 per cent on a constant currency basis.

In a research note released before the bell, Canaccord Genuity equity analyst Aravinda Galappatthige said: “Cogeco [Communications] reported Q1/F23 results today with the top line and adjusted EBITDA coming in better than our estimates, but subs on both sides of the border were lighter. Consolidated revenues and EBITDA were up 6.1 per cent and 5.1 per cent year-over-year, respectively, mainly driven by the foreign exchange impact and solid financials within the Canadian segment. Sub adds came in notably lower than our expectations, with the US segment reporting a steeper-than-expected decline across product segments (internet, cable, and telephony). Owing to Cogeco’s recent underperformance in the US (i.e., loss of subs in Ohio) and deteriorating macro conditions, the company lowered its 2023 guidance.”

Cogeco Inc. (CGO-T) was also lower in the wake of trimming its fiscal 2023 financial guidance.

Shares of Shaw Communications Inc. (SJR.B-T) were lower following the late Thursday release of fourth-quarter results that fell short of the Street’s expectations, prompting a pair of equity analysts on the Street to downgrade the company’s shares.

“Having followed the company for a long time it is quite clear that it is not business as usual. Some investors might react to these results and begin to wonder if Rogers and/or Quebecor could be having buyer’s remorse. We don’t think the results are a true reflection of the underlying business but rather suffering from management’s focus being spent on merger-related activities as regulatory approval continues to extend in time. We are taking this opportunity however to lower our recommendation on the stock as upside from these levels has become limited,” said Scotia Capital’s Maher Yaghi.

The Calgary-based company says net income for the quarter was down 14.3 per cent, with earnings per share at 34 cents, down from 39 cents a year earlier.

Shaw added approximately 13,800 new wireless customers, driving wireless service revenue up by 5.4 per cent to $252-million. Wireline revenue was down 2.7 per cent to $1.03 billion.

The company says it received an extension from the Toronto Stock Exchange to hold its annual general meeting as late as April 11 as it waits for news on whether its takeover by Rogers Communications Inc. will go through.

Corus Entertainment Inc. (CJR.B-T) plummeted 15.5 per cent as it reported its first-quarter profit fell compared with a year ago as its revenue also moved lower.

The television and radio company says it earned $31.4 million in net income attributable to shareholders or 16 cents per diluted share for the three months ended Nov. 30.

The result compared with a profit of $76.2-million or 36 cents per diluted share in the same quarter a year earlier.

Revenue totalled $431.2-million, down from $463.9 million a year earlier.

The decline in revenue came as Corus reported its television revenue fell to $401.5-million compared with $434.7-million.

Radio revenue was $29.7-million, up from $29.1-million a year earlier.

Lundin Mining Corp. (LUN-T) was lower by 5.9 per cent after releasing fourth-quarter production results and forward guidance that fell short of expectations on the Street.,

The Toronto-based company’s quarterly copper and zinc production came in at 56,552 tons and 44,308 tons, respectively, missing the consensus projections of 67,300 and 49,200 tons. Gold output of 36,000 was lower than anticipated (41,000 tons).

“Three-year production guidance is also generally negative,” said BMO analyst Jackie Przybylowski. “2023 guidance for zinc production at Neves-Corvo is below previously disclosed guidance and consensus and BMO expectations as the Zinc Expansion Project ramps up slower than expected; full processing rates are expected to be achieved during 2024. Lundin provided maiden 2025 guidance which was below consensus and our expectations across most operations.”

“Maiden 2023 cost guidance is higher than previously expected, likely due to inflationary cost pressures which will continue to weigh on the sector this year and due to lower-than-forecast production volumes.”

Delta Air Lines Inc. (DAL-N) on Friday forecast first-quarter profit below analysts’ estimates on a rise in labor costs as U.S. carriers go all out to improve staffing levels amid robust travel demand.

Delta’s shares fell, dragging rivals United Airlines (UAL-Q), American Airlines (AAL-Q) and Southwest Airlines (LUV-N) down.

U.S. carriers are enjoying the strongest travel demand since the start of the pandemic, boosted by reopening of closed borders, a strong U.S. dollar and rising corporate travel.

But airlines have had to shell out more money to attract and retain pilots and cabin crew after many were let go during the pandemic.

Delta said on Friday it expects non-fuel unit costs to rise 3 per cent to 4 per cent in the first quarter from a year earlier.

The company has also offered a 34-per-cent pay hike to its pilots in a new contract, Reuters reported last month, which is expected to become a new “benchmark” for the industry.

A worsening economic outlook has sparked concerns about consumer spending, but travel demand remains strong and exceeds the pace of flight capacity growth, keeping ticket prices high.

“As we move into 2023, the industry backdrop for air travel remains favorable and Delta is well positioned to deliver significant earnings and free cash flow growth,” Chief Executive Ed Bastian said.

The company forecast first-quarter revenue would be 14-17 per cent higher than 2019 on capacity that is 1 per cent lower. Delta expects earnings of 15 US cents to 40 US cents per share, below estimates of 55 US cents, according to Refinitiv IBES data.

Tesla Inc. (TSLA-Q) has slashed prices on its electric vehicles in the United States and Europe by as much as 20 per cent, extending a strategy of aggressive discounting after missing Wall Street estimates for 2022 deliveries.

The move, which prompted a drop in Tesla’s shares in Friday trading, came after CEO Elon Musk warned that the prospect of recession and higher interest rates meant it could lower prices to sustain volume growth at the expense of profit.

The lower pricing across Tesla’s major markets marks a reversal from the strategy the automaker had pursued through much of 2021 and 2022 when orders for new vehicles exceeded supply. Mr. Musk acknowledged last year that prices had become “embarrassingly high” and could hurt demand.

More stable cost inflation was also a factor in reducing prices, said a spokesperson for Tesla Germany, confirming price cuts in its top European market.

The U.S. price cuts, announced late Thursday on its global top-sellers the Model 3 sedan and Model Y crossover SUV, were between 6 per cent and 20 per cent, Reuters calculations showed.

The basic version of its Model Y now costs US$52,990, down from US$65,990 previously.

That is before an up to US$7,500 federal tax credit that took effect for many electric vehicle models at the start of January.

UnitedHealth Group Inc. (UNH-N) slid after it beat Wall Street expectations for fourth-quarter profit on Friday, as lesser COVID-related expenses kept a check on medical costs at its health insurance business.

Health insurers’ costs have been in flux during the pandemic, but have eased over the past year as COVID-related hospitalizations have fallen from their peak.

UnitedHealth’s medical cost ratio – the percentage of payout on claims compared to its premiums – fell by nearly a per cent to 82.8 per cent, marginally lower than analysts’ estimates of 82.87 per cent, according to Refinitiv IBES data.

Bernstein analyst Lance Wilkes said the improvement in the ratio was due to the high COVID-19 spike that was seen last year.

UnitedHealth had also factored in “less intense but moderately higher than normal” flu season during its investor conference in November, so analysts were expecting flu-related hospitalizations to partially offset gains from lower COVID hospitalization.

Stephens analysts Scott Fidel said UnitedHealth’s beat was also aided by higher investment and other income, which came in at US$855-mllion for the reported quarter, up 5 per cent from a year earlier.

Excluding items, the company reported a profit of US$5.34 per share for the quarter ended Dec. 31, beating analysts’ estimates of US$5.17 per share, according to Refinitiv IBES data.

UnitedHealth’s revenue rose 12 per cent to US$82.79-billion, beating estimates of US$82.59-billion.

With files from staff and wires