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A look at North American equities heading in both directions

On the rise

PepsiCo Inc. (PEP-Q) raised its annual forecasts on Tuesday after price hikes undertaken to offset higher costs and steady demand helped the soda and snack giant beat first-quarter results.

Global consumer goods companies have raised prices to battle sky-rocketing costs of everything from aluminum cans to labor and shipping since the supply-chain disruptions during the pandemic and aggravated by the Russia-Ukraine conflict.

“We do not expect commodity prices to decrease for us, only the rate of inflation will get a little bit lighter during the course of the year,” Chief Financial Officer Hugh Johnston told Reuters.

Meanwhile, the Frito-Lay maker also plans to raise prices in some regions, in stark contrast to its decision earlier this year to hit a pause.

Majority of the pricing is in place but “there are some markets, highly inflationary markets around the world, where we might have to take additional pricing,” CEO Ramon Laguarta said in an earnings call.

Average prices jumped 16 per cent in the first quarter, PepsiCo said, while organic volume slipped 2 per cent.

The company’s shares rose 2.3 per cent as the results pointed to a resilient consumer and followed similar performances by Nestle earlier in the day and by rival Coca-Cola (KO-N) on Monday.

PepsiCo’s raised forecast at this stage in the year suggests “very deep confidence in what is going on in the snacking business and also the improvements on the beverage side,” said Markus Hansen, a portfolio manager at Vontobel Quality Growth, adding the company is historically very conservative.

Sales in the North America beverage unit, PepsiCo’s largest business and which houses 7UP and Gatorade, rose 8 per cent in the March quarter.

PepsiCo said it expects 2023 organic revenue to rise 8 per cent, compared with its prior forecast of a 6-per-cent increase. It sees annual core earnings per share of US$7.27, compared with US$7.20 earlier.

Spotify Technology SA (SPOT-N) has crossed the half billion mark for monthly active users for the first time, helped by the music streaming company’s expansion into more markets, it said on Tuesday, sending its shares up 5.4 per cent.

The number of monthly active users rose to 515 million in the first quarter, beating Spotify’s guidance and analysts’ forecast of 500 million, according to IBES data from Refinitiv.

Premium subscribers, who account for most of its revenue, rose 15 per cent to 210 million, topping estimates of 206 million.

Its premium subscriber forecast of 217 million for the current quarter also beat expectations of 212 million. The company forecast monthly active users of 530 million.

Spotify last year laid out plans to get one billion users by 2030 and reach US$100-billion in annual revenue. It also promised high-margin returns from its costly expansion into podcasts and audiobooks.

“Spotify is not sort of one silver bullet, but it’s rather 100 or 1,000 things that we are doing that sort of compounds and adds to the story,” CEO Daniel Ek told Reuters.

However, the company’s quarterly revenue of 3.04 billion euros (US$3.35-billion) missed analyst estimates of 3.08 billion euros, and it posted a bigger loss than expected.

“There’s still a kind of a lot of macro choppiness in Q1 so that impacts us a little bit,” Mr. Ek said.

A lot of subscribers come on free trials, or part of a family plan, and Spotify doesn’t get revenue right away, which starts coming in a quarter later, he said.

A soft ad market due to ongoing economic uncertainty has led to lower prices, hitting Spotify’s margins.

Gross margin dipped to 25.2 per cent from 25.3 per cent in the year-earlier quarter.

Spotify’s current-quarter revenue forecast of 3.2 billion euros also missed expectations of 3.26 billion euros.

On the decline

Canadian National Railway Co. (CNR-T) issued a downbeat outlook for the economy, adding to a growing chorus of companies that are warning of deteriorating operations as rising interest rates weigh on activity.

”Our current volumes reflect that we are in a mild recession,” Tracy Robinson, CN’s chief executive officer said during a call with analysts on Tuesday.

”We are uncertain about how deep or how long it will go on, but what we are modelling is negative North American industrial production for the full year,” Ms. Robinson added.

CN Reaction from the Street: Tuesday's analyst upgrades and downgrades

The gloomy outlook detracted from the railway’s strong first quarter financial results, released after markets closed on Monday. CN said reported a profit of $1.82 a share, up 39 per cent from the first quarter of 2022 and well above analysts’ expectations for earnings of $1.72 a share. As well, revenue rose 16.3 per cent, year-over-year.

The railway also dazzled on a number of metrics: Trains ran faster during the quarter and fuel efficiency improved. Its operating ratio – or expenses as a percentage of revenues, where a smaller number is better – declined to 61.5 per cent.

Yet the share price fell almost 4 per cent in Toronto on Tuesday, suggesting that investors are putting little stock in past financial results amid evidence of a shifting economy.

- David Berman

McDonald’s Corp. (MCD-N) beat Wall Street expectations for quarterly global comparable sales and profit on Tuesday, as more customers visited in every market and from all income groups amid the threat of a recession.

Also helped by higher prices for burgers and fries, global comparable sales climbed 12.6 per cent, blasting past analysts’ estimates of an 8.5-per-cent rise, according to Refinitiv IBES data.

Sales also jumped by 12.6 per cent within each of McDonald’s geographical segments - including Europe, where inflation is more severe than the United States.

The Chicago-based company is gaining market share “across all income groups, which makes us feel good about kind of where we’re at from a value and a consistency standpoint,” Chief Executive Chris Kempczinski said during an earnings call.

Though customers are buying fewer items per order, McDonald’s performs well “in good times and in bad,” Mr. Kempczinski said. “That’s what gives us the optimism as we go through the rest of this year.”

The burger chain’s shares fell 0.6 per cent in choppy trading as the market was broadly lower. McDonald’s maintained its 2023 outlook as it kicked off quarterly earnings reports among publicly traded restaurants.

“Investors are struggling to balance the good news ... versus the reality that global economies could slow while inflation persists,” Northcoast Research analyst Jim Sanderson said.

Gaining share among all income groups “is emblematic of the strength that the brand is seeing broadly across the U.S. and globally,” UBS analyst Dennis Geiger said, adding that McDonald’s attracting more middle- and higher-income consumers also highlights the company’s moves to improve speed of service and food quality, among other enhancements.

While McDonald’s has raised menu prices roughly 10 per cent to shield its margins as costs rose, its meals have remained less expensive than its competitors’.

The average spending per McDonald’s trip was US$7.77 for the 12 months ended March 31, less than its closest burger rivals Burger King and Wendy’s and most other fast-food brands, according to data firm Numerator.

However, growth in McDonald’s delivery has slowed, Mr. Kempczinski said.

The company’s total revenue increased 4 per cent from the prior year to nearly US$5.9-billion in the three months ended March 31. That bested estimates of a 1.4-per-cent drop year-over-year to US$5.587-billion.

On an adjusted basis, McDonald’s earned US$2.63 per share, compared with estimates of US$2.33. The company’s total restaurant margins in the U.S. rose 14 per cent in the quarter.

General Motors Co. (GM-N) lifted its full-year profit and cash flow forecasts, citing stronger-than-expected demand and higher prices, but executives cautioned the price gains over 2022 won’t last as the year goes on.

After better-than-expected first quarter results, the No. 1 U.S. automaker said it expects full-year pre-tax profit in a range between US$11-billion and US$13-billion, up US$500-million from a prior forecast.

Consumers willing to pay a rich price for a new vehicle gave GM a significant boost in the latest quarter. Higher prices added nearly US$1,800 a vehicle to GM’s North American pre-tax profit, the company reported.

“As we lap last year’s price increases, we are planning and assuming we give some of that back and are net flat for the year,” Chief Financial Officer Paul Jacobson told analysts during a call Tuesday.

GM shares fell 4.1 per cent after the company’s call with analysts.

Wall Street sees Tesla’s recent price cuts as a threat to rival automakers’ margins. “We are going to work toward profitable growth” in electric vehicle sales, Chief Executive Mary Barra told analysts Tuesday.

Ms. Barra reaffirmed a goal of building 400,000 EVs in North America from 2022 through the first half of 2024.

GM’s latest numbers also underscored how China has gone from being a reliable profit engine to a problem.

Pre-tax income from GM’s China joint venture operations plunged by half to about $100 million in the quarter as unit sales fell by 23 per cent. GM once had a leading position in the world’s largest auto market.

Ms. Barra promised “aggressive measures on taking out structural costs” in its China operations to counter competition from Tesla Inc, BYD and other Chinese EV manufacturers.

China has 100 vehicle brands vying for sales and 50-per-cent capacity utilization, Ms. Barra said. “I don’t think that’s a steady state.”

Ms. Barra said GM can rebuild profitability in China over the next two years as it launches new electric vehicles.

GM’s first-quarter results beat the company’s internal forecasts, Jacobson said. Savings from a drive to cut US$2-billion from fixed costs by the end of 2024 “are flowing to the bottom line faster than we originally anticipated,” he said.

About 5,000 employees have accepted buyout packages to leave the company, GM said this month.

For the first quarter of 2023, GM reported adjusted pre-tax profit of US$3.8-billion, or US$2.21 a share, on revenue of US$40-billion, down from pre-tax profit of US$4-billion on revenue of US$36-billion a year ago.

3M Co. (MMM-N) turned lower in afternoon trading and lost 0.6 per cent after it said on Tuesday it would cut about 6,000 positions globally as the U.S. industrial conglomerate looks to focus on high-growth businesses, including automotive electrification and home improvement.

The move comes as an uncertain economy along with rising interest rates and stubbornly high inflation forces corporate America to get leaner in recent months.

3M, which makes electronic displays for smartphones and tablets, has been struggling with waning demand for consumer electronics as sticky inflation makes buyers cut back on discretionary spending.

The maker of ‘Scotch’ tape and ‘Post-it’ notes has been raising prices to offset a hit from surging commodity costs.

Along with this, recent cost-cut actions helped 3M beat profit and revenue estimates for the first quarter, sending its shares up.

“We announced actions that will reduce costs at the corporate center, further simplify and strengthen our supply chain structure, and streamline our go-to-market business models, which will improve margins and cash flow,” said 3M CEO Mike Roman.

The restructuring, which is expected to hit all functions, businesses, and geographies, is aimed at reducing layers of management and the size of the corporate center, the company said. Tuesday’s job cut is in addition to the reduction of 2,500 roles announced earlier this year.

The company had about 92,000 employees, as of Dec. 31, 2022, according to its annual filing.

3M anticipates annual pre-tax savings of US$700-million to US$900-million upon completion of the cost-cut actions.

The St. Paul, Minnesota-based company reported an adjusted profit of US$1.97 per share for the quarter ended March 31, above analysts’ expectations of US$1.58 per share, according to Refinitiv. Revenue of $8.03 billion also topped estimates of US$7.49-billion.

United Parcel Service Inc. (UPS-N) on Tuesday pegged annual revenue at the lower end of its prior forecast and warned of persistent pressure on parcel volumes, deepening the gloom for the inflation-hit shipping industry.

Most delivery firms have been left with a bloated delivery capacity after online sales that had peaked during the pandemic started to fizzle as high inflation dented discretionary spending.

“Deceleration in U.S. retail sales resulted in lower volume than we anticipated, and we faced ongoing demand weakness in Asia ... Given current macro conditions, we expect volumes to remain under pressure,” UPS CEO Carol Tomé said.

The commentary from the world’s largest parcel delivery firm dampened hopes of some respite for the shipping industry in the second half of the year.

Shares of UPS fell 10 per cent after it forecast full-year revenue of about US$97-billion, at the lower end of an earlier estimate of US$97-billion to US$99.4-billion. Analysts were expecting US$98.14-billion, according to Refinitiv data.

It also expects 2023 adjusted operating margin of about 12.8 per cent, compared with its prior forecast of 12.8 per cent to 13.6 per cent.

Still, Atlanta-based UPS has been doing a better job of managing costs than rival FedEx, despite having a unionized workforce. Fedex has been slashing billions of dollars in costs and combining its separate delivery businesses under one roof.

UPS in recent quarters has also benefited from a strong focus on moving high-margin parcels.

The company reported an adjusted profit of US$2.20 per share, compared with analysts’ average estimate of US$2.21.

“Q1 2023 revenues of $22.9 billion (6-per-cent year-over-year decline) for UPS demonstrates that the economy is slowing and the company is seeing volume risk in 2023,” Third Bridge analyst Anthony DeRuijter said.

The company’s revenue of US$22.93-billion fell short of estimates of US$23-billion.

Dow Inc. (DOW-N) was lower by 5.2 per cent on Tuesday after it forecast second-quarter revenue below Wall Street estimates as the chemicals giant navigates subdued demand from the consumer durable and construction businesses.

The company expects current-quarter revenue to be between US$11.75-billion and US$12.25-billion, compared with analysts’ average estimate of US$12.91-billion.

Global manufacturing has come under pressure as industries ranging from food packaging to electronics look to protect margins from higher costs and rising interest rates.

Net sales fell about 22 per cent to US$11.85-billion in the first quarter due to declines in all operating segments, Dow said, but beat analysts’ estimates of US$11.35-billion. Overall prices dropped 10 per cent.

The company performed well despite “challenging macroeconomic conditions” by leveraging advantaged feedstock positions, CEO Jim Fitterling said in a statement.

Average natgas prices dropped about 40 per cent during the quarter as a milder-than-usual winter in the U.S.

Dow said on Tuesday plans to save US$1-billion in 2023 were “progressing.” The company said in January it would cut about 2,000 jobs as it counters weaker demand and inflationary pressures.

On Tuesday, Dow also announced a partnership with industrial gas maker Linde Plc for clean hydrogen and nitrogen supply for a proposed net-zero carbon emissions ethylene and derivatives complex in Canada.

The Midland, Michigan-based company posted an operating income of 58 US cents per share, beating analysts’ estimates of 36 US cents.

First Republic Bank (FRC-N) faces an uphill challenge to regrow its business after losing more than half of its deposits, analysts said on Tuesday, as shares sank almost 50 per cent after the bank reported its first-quarter earnings.

The beleaguered lender reported a more than US$100-billion plunge in deposits in the quarter in the aftermath of the biggest crisis to hit the banking sector since 2008.

Wall Street analysts continue to see gray skies ahead for the bank, expecting challenges to extend through the year after two U.S. bank failures last month created a liquidity crunch at a slew of regional lenders.

Analysts at Wells Fargo said the reported deposit outflows were much worse than Wall Street estimates and at a “level that could prove very hard to come back from.”

The spotlight on the bank has also drawn in retail investors. First Republic was the most ordered stock on Fidelity’s platform on Monday, ending the day at a 12.2-per-cent gain, with a 64 per cent/36 per cent buy/sell split.

First Republic’s ticker is also among the most active on retail investor-focused on Tuesday morning.

However, about 36 per cent of the bank’s free float of shares were short, according to analytics firm Ortex

Deposit flight has been at the center of investor concerns as clients move capital towards money market funds that bring in higher returns or larger ‘too-big-to-fail’ institutions.

UBS (UBS-N) declined 4.7 per cent after saying Tuesday it had set aside more money to draw a line under its involvement in toxic U.S. mortgages, halving its first-quarter profit as the bank girds itself for the “hard” task of swallowing fallen rival Credit Suisse.

Sergio Ermotti, brought back as UBS chief executive to steer the takeover, said it aims to close the deal with fellow Zurich-based bank Credit Suisse by May but warned that it could take four years for a full integration.

“There is much to do and there will difficult decisions to be made in the coming months,” he said during a call with analysts.

Meanwhile, the Herculean task of absorbing Credit Suisse includes dealing with a backlash against the deal at home, where thousands of jobs cuts are feared.

Shares in UBS were down following news of the attempt by Switzerland’s biggest bank to make a clean sweep of problems dating back 15 years to the global financial crisis.

UBS said concerns about the banking sector globally persisted and customer activity “could remain subdued in the second quarter”, adding, however, that higher interest rates would bolster its lending income.

It reported a 52-per-cent slide in quarterly income, having made an additional US$665-million in provisions to cover litigation costs related to U.S. residential mortgage-backed securities that played a central role in the global financial crisis.

Net profit of US$1-billion was well below the US$1.7-billion consensus average from a UBS-conducted poll.

But the world’s largest wealth manager also reported strong inflows, totalling some US$42-billion.

Its flagship wealth management division received US$28-billion in net new money, a quarter of which came in the last ten days of March after the Credit Suisse rescue takeover deal.

UBS reported a slight drop in year-on-year profit before tax and revenue for the division, saying there had been an increase in deposit revenues stemming from higher interest rates but at the same time some clients had shifted to lower-margin products.

Oilfield firm Halliburton Co. (HAL-N) dipped 3.5 per cent after it reported a first quarter profit that topped Wall Street estimates as a tight services and equipment market have helped drive demand and improve its pricing.

Global oil futures are currently trading around US$82 a barrel, down about 20 per cent from a year ago but still higher than the price most companies need to drill profitably. Markets have been choppy in the past month, falling to around US$70 a barrel amid concerns of a banking crisis before rebounding on a surprise cut by OPEC+.

“Our customers are clearly motivated to produce more oil and gas and service capacity is tight,” CEO Jeff Miller said in a statement. Halliburton is the largest provider of U.S. hydraulic fracturing equipment.

Revenue in its North America business was up 44 per cent year-over-year to US$2.8-billion, while its international revenue increased by 23 per cent to US$2.9-billion over that period.

It reported operating margin of 17.2 per cent, an increase of 530 basis points year-over-year.

Houston-based Halliburton said net income attributable to the company stood at US$651-million, or 72 US cents per share, for the three months ended March 31, beating analysts’ forecast for earnings of 67 US cents per share, according to data from Refinitiv. That’s up from earnings of US$263-million, or 29 US cents per share, a year earlier.

Market leader Schlumberger (SLB-N) and rival Baker Hughes Co. (BKR-Q) also topped Wall Street estimates for first-quarter profit last week. The upbeat results come as the average international rig count, an indication of future production, for the quarter stood at 915, 11% higher than the previous year, according to Baker Hughes data.

With files from staff and wires

Follow David Leeder on Twitter: @daveleederOpens in a new window

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