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A look at North American equities heading in both directions

On the rise

Shares of Metro Inc. (MRU-T) rose 0.6 per cent on Wednesday after it said it earned $218.8-million in its latest quarter, up from $198.1-million in the same quarter last year, as its sales rose 6.6 per cent.

The grocery and drugstore retailer says the profit amounted to 93 cents per diluted share for the 12-week period ended March 11, up from 82 cents per diluted share a year earlier.

Sales in what was the company’s second quarter totalled $4.55-billion, up from $4.27-billion in the same quarter last year.

The increase in sales came as food same-store sales rose 5.8 per cent compared with a year earlier, while pharmacy same-store sales gained 7.3 per cent.

On an adjusted basis, Metro says it earned 96 cents per diluted share, up from 84 cents per diluted share a year earlier.

Analysts on average had expected an adjusted profit of 94 cents per share, according to financial markets data firm Refinitiv.

In a research note, Desjardins Securities’ analyst Chris Li said: “The outperformance came mainly from stronger-than-expected gross margin, which was stable compared with last year and vs our expectation for a 30bps decline. This was partly offset by higher-than-expected operating expenses. Sales growth was strong in both food and drug. Overall, there is no change to our view. We believe the solid results reflect continuing solid execution and were largely priced in. This quarter is likely the peak quarter for earnings growth as we expect growth to moderate as inflation normalizes in 2H. Management is seeing some moderation in inflation, although it is still elevated compared with pre-pandemic levels. Combined with an above-average valuation (approximately 17.2 times forward P/E vs 16 times), we see limited multiple upside, with share price appreciation largely tracking EPS growth in the high-single-digit percentage range.”

Fairfax Financial Holdings Ltd. (FFH-T) turned higher and finished up 2.2 per cent after announcing a deal to acquire an additional 46.32-per-cent interest in Gulf Insurance Group K.S.C.P. from Kuwait Projects Co. in a deal worth approximately $860-million.

Its interest in GIG will increase to 90.01 per cent from 43.69 per cent.

“We are excited to increase our ownership interest in GIG,” said Fairfax chair and CEO Prem Watsa in a statement. “GIG is among the largest and most diversified insurance groups in the Middle East and North Africa region, with operations in 13 different countries and a market-leading presence in each of Kuwait, Jordan, Bahrain and Egypt. Since our first investment in 2010, GIG has proven to be a great company.”

Morgan Stanley’s (MS-N) profit beat expectations as wealth management revenue climbed in the first quarter, offsetting slumps in investment banking and trading revenue.

The bank earned US$1.70 per share, beating analysts’ average estimate of US$1.62 per share, according to Refinitiv data. Its stock erased early losses and finished up 0.6 per cent.

The Wall Street powerhouse set aside US$234-million in the quarter to cover souring loans, rising from US$57-million a year ago, as it braced for a recession and weakness in the commercial real estate market. The provisions were linked to a handful of loans.

“We are not in a banking crisis, but we have had, and may still have, a crisis among some banks,” Morgan Stanley CEO James Gorman told analysts on a conference call after the results were announced. The turmoil caused by the collapse of two lenders in March was not “remotely comparable” to the 2008 mortgage crash, he said.

Morgan Stanley joined other U.S. banking behemoths, including JPMorgan Chase & Co (JPM-N), Bank of America Corp (BAC-N), Citigroup Inc (C-N) and Wells Fargo & Co (WFC-N), in reporting profits that beat earnings forecasts in the first quarter. The lenders raked more income thanks to higher interest rates and stayed resilient despite the industry tumult.

Morgan Stanley’s wealth management revenue jumped 11 per cent to US$6.6-billion versus a year earlier. The division brought in US$110-billion in net new assets, of which only about US$20-billion came from regional banks after the March turbulence, Chief Financial Officer Sharon Yeshaya told Reuters in an interview.

Mr. Gorman, known for a string of transformational deals, said Morgan Stanley will continue to make acquisitions in wealth and asset management, but said a transaction was not imminent.

The decline in investment banking activity dragged total revenue down nearly 2 per cent to US$14.5-billion in the quarter.

Investment banking revenue was better than expected, but still low, Oppenheimer analyst Chris Kotowski wrote in a note to clients.

“While the key investment banking and asset management fee lines are under pressure given the environment, a 16.9% return on tangible equity is a very respectable performance,” Mr. Kotowski wrote.

Shares of Western Alliance Bancorp (WAL-N) surged 24.2 per cent on Wednesday after the regional bank posted stronger-than-expected earnings and said its deposits had stabilized after the March banking crisis.

The Phoenix, Arizona bank was among several regional players punished by stock investors last month as consumers shifted their deposits into bigger institutions following the collapse of Silicon Valley Bank.

Western Alliance said late on Tuesday that total deposits fell 11 per cent to US$47.6-billion in the first quarter from the previous three months, but that deposits steadied late in the quarter and grew US$2-billion from March 31 to April 14.

Balance sheet repositioning, which included selling some assets and reclassifying loans, resulted in non-operating charges of US$110-million.

“WAL’s decisive balance sheet actions and resulting meaningful capital build are exactly what we wanted,” Keefe, Bruyette and Woods analyst Christopher McGratty wrote in a client note on Wednesday.

Wedbush raised its rating on Western Alliance to “outperform” from “neutral” and added the bank to its “Best ideas list,” among stocks including Apple and Microsoft .

U.S. oilfield firm Baker Hughes Co. (BKR-Q) was up 3.6 per cent after it beat first-quarter profit estimates on Wednesday, as stronger oil prices supported demand for its equipment and services.

Global oil futures are currently trading around US$83.12 a barrel, down about 22 per cent from a year ago but still well above a level where firms can drill profitably.

Markets have been choppy in the past month, with the price of a barrel falling to around $70 amid concerns of a banking crisis and economic jitters before rebounding on a surprise cut by OPEC+.

“While 2023 has already started off with some macro volatility, we remain optimistic on the outlook for energy services,” CEO Lorenzo Simonelli said in a statement.

He sees the current spending-cycle for oil and gas as “less sensitive to commodity price swings,” pointing to factors such as the development of liquefied natural gas projects.

The company is anticipating double-digit spending growth by upstream oil and gas companies this year, eyeing full-year revenue of between US$24-billion and US$26-billion, up from US$21.2-billion in 2022.

Revenue from Baker’s Oilfield Services & Equipment business rose 19 per cent year-over-year, while sales in its Industrial & Energy Technology business grew by 18 per cent.

Adjusted net income was US$289-million, or 28 US cents per share, for the three months ended March 31, topping Wall Street expectations of 26 US cents per share, according to Refinitiv data, but down from 38 cents in the prior quarter.

“Positive update as Q1 beats, Q2 sets up well vs. expectations, and order momentum continues,” wrote analysts for investment firm Tudor, Pickering, Holt & Co in a note.

Baker Hughes kicks off first-quarter earnings for the oilfield services industry. SLB (SLB-N), the largest firm in the sector, is expected to report quarterly results on Friday and Halliburton Co. (HAL-N) on Tuesday.

United Airlines Holdings Inc. (UAL-Q) soared 7.6 per cent as it forecast a profit for the second quarter and retained its earnings outlook for the full year on “strong” travel demand, particularly for international trips.

In a statement, CEO Scott Kirby said bookings for international travel are growing at twice the domestic rate.

The Chicago-based carrier’s earnings came days after rival Delta Air Lines (DAL-N) played down risks of a slowdown in travel spending, citing record bookings.

United said it expects an adjusted profit of US$3.50-$4 a share in the second quarter, with a 14-16-per-cent year-on-year jump in revenue. The earnings forecast compares with analysts’ estimates of US$3.65 a share, according to a Refinitiv survey.

The company also reiterated its forecast for a four-fold jump in profit this year.

United last month spooked investors with a profit warning, stoking worries about the industry’s pricing power. Those concerns were amplified last week when American Airlines Group Inc’s revised earnings forecast fell short of Wall Street estimates.

A manufacturing problem with Boeing Co’s 737 MAX jets has also cast a shadow on U.S. carriers’ plans to add more flights to capitalize on a busy summer travel season.

United did not comment on the potential impact of MAX’s delays in its earnings report. It reiterated its plans to increase capacity this year.

It is one of the most exposed carriers to Boeing’s delivery delays. The airline has yet to receive nearly three-fourths of its MAX jet order this year.

“The aggressive earnings forecast has been premised on additions of new aircraft to the company’s fleet,” said Peter McNally, an analyst at research firm Third Bridge. “This is entirely dependent on Boeing 737s.”

United’s adjusted loss for the quarter through January came in at 63 US cents a share, lower than the loss of 73 US cents that analysts had expected, according to Refinitiv data.

Abbott Laboratories (ABT-N) jumped 7.8 per cent in response to reporting a quarterly profit above expectations on Wednesday, driven by sales of its diabetes care devices and an improved demand for other devices due to a resumption in non-urgent medical procedures.

Improvement in staffing levels at hospitals across the United States, along with the easing of pandemic restrictions in various countries were expected to aid in the recovery of procedure volumes, and in turn, help Abbott and other medical device makers generate strong sales this quarter.

Sales of medical devices - Abbott’s largest segment - grew 8.5 per cent to US$3.90-billion, of which glucose monitoring device Freestyle Libre reported a revenue of US$1.2-billion. Analysts had estimated the segment’s sales to be US$3.77-billion.

The sales of medical devices mirror a trend seen by rival Johnson & Johnson (JNJ-N), which on Tuesday posted better-than-expected sales for the segment.

Excluding one-off items, the company reported a profit of US$1.03 per share for the first quarter ended March 31, higher than the average of analysts’ estimates of 99 US cents per share, according to Refinitiv IBES data.

The healthcare giant retained its adjusted profit forecast for this year at US$4.30-$4.50 per share, as it expects growth of its non-COVID-testing-related revenue to offset a decline in its testing kit sales.

Abbott cut its COVID-testing-related sales forecast to US$1.5-billion from US$2-billion.

Property and casualty insurer Travelers Companies Inc. (TRV-N) reported a fall in quarterly profit, hurt by severe wind and hail storms in parts of the United States in March.

Core income of the New York-based company, often seen as a bellwether for the insurance sector as it typically reports before industry peers, fell 6 per cent to US$970-million, or US$4.11 per share, in the first quarter ended March 31.

The storms pushed up the insurer’s catastrophe losses net of reinsurance to US$535-million from US$160-million a year earlier.

The company, however, authorized an additional US$5-billion of share buybacks, pushing its shares higher by 6.2 per cent.

Global insured losses were anticipated to reach at least $15 billion in the quarter, insurance broker Aon said in a report.

Apart from the devastating earthquake in Turkey, insured losses in excess of US$3-billion were also expected from the outbreak of storm activity in the United States on March 1-3, Aon said.

The company reported a combined ratio of 95.4 per cent, compared with 91.3 per cent a year earlier. A ratio below 100 per cent means the insurer earned more in premiums than it paid out in claims.

Travelers’ underlying combined ratio increased 3.9 points, primarily driven by losses related to the disruption in the banking sector in bond and specialty insurance, and a higher expense ratio.

Two U.S. lenders crumbled after a flight of deposits spiraled out of control last month, sparking a global crisis that shook investor confidence in the banking industry and rattled markets.

The turbulence has since subsided after intervention by regulators, but analysts have warned the banking industry will suffer long-term repercussions.

On the decline

Suncor Energy Inc. (SU-T) was lower by 2 per cent after it reported the release of 5,900 cubic meters (208,400 cubic feet) of water with more than twice the approved level of suspended solids from a sedimentation pond at its Fort Hills oil sands project in northern Alberta.

The release on April 16 was reported to the Alberta Energy Regulator (AER) because the total suspended solids, in this case mud, in the water exceeded the approved limits, Suncor said.

The water came from a sedimentation pond, which collects and discharges surface run-off from the oil sands site, and not a tailings pond, Suncor spokesperson Erin Rees said in an email.

Oil sands companies are under scrutiny for how they manage water on their sites, after Imperial Oil said in February that tailings ponds at its Kearl site had been seeping for months and another spill released 5,300 cubic meters of process water in late January. Tailings are a toxic mixture of water and waste products from bitumen mining.

“This is not a tailings pond, but a water run-off pond that collects and discharges run off into Fort Creek ... in line with regulatory approvals,” Rees said.

The water discharges into Fort Creek roughly 800 meters upstream of the Athabasca River, the main waterway running through the oil sands region.

The AER said Suncor is working to understand why the release into the Athabasca exceeded the approved regulatory limit for total suspended solids, and has taken water quality samples for analysis.

Teck Resources Ltd. (TECK-B-T) closed down 0.4 per cent after Glencore intensified its battle by dangling the prospect of a higher bid as long as shareholders reject the Canadian company’s proposal to split the company in two next week.

In an open letter pitched Wednesday morning to Teck’s Class B shareholders, who own almost all the equity but few of the votes, Glencore CEO Gary Nagle said that, should the vote go against Teck, his company would open negotiations directly with shareholders if Teck continues to resist its offer.

“Glencore is willing to consider making improvements to its proposal,” Mr. Nagle said. “Glencore has never stated that its proposal is ‘best and final’ and that is it not willing to make changes and improvements to its proposal.”

Mr. Nagle’s new pitch came exactly one week ahead of the Teck vote, which requires two-thirds approval by both the Class A and Class B shareholders to succeed. If Teck wins the vote Teck would place is copper and zinc assets in a metals-focused company and spin off its metallurgical coal business, which would pay most of its cash flow to the metals company for a number of years.

Opinion: How the hedge funds could feast on any Teck deal – and possibly influence its outcome

- Eric Reguly

Netflix Inc. (NFLX-Q) slid 3.2 per cent after it beat Wall Street earnings estimates for the first quarter but offered a lighter-than-expected forecast, demonstrating the challenges the mature streaming service faces in its pursuit of growth.

The company said it shifted a wider launch of a plan to crack down on unsanctioned password sharing into the second quarter to make improvements, delaying some financial benefits, but said it was pleased with results so far.

As the streaming video pioneer faces signs of market saturation, it is looking to new ways to make money, such as the password crackdown and a new ad-supported service.

Revenue and earnings for the first quarter came in roughly in line with the average analyst estimates from Refinitiv. Earnings per share hit US$2.88 with revenue of US$8.162-billion.

“We are growing and we are profitable,” Co-Chief Executive Ted Sarandos said in the company’s post-earnings video interview. “We have a clear path to accelerate growth in both revenue and profit, and we’re executing it.”

Netflix serves as a bellwether for the streaming industry, in which growth has slowed as competition has intensified.

From January through March, Netflix added 1.75 million streaming subscribers, missing analyst estimates of 2.06 million additions.

Analyst Paolo Pescatore of PP Foresight described the first- quarter results as mixed.

“Netflix is a mature business reinforcing less reliance on subscriber growth. However, this metric still moves the needle for key stakeholders,” he said.

The company began rolling out its solution for password-sharing - offering a “paid sharing” option - in 12 countries in February but is delaying expansion.

“We believe it will result in a better outcome for our members and our business,” the company said. Netflix also said it was “on track to meet our full year 2023 financial objectives.”

The clampdown on password sharing will begin in the United States during the current quarter, Netflix said.

For April through June, the company forecast US$8.242-billion in revenue and US$2.86 in diluted EPS. Wall Street had been projecting US$8.476-billion for revenue and US$3.05 for diluted EPS.

Netflix also is moving into live streaming. The company angered fans of dating show Love is Blind on Sunday when a reunion special that was meant to be shown live was unavailable. The mishap was due to a “bug” that has been fixed, Co-CEO Greg Peters said on Tuesday.

Tesla Inc. (TSLA-Q) cut prices for some of its Model Y and Model 3 vehicles in the U.S., the sixth time the company has made such a move this year as it looks to spur demand even at the cost of its industry-leading profit margins.

The cuts came ahead of the electric-vehicle maker’s first-quarter earnings due on Wednesday and sent the stock down 1.4 per cent. Shares have risen just a little under 50 per cent this year, after posting their biggest annual drop in 2022.

Tesla’s website showed late on Tuesday that it cut prices of its Model Y ‘long range’ and ‘performance’ vehicles by US$3000 each and of its Model 3 ‘rear-wheel drive’ by US$2,000 to US$39,990.

The company cut U.S. prices of its base Model 3 by 11 per cent so far this year and that of its base Model Y by 20 per cent – moves that come as the United States, its largest market, prepares to introduce tougher standards that will limit EV tax credits.

It also recently lowered prices in Europe, Israel and Singapore, as well as in Japan, Australia and South Korea, expanding a discount drive it started in China in January.

Still, Tesla reported a sequential rise of just 4 per cent in its first-quarter deliveries, much less than the 17.8-per-cent sequential climb in the prior quarter.

That has prompted several analysts to predict more price cuts as competition rises at home from rivals such as Ford Motor Co (F-N) and Tesla plays catch-up with BYD in China, its second-largest market.

For the first quarter, Wall Street expects the company’s auto gross margin to hit a more than three-year low of 23.2%, according to 17 analysts polled by Visible Alpha.

Its revenue is expected to rise 24.2 per cent year-on-year to US$23.29-billion, but analysts’ average profit estimate has fallen by about 2.4 per cent in the last three months, according to Refinitiv data.

Fox Corp. (FOXA-Q) decreased 0.4 per cent the day after settling a defamation lawsuit by Dominion Voting Systems for US$787.5-million, averting a high-profile trial putting one of the world’s top media companies in the crosshairs over its coverage of false vote-rigging claims in the 2020 U.S. election.

The settlement was announced by Fox, Dominion and the judge in the case at the 11th hour, with a 12-person jury selected on Tuesday morning and the case poised to kick off with opening statements on Tuesday afternoon. Dominion had sought US$1.6-billion in damages in the lawsuit filed in 2021, with Delaware Superior Court Judge Eric Davis presiding over the case in Wilmington.

Dominion disclosed the settlement figure and its CEO John Poulos said Fox had admitted to telling lies about his company. Dominion attorney Justin Nelson said the settlement “represents vindication and accountability” and that “lies have consequences.” Dominion lawyers declined to answer questions about whether Fox News would apologize publicly or make reforms.

“We acknowledge the court’s rulings finding certain claims about Dominion to be false. This settlement reflects Fox’s continued commitment to the highest journalistic standards. We are hopeful that our decision to resolve this dispute with Dominion amicably, instead of the acrimony of a divisive trial, allows the country to move forward from these issues,” Fox said in a statement.

With files from staff and wires

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

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