A survey of North American equities heading in both directions
On the rise
Shares of Canadian National Railway Co. (CNR-T) rose 1.1 per cent on Wednesday despite reporting a drastic drop in profits for the three months ended Sept. 30, citing falling consumer demand, fallout from the B.C. port workers strike and a raft of forest fires and floods.
Overstocked inventories and dockworkers’ 13-day job action in July dented its cargo volumes and revenue, as did ravenous wildfires and floods at both ends of the country.
Net income in CN’s third quarter fell 24 per cent from a year earlier, the company said.
“It was tough operating out there in quarter three,” Ed Harris, CN’s chief operating officer, told investors on a conference call Tuesday.
“We started out by dealing with a two-week port strike on the West Coast and then faced constant disruptions from forest fires and flooding until September,” said Mr. Harris, who’s set to step down from that role on Nov. 15.
“We continue to see a hangover effect,” he said.
The country’s largest railway saw revenues in its biggest category — container shipping — drop by more than a third, due in part to consumers’ smaller post-pandemic appetite for pricey products.
“I believe we’ve seen the bottom on volumes,” CEO Tracy Robinson said, referring to container shipments. Nonetheless, she added that consumer activity “continues to be murky” amid an uncertain economic environment.
“What remains to be seen is exactly the strength of the economy returning.”
Ms. Robinson sought to reassure analysts despite the sharp decline, noting that domestic container shipments — as opposed to those bound for the U.S. — enjoyed sustained demand.
“We think this is a temporary issue,” the CEO said, acknowledging that any ramp-up in international container traffic from B.C. docks may be gradual.
“We’ve lost a little confidence in the West Coast ports,” she said.
All five of CN’s bulk categories, from coal to forest products, saw a revenue decrease — except grain, which shot up 16 per cent on the back of a bumper wheat crop. Auto volumes also rose amid persistent demand following the supply chain backlog prompted by the COVID-19 pandemic.
On Tuesday, the railroad operator reported net income in its third quarter fell to $1.11-billion from $1.46-billion in the same period a year earlier.
Revenues decreased 12 per cent to $3.99 billion from $4.51-billion the year before, the Montreal-based company said.
On an adjusted basis, diluted earnings were down 21 per cent at $1.69 per share from $2.13 per share last year, slightly below analyst expectations of $1.72 per share, according to financial data firm Refinitiv.
In a research note, Citi analyst Christian Wetherbee said: “Canadian National reported 3Q23 EPS of $1.69, which beat our estimate by 14 cents, but missed consensus by 1 cents. Revenues were better than expected, as yields were better than we modeled, while expense were also elevated. Nevertheless, operating profit beat by $122-million, which contributed 14 cents of the beat, yielding core operating EPS in line with the headline. Operating ratio was 62.0 per cent, which was a 590 basis points deterioration year-over-year but 130 bps better than our target. CN reiterated its full year EPS target of flat to slightly down year-over-year, which is better than our 2023 estimate even flowing through the 3Q beat and implies 4Q EPS ahead of consensus’ $1.94 estimate. Overall, the quarter missed slightly while guidance was maintained. We believe expectations were low, but with volume slower to ramp in 4Q results may weigh on shares.”
Microsoft (MSFT-Q) gained 3.1 per cent after it beat Wall Street estimates for fiscal first-quarter results in all segments, with its cloud computing and PC businesses growing as customers anticipate using its artificial-intelligence offerings.
Its forecast also was mostly ahead of analyst targets.
Microsoft, which has heavily backed and collaborated with OpenAI, has yet to roll out most of the products based on its work with the ChatGPT creator. But enthusiasm among corporate technology buyers for features like the ability to summarize heaps of email into a few bullet points or speedily complete lines of computer code helped the company’s revenue rise 13 per cent to US$56.5-billion in the quarter ended Sept. 30. That compares with analysts’ consensus estimate of US$54.52-billion, according to LSEG data.
“The results indicated that artificial intelligence products are stimulating sales and already contributing to top and bottom-line growth,” said Jesse Cohen, senior analyst at Investing.com.
In the reported quarter, revenue from Microsoft’s Intelligent Cloud unit, which houses its Azure cloud-computing platform where much of the AI work will take place, grew to US$24.3-billion, compared with analysts’ estimate of US$23.49-billion, LSEG data showed. Azure revenue rose 29 per cent, higher than a 26.2-per-cent growth estimate from market research firm Visible Alpha.
Microsoft said fiscal first-quarter profit was US$2.99 per share, above analyst estimates of US$2.65 per share, according to LSEG data.
Investors are also tracking how much Microsoft spends on the massive data centers to power AI software. Microsoft said on Tuesday that fiscal first-quarter capital expenditures were US$11.2-billion, up from US$10.7-billion in the previous quarter, which itself was the biggest spend since at least fiscal 2016. Microsoft executives say that figure is likely to grow each quarter this fiscal year, putting the company on track to spend more than $44 billion.
For its fiscal second quarter, Microsoft forecast an Azure growth rate of 26-2 per cent in constant currency, above analyst estimates of 25.1-per-cent according to Visible Alpha. The company forecast revenue of US$25.1-billion to US$25.4-billion for the segment that contains Azure, ahead of estimates of US$24.94-billion, according to LSEG data.
Calling it a “significant beat,” Citi analyst Tyler Radke said: “Software earnings season is off to a good start. There was not a lot to pick at with Microsoft delivering an impressive 4-per-cent total revenue beat (largest in 2+ years) with upside across all three key segments, acceleration in Azure revenue growth, with strong cost discipline driving bottom line outperformance and accelerating EPS growth.”
Visa’s (V-N) fourth-quarter profit beat estimates as consumers undeterred by inflation and a cost-of-living crisis continued to swipe cards to travel and dine out, sending it shares higher by almost 1 per cent in Wednesday trading.
Spending by affluent consumers and a post-pandemic rebound in travel has so far provided a bulwark for U.S. card giants against volumes taking a hit due to the prevailing economic uncertainty.
Visa said payment volumes rose per cent in the quarter, while cross-border volumes excluding transactions within Europe, which drives revenue from international transactions, increased 18 per cent.
Even as higher prices for everything from groceries to electricity have begun to squeeze budgets, particularly in lower income households, consumer spending has remained remarkably steady in the face of a looming economic slowdown.
“Throughout the year, we have seen resilient consumer spending, ongoing recovery of cross-border travel spend versus 2019,” CEO Ryan McInerney said in a statement.
The company’s net revenue rose 11 per cent, to US$8.6-billion, in the fourth quarter.
Last week, rival American Express (AXP-N) also posted quarterly profit that beat expectations, helped by resilient spending from its wealthy customers.
On an adjusted basis, Visa, the world’s largest payments processor, reported a profit of US$2.33 per share in the three months ended Sept. 30. Analysts on average had expected US$2.24 per share, according to LSEG data.
For the full fiscal year, it reported an adjusted profit of US$8.77 per share, beating Wall Street expectations of US$8.68 per share, according to LSEG data.
Hilton Worldwide Holdings (HLT-N) beat Wall Street estimates for third-quarter revenue and lifted its annual forecast on Wednesday, as record lodging prices and higher occupancy levels boosted results.
Hotel and resort operators are benefiting from the global rebound in travel as consumers continue to plan vacations despite inflation and the higher cost of travel compared to pre-pandemic.
Shares were higher in Wednesday trading.
Hilton, which owns brands including Waldorf Astoria Hotels & Resorts, said its third-quarter revenue per available room, an important metric in the hospitality industry, rose 6.8 per cent from a year earlier.
“We continued to see strong results during the third quarter, exceeding our expectations for system-wide RevPAR growth, with growth across all customer segments,” said Christopher Nassetta, chief executive officer of Hilton, in a statement.
Hilton’s revenue per available room in the third quarter saw significant recovery in Asia, up 65.5 per cent compared to the year earlier. Occupancy levels rose 18.9 per cent in the same period.
The company’s third-quarter revenue rose to US$2.67-billion, exceeding the average Wall Street estimate of US$2.64-billion, according to LSEG data.
Adjusted earnings of US$1.67 per share met average analysts’ estimate.
Hilton now expects annual adjusted profit between US$6.04 and US$6.09 per share, compared with its prior estimate of US$5.93 to US$6.06 per share.
It expects full-year revenue per room to increase between 12.0 per cent and 12.5 per cent compared to 2022.
Net unit growth – which reflects room additions - remained at approximately 5 per cent for the full year.
On the decline
Google-parent Alphabet’s (GOOGL-Q) cloud business crawled to its slowest in at least 11 quarters, sending the company’s stock down 9.7 per cent, even as sales at rival Microsoft’s (MSFT-Q) cloud unit boomed.
The drop in Google’s share price despite beating Wall Street estimates for profit and sales, shows how much investors want the company to deliver gains in artificial intelligence, and show the cloud business remains competitive against a more powerful Azure from Microsoft and Amazon’s (AMZN-Q) AWS.
Fears of a slowing global economy have prompted companies to curb spending on cloud-related services, including expensive AI tools, which has slowed revenue growth at Google’s cloud unit to 22.5 per cent in the third quarter, from 28 per cent in the prior three-month period.
Google Cloud third-quarter revenue rose 22.5 per cent to US$8.41-billion, the slowest growth since at least the first quarter of 2021. The cloud unit reported a operating income of US$266-million, compared with an operating loss of US$440-million a year ago. Wall Street expected cloud computing revenue of US$8.62-billion.
“Despite Alphabet topping quarterly earnings and revenue estimates, investors were disappointed by the relatively weak performance at its Google cloud platform, which is at risk of falling further behind Azure and AWS,” Investing.com senior analyst Jesse Cohen.
While advertising spending has been strong in some sectors such as retail and travel, industry executives and analysts have noted a pullback in budgets in some areas, affecting Alphabet’s major source of revenue.
Alphabet reported a net profit of US$19.69-billion for the July-Sept. period, compared with US$13.91-billion a year earlier.
Revenue for the quarter ended Sept. 30 stood at US$76.69-billion, compared with estimates of US$75.97-billion, according to LSEG data.
In a research note titled Missing on the 3 C’s: Cloud, Capex & Costs, RBC Capital Markets analyst Brad Erickson said: “GOOGL’s Q3 report missed expectations. Search continues proving resilient in the face of a choppy macro but a cloud miss, rising capex intensity attributable to GenAI and a lack of margin flow-through are leaving investors with relatively less upside to play for looking into ‘24 versus the other mega-caps in our coverage. Ongoing execution on search amidst while layering on GenAI along with YouTube acceleration is a compelling thesis into next year and keeps us at Outperform but we believe this could take another few quarters before investor fears prove out as overdone.”
First Quantum Minerals Ltd. (FM-T) turned lower and closed down 3 per cent following the release better-than-expected third-quarter financial results after the bell on Tuesday, benefitting from higher copper sales and lower tax expenses.
The Vancouver-based miner reported adjusted earnings before interest, taxes, depreciation and amortization of $969-million, exceeding the Street’s expectation of $793-million. Adjusted earnings per share of 52 cents also blew past the consensus forecast (26 cents).
However, First Quantum reduced its full-year copper guidance by 5.6 per cent (to 745-775kt from 770-840kt), due largely to a 16.7-per-cent reduction at its Sentinel open-pit mine in Zambia. Its gold production expectation was reduced to 230-250koz (from 265-295koz).
CEO Tristan Pascall says production continued to improve during the third quarter at each of the company’s three main copper operations.
Earlier in the year, First Quantum’s production took a hit amid a dispute with the Panama government over its Cobre Panama copper mine.
On Monday, the company announced that the bill enacting its mining concession contract for the mine became law, after reaching a deal with the government in March.
Pointing to a “very strong cost performance,” Citi analyst Alexander Hacking said: “Copper production guidance is lowered based on continued challenges at Sentinel (tough mining, hard rock), but this was largely anticipated, in our view, while net debt remained stable at $5.6-billion, still above the levels of a year ago. We expect the stock to outperform.”
Wheaton Precious Metals Corp. (WPM-T) shares finished narrowly lower after announcing the US$115-million acquisition of a new silver stream on the Mineral Park Mine in Arizona with Waterton Copper Corp.
The Vancouver-based company will purchase 100 per cent of the payable silver from the project for the life of the mine. Attributable production is forecast to average 0.69 million ounces per year for the first five years of production and 0.74 million ounces over life of the mine, which is estimated to be over 20 years.
Construction on the project is expected to be completed by the end of the first quarter of 2025.
Canada’s MDA Ltd. (MDA-T) was down 0.6 per cent after it said on Wednesday it had selected Elon Musk’s SpaceX to be the launch service provider for CHORUS, the space technology firm’s next-generation satellite constellation for Earth observation.
MDA’s satellite constellation, or a group of artificial satellites working together as a system, is set to be launched on SpaceX’s Falcon 9 rocket in the fourth quarter of 2025 from Florida.
“The production of CHORUS is well underway and we are looking forward to once again working with SpaceX to launch our next generation Earth observation capability,” said Mike Greenley, CEO of MDA.
MDA was SpaceX’s first private customer for a commercial mission using the Falcon 9 rocket about a decade ago, in which the spacecraft carried Canadian commercial and scientific satellites.
Texas Instruments Inc. (TXN-Q) on Tuesday forecast fourth-quarter revenue and profit below estimates, as the analog chipmaker was forced to slash some production after demand across its key industrial market worsened.
Shares of the Dallas, Texas-based company declined 3.5 per cent in Wednesday trading.
Sales from the industrial market – Texas Instruments’ biggest by revenue share – was down in the mid-teens percentage in the third quarter, with the weakness pervading all regions except Japan, Dave Pahl, head of investor relations at TI, told analysts.
“As China came out of COVID, I think most of us would have expected there to be a more significant rebound, which just hasn’t materialized,” he said.
The company forecast current-quarter revenue between US$3.93-billion and US$4.27-billion, compared with analysts’ average estimates of US$4.49-billion, according to LSEG data.
TI forecast profit per share between US$1.35 and US$1.57, below estimates of US$1.76 per share as it had to lower its factory loadings in the third quarter to reduce inventory and protect its gross margin.
The forecast paints a picture that demand will deteriorate further and that the weakness will likely persist for at least the next couple of quarters, Edward Jones analyst Logan Purk said.
Revenue at all other segments except automotive was also down in the three months ended September. Automotive sales rose 20% in that period.
While most analysts raised concerns over the broader weakness in the automotive end-market and flagged the impact from the United Auto Workers strike, TI executives said they do not see any change in the demand trends from that sector.
Revenue fell 14 per cent to US$4.53-billion, compared with estimates of US$4.58-billion, while earnings per share of $1.85 beat estimates.
Boeing Co. (BA-N) cut its 737 delivery forecast for this year citing quality issues at supplier Spirit AeroSystems (SPR-N), a temporary setback for the planemaker as it looks to recover from its own set of crises.
Despite a third-quarter net loss of US$1.6-billion, Boeing stuck to its goal of generating US$3-billion to US$5-billion in free cash flow this year. Shares were down 2.5 per cent in Wednesday trade.
The company was aiming to deliver 400 to 450 737 jets in 2023 but was forced to temper that goal to 375 to 400 jets after two separate quality issues at Spirit, which makes fuselages for the cash-cow narrowbody jets.
Boeing plans to meet a delivery target of at least 70 widebody 787 Dreamliners in 2023 and is transitioning from a production rate of four to five jets per month.
The company also intends to keep its 737 production ramp-up plan intact.
Meanwhile, the company’s ailing defence business continues to struggle with cost overruns on fixed price contracts.
It reported another quarter of negative margins due to combined losses of US$797-million on its next-generation Air Force One and an unspecified satellite program.
Earlier this month, Boeing said it had expanded the scope of its inspections of a production defect arising from misdrilled holes that affect its bestselling 737 MAX 8 aircraft.
“I have heard those outside our company wondering if we’ve lost a step. I view it as quite the opposite,” said Boeing CEO Dave Calhoun in a letter to employees.
“Thanks to the culture we’re building, we have identified non-conformances from the past that we now have the rigor to find and fix once and for all.”
The company delivered 70 737 aircraft in the third quarter, down 20 per cent. Planemakers get the bulk of the payment when they hand over jets, so delivery numbers are closely watched.
Boeing “is hanging on by its fingernails” to its free cash flow target, but investors will wonder whether ongoing problems could bleed into cash flow goals for 2024 and beyond, said Rob Stallard of Vertical Research Partners.
For its third quarter through September, Boeing reported a wider-than-expected cash burn of US$310-million compared with cash generation of US$2.91-billion a year ago. Analysts had projected a US$272-million cash burn for the quarter, according to LSEG data.
The company reported a wider than expected loss of US$3.26 per share, compared with average analysts’ expectation of US$2.96 per share. The company reported US$18.1-billion in revenue, slightly beating consensus estimates of US$18.0-billion.
Photo messaging app Snap Inc. (SNAP-N) gave back early gains and fell lower by 5.6 per cent in the wake of reporting a surprise rise in quarterly revenue and forecast an upbeat current quarter as its efforts to bolster ad-targeting tools with artificial intelligence showed signs of paying off.
Revenue for the third quarter ended September rose 5 per cent to US$1.19-billion, beating analysts’ expectations of US$1.11-billion, according to LSEG data.
While the company has returned to growth, concerns on whether it can go back to double-digit growth remains, Third Bridge analyst Scott Kessler said.
For the fourth quarter, the Santa Monica, California-based company expects revenue to be between US$1.32-billion and US$1.38-billion. Analysts were expecting revenue of US$1.33-billion.
Snap, however, said it saw a risk to its sales in the fourth quarter as a war in the Middle East could tamp down spending from a large number of brand-oriented advertising campaigns.
The social media company’s subscription service, Snapchat+, which gives subscribers access to exclusive and pre-release features and costs US$3.99 a month, hit more than 5 million members in the third quarter.
“I think what you’re seeing is the work starting to show up in the output, and the fundamental progress we’re making with the ad platform, and that’s showing up in the ARPU (average revenue per user), which is great news for the business,” CEO Evan Spiegel told analysts.
Daily active users on Snapchat were 406 million, beating Wall Street expectations of 405.7 million.
“Risks remain in place for next year, as Snap will still need to do much better than this to regain the lost ground,” said Thomas Monteiro, senior analyst at Investing.com.
Snap’s net loss widened to US$368-million in the quarter from US$360-million a year earlier.
With files from staff and wires