Al Root
This earnings season has provided some nasty surprises for investors, resulting in some major stock drops.
But not every drop is the same, and differentiating between them can help investors in the long run. Here are five big drops from this week's earnings, along with some explanation about what happened.
The Overreaction
Honeywell International stock dropped 5.2% after the company reported better-than-expected second-quarter earnings on Thursday. The problem was a guidance cut. Honeywell expects 2024 earnings per share of about $10.15, down from $10.30.
Guidance cuts are never good, but it was a 1.5% reduction, smaller than the stock move. The company said margins are likely to be lower due to product mix and the impact of acquisitions. Nothing catastrophic.
Barron's recently wrote positively about Honeywell stock believing that faster sales growth would boost earnings per share in years to come. We still feel that way. The company actually raised sales guidance while trimming the EPS numbers.
The Nasty Surprise
Then there is Ford Motor. It reported a second-quarter operating profit of $2.8 billion, about $900 million lower than Wall Street projected. All of the miss was essentially related to increased warranty spending. Ford says it's had some quality problems with 2021 model-year vehicles and older.
Shares dropped 18.4% on Thursday. It was the worst one-day drop since November 2008. That reaction shows investors and analysts had no clue about what was coming. The lowest operating profit estimate aggregated by FactSet was $2.9 billion. Ford's result was a shock, shaking investor confidence.
Barron's also recently wrote positively about Ford, believing quality was improving. The quarter shook our confidence, too.
Not Living Up To The Hype
Tesla stock dropped 12.3% after reporting second-quarter numbers on Tuesday evening. On the surface, the quarter looked weak. Tesla reported adjusted earnings per share of 52 cents while Wall Street was looking for 61 cents, according to FactSet.
A miss is never great, but there were a couple of mitigating factors. There was a larger-than-expected restructuring charge for employee layoffs and better-than-expected regulatory credit sales. (Tesla sells credits because it makes more than its fair share of zero-emission vehicles.) Netting those two items together, the quarter came very close to what analysts had predicted.
The quarter was OK, but coming into earnings shares were up roughly 80% from April lows. In the spring investors caught self-driving fever.
Tesla is making progress using AI to train its autonomous driving systems, but there are no truly self-driving cars on the road. Yet, the move from April lows added some $300 billion in market value. It would have taken something truly special from Tesla to live up to that hype.
Profit Taking
General Motors reported better-than-expected second-quarter numbers Tuesday morning. The company raised guidance and the quarter drew mostly positive comments from Wall Street analysts. Still, shares dropped more than 6% in response.
Nothing was really wrong. Car pricing held up better than expected and the profit in the second half of 2024 is shaping up exactly as Wall Street modeled.
Coming into the week of trading, however, GM stock was up roughly 80% from November lows set close to when the new UAW labor contract was ratified.
Higher labor costs haven't impacted margins as much as feared. Operating profit is expected to be up in 2024 compared with 2023. Still, with shares up so much, investors took some money off the table.
Alphabet stock also dropped 5% on Wednesday after reporting better-than-expected earnings on Tuesday evening. The issue, ostensibly, was higher than expected capital spending related to AI. That isn't a bad thing, though. Slowing spending on AI would be a much bigger problem for Alphabet, Nvidia, and other big tech stocks. AI is supposed to be the driver of profits for years to come.
Coming into the week, the Magnificent Seven stocks were up about 36% year to date on average. Alphabet stock was up 27%. AI spending was an excuse for investors to take some profits.
What To Do
Any stock move is an opportunity for investors to evaluate positions.
In the case of Tesla, if an investor is all-in on self-driving technology there is, frankly, nothing to worry about from Wednesday's drop.
If an investor believes Americans will buy more new cars in coming years or that AI applications will continue to proliferate, then Alphabet and GM shares should be just fine.
The situation at Ford is a little more serious. Management will have to explain how quality will improve -- and then deliver.
It can be hard to react appropriately when losses mount as stocks swing wildly. At least understanding why shares move might help investors avoid potential portfolio mistakes.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 26, 2024 00:30 ET (04:30 GMT)
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