2023 Q2 Earnings Review Part I: Consumer Defensive & Financial Sectors

David Shoko
2023-09-13

(Finder. com-Prashant Mehra)
  • PepsiCo delivered yet another outstanding quarter as they beat on the top and bottom lines.
  • Conagra Brands missed our expectations, and the report nudged us to sell the whole position.
  • JP Morgan Chase reported one of the best banking quarters as they increased their foothold in regional areas.
  • Bank of America had an impressive quarter based on its large deposit base and good global services.
  • Visa’s quarter shows the global economic recovery from COVID-19 restrictions as a new CFO was announced for the company.

PepsiCo (PEP): The consumer beverage company reported headline numbers that beat the top and bottom lines. PepsiCo earned $2.09/share (beat Wall Street estimates by $0.13) on a revenue base of $22.32 billion (beat estimates by $590 million). We estimated that the company would report some subdued numbers as we anticipated they would earn $2.03/share on revenue of $21.8 billion. We underestimated the company’s overseas (Latin America and Europe surprised our expectations) market with COVID-19 restrictions being lifted. The company’s net revenue growth of 10.4% was driven by its snacks business (Frito Lay), and some higher pricing power was also factored in. The company had expanded margins from Gross Profit to Net Profit. We were most impressed by the company’s operational margin expansion.

Management also executed well on its free cash flow as it went up from $604 million to $628 million. The company slowed down its share repurchasing program as it looked to pay down its long-term debt. The company raised its guidance on its revenue outlook. Overall, the company reported a solid quarter, and we have been adding to our position in PepsiCo because we like the company’s resilience even in a challenging economic environment. The stock is one of our core holdings, given the economic downturn that is fast approaching.

Conagra Foods (CAG): The consumer food company reported mixed headline numbers as they beat on earnings ($0.62 versus expectations of $0.59) and missed on revenue ($2.97 billion versus expectations of $3 billion). The consumer goods company had a dismal quarter, as we expected them to earn $0.73/share on a revenue basis of $3.05 billion. The miss on the top and bottom lines prompted us to exit the position. The net revenue growth for Conagra was 2%, which was primarily driven by pricing because the volume numbers were lower compared to the same period a year ago. The company took a bond impairment charge of $345 million as the company reported some significant margin compression (down 2.9% in operating profit).

Other contributing factors that caused the margin compression were higher payroll and benefits costs and unfavorable commodity positions for their ingredients. Conagra’s free cash flow declined from $733 million to $636.4 million. The outlook from management was not impressive as they forecasted sluggish sales growth. Management is looking to raise its operating margins to the high mid-teens, which signals that cost cuts will occur at the company. Overall, this was a poor quarter from Conagra and justifies why we sold all our company shares.

J.P. Morgan Chase & Company (JPM): The large money center bank reported solid numbers despite the regional banking crisis in the first quarter 2023. JPM reported earnings of $4.37/share (beat WallStreet estimates by $0.61) on a revenue base of 41.3 billion (beat WallStreet estimates by $2.45 billion). Jamie Dimon and his management team exceeded our estimates, pegged at $4.09/share on a revenue basis of $39.5 billion. The bank benefited from the regional banking crisis as they could scoop up First Republic Bank for dirt cheap, giving them access to a wealthy clientele into their flywheel. Management even echoed the same sentiments, indicating the transaction was a “bargain” for the bank. The company reported revenue growth of 25.6% as net interest income was up 44% (all thanks to higher interest rates) at $21.9 billion.

The Wealth Management segment showed strong results from the First Republic Bank acquisition. However, the Corporate & Commercial Banking segments showed weakness, and management raised its loss provisions by 163% from a year ago. The higher loss provision is excellent risk management since they are taking the loan book from First Republic Bank. The investment banking division was impressive because we expected the bank to report $1.4 billion in revenue, but they reported $1.6 billion. JPM returned $4.7 billion to shareholders through share buybacks and dividends.

Overall, JPM reported good numbers and showed they are the best bank in the United States (I would go a step further and say the best bank in the world) and will seamlessly integrate First Republic Bank. Despite the impressive number, we sold our entire position in the high $150s as we rotated out of banks into other sectors. If the stock breaks the $140/share, we want to add it again into the portfolio.

Bank of America (BAC): Bank of America reported a record that showed that the bank is in great shape to sustain this tightening credit cycle. The money center bank reported earnings of $0.88/share (beat Wall Street estimates by $0.05) on revenue of $25.2 billion (exceeding analyst expectations by 260 million). We had higher expectations on the earnings side, where we estimated that the bank would earn $0.90/share, and the revenue reported exceeded our estimate by $100 million. Bank of America said revenue growth of 11% as net interest revenue was up 14% (thanks to interest rate hikes). In addition to that, the Global Banking division was solid. At the same time, Investment Banking was better than expected but came below our estimations (we anticipated the bank would generate $1.25 billion in revenue, but they reported $1.21 billion).

In anticipation of the impending recession, Bank of America raised its provision for credit losses by $602 million to $1.1 billion. This is another good indication that management is making proper risk measures with their capital. Regarding distributions to shareholders, Bank of America returned $2.3 billion during the quarter. This was a solid quarter for Bank of America; they still delivered substantial numbers. We will continue to hold the stock because it is undervalued because of its large deposit base, plus the stock yields 3%+, which fits our portfolio criteria.

Visa Inc. (V): The payments processing company reported better than expected results but missed our expectations for the company because we hold it to a high standard. Visa reported earnings of $2.16/share (beat by Wall Street analyst estimates by $0.04) from a revenue base of $8.1 billion (beat Wall Street estimates by $40 million). The headline numbers came in short of our expectations of earnings of $2.19/share on revenue of $8.2 billion. The company reported 12% revenue growth due to strong international payment volumes as consumers traveled during the summer. The company announced a new leadership change in the CFO position, Chris Suh from Microsoft, who has extensive cloud and artificial intelligence knowledge.

The new CFO will help integrate the company’s acquisition of Pismo, giving them entry into Brazil with their payment infrastructure. We think this move by Visa will be significantly accretive to the company’s growth. Regarding operating margins, Visa reported expanded margins from 56.9% to 61.8%. The company generated $10.3 billion in free cash flow, enabling the company to buy back $3 billion worth of shares in the quarter. The company’s shares had a muted reaction as it slightly decreased as investors wanted more from the quarter. Visa is one of our core positions in the financial sector for our portfolio, and we would like to add more in a market sell-off.

Disclosure: Cresco Investments is long PepsiCo (PEP), Bank of America (BAC) and Visa Inc. (V).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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