- Halliburton reported a mixed quarter as revenue came in short of expectations as we exited the position.
- Johnson & Johnson reported an outstanding quarter as management raised guidance as they completed the Kenvue spinoff.
- RTX Corporation reported strong headline numbers dampened by the news that the company will have to inspect commercial airplane engines for quality control.
- Alphabet reported a better-than-feared quarter, highlighting the strength of the Search Business as the company ramps up its AI spend.
- Thermo Fisher Scientific had a dismal quarter in which they lowered guidance as they pivoted from the COVID-19 high demand.
Halliburton Company (HAL): The oil services company reported $0.77/share (beat Wall Street estimates by $0.02) on revenue of $5.8 billion (missed Wall Street expectations by $60 million). We anticipated that the company would have higher expenses, but would beat on revenue due to increased demand for oil services. Based on these assumptions we estimated that the company would earn $0.73/share on revenue of $5.94 billion. The revenue came in lighter than expected, and this might be a sign that the oil demand is subdued given the stuttering of China’s reopening of the economy due to the pandemic. Despite the revenue miss, Halliburton reported 14% year-over-year revenue growth thanks to the Completion & Production segment.
The Completion & Production segment had 19.4% revenue growth thanks to North America and the Gulf of Mexico activity. The Drilling and Evaluation segment was led by demand coming from Saudi Arabia as they continue to be the biggest factor in OPEC’s oil production. Although Saudi Arabia was a huge factor in Halliburton’s business, they have been scaling back on production to maintain the high oil price which may contribute to the revenue miss. The company reported an operating margin of 17.4% up 3.29% from a year ago because of an impairment charge of 344 million to exit Eastern Europe due to the war. Halliburton generated $798 million of free cash flow, using $248 million to buy back shares.
Overall, Halliburton reported a mixed quarter, and we took the opportunity of the stock sell-off to exit our position to lock in our profits. We redirected those funds into other market sectors during our quarterly rebalancing.
Johnson & Johnson (JNJ): The healthcare giant reported earnings, revenue beats, and a raised guidance for the year. Johnson & Johnson earned $2.80/share (beat Wall Street estimate by $0.18) on a revenue basis of $25.5 billion (beat Wall Street estimates by $860 million). We expected that Johnson & Johnson would have higher expenditures from the legal issues the company is having while having sluggish revenue. On that basis, we estimated Johnson & Johnson would earn $2.56/share from revenue of $24.5 billion. The healthcare giant exceeded our expectations by far as they reported 6.3% revenue all thanks to solid growth from the Medtech division. The revenue growth number would have been higher because of the stronger U.S. dollar.
Johnson & Johnson wants to grow its Pharmaceutical and Medtech divisions as R&D expenses grew 3.4% as management completed its Kenvue spinoff. The healthcare giant eliminated its consumer division in an offering to generate $13.2 billion for the company. Johnson & Johnson generated $5.4 billion in free cash flow as it completed its share buyback program. Management raised the company's guidance on revenue from the $97.9 - $98.9 billion range to the $99.3-$100.3 billion range. The company reported an outstanding earnings report, and the stock reacted well to the print. We would like to add more to our JNJ position as a defensive position to the economic downturn predicted in early 2024.
RTX Corporation (RTX): The company formerly Raytheon Corporation reported earnings and revenue beats dampened by the engine quality control inspections. RTX earned $1.29/share (beat estimates by $0.11) from a revenue base of $18.3 billion ($615 million ahead of Wall Street estimates). The earnings headline numbers exceeded our expectations because we thought the aerospace & defense contractor would have supply chain & labor shortage problems that would hamper quarterly numbers. We estimated RTX would earn $1.21/share on revenue of $17.8 billion. RTX’s revenue boost came from its aerospace segments while the defense spending by governments around is helping the company win long-term contracts.
Collins Aerospace & Pratt and Whitney segments grew double-digit revenue thanks to commercial aerospace demand and healthy operating margins. RTX’s Missile and defense segment had revenue growth of 12% due to higher volumes from air power and defense programs. The company’s Intelligence segment reported sluggish growth of 2% in the midst of cybersecurity being a hot topic in 2023. Management might have to do some M&A to bolster its Intelligence segment or sell the division entirely. RTX’s overall operating margin deteriorated from 8.3% to 8% a sign of the company's struggles. RTX’s free cash flow declined from $807 million to $193 million, an early sign of management setting aside funds for the engine inspections.
Overall, the headline numbers were good, but under the hood, RTX is struggling and will need to make some cost cuts to get back on track. The stock did not react well to the news of an engine inspection that will cost the company $3 billion approximately on its Pratt & Whitney segment. The stock has suffered constant downgrades from analysts and target price cuts. We will continue to hold stock and will be looking to add more if the stock breaches $70/share (a 7.3% downside from the closing price of RTX on September 14, 2023).
Alphabet Inc. (GOOGL): The technology giant beat on revenue and earnings as management continues to remain steadfast in showing that they are not behind in the AI race. Alphabet earned $1.44/share (beat Wall Street estimates by $0.10) on revenue of $74.6 billion (beat Wall Street estimates by $1.84 billion). The headlines were impressive because there was anticipation that Google’s Search business would report weak numbers given the rise of ChatGPT. This factor was baked into our estimate for Alphabet to earn $1.39/share from a revenue basis of $74.2 billion. Contrary to what we estimated, Google’s advertising business generated $58.1 billion, head and shoulders above our estimate of $55.7 billion.
Google Cloud seems to be growing greatly as that segment reported a 28% revenue growth with $8.03 billion (beating our estimate of $7.73 billion). YouTube is now on a $30 billion revenue run rate, but growth was a bit subdued at 4% as we see evidence of advertising customers pulling back and revising their digital spending. Alphabet’s operating margins improved by 140 basis points to 29.3% as management implemented some job cuts. The Others Bets segment of the company where the company’s innovation projects are housed reported a loss of $800 million. Management has been spending significantly on AI as they spent $1.2 billion during the quarter, five times more than the prior year. Alphabet’s balance sheet remains a fortress with a cash pile of $118.3 billion, and management has the right to buy back stock.
Overall, this was a solid quarter for Alphabet, showing that the Search Business is still intact. There is some slight weakness with YouTube, and it seems like advertising is conscious of how Google needs to clean up the platform a little. The stock reacted well to the news, shooting up close to 6% and the company remains our core holding in the portfolio.
Thermo Fisher Scientific Inc (TMO): The diagnostics and life sciences company had a dismal quarter as they look to pivot after the pandemic. Thermo Fisher earned $5.54/share (missed Wall Street estimates by $0.28) from revenue of $10.7 billion (missed Wall Street estimates by $310 million). The headline numbers were a miss for our fund estimates of earnings of $5.54/share on revenue of $11.1 billion because we thought the company would get increased demand from biotechnology companies. Thermo Fisher reported a revenue decline of 3% as management noted a challenging economic environment and weakness from China.
Operating margins contracted from 18.2% to 14.8%, indicating how tough of a quarter the company had. Free cash flow declined significantly from $2.6 billion to $1.5 billion, and a significant amount was spent on an acquisition. Management highlighted the company’s acquisition of CorEvitas for nearly a billion dollars. This acquisition will further advance Thermo Fisher’s capabilities in pharmaceuticals and biotechnology. Management lowered guidance as management indicated a difficult fiscal year, and they will need to execute some cost-cutting measures when they integrate the CorEvitas acquisition. The stock sold off on the news down close to 4%, and we are currently looking to add more shares to our position.
Disclosure: Cresco Investments is long Johnson & Johnson (JNJ), RTX Corporation (RTX), Alphabet (GOOGL), and Thermo Fisher Scientific (TMO).
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.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and consult with their financial advisor(s).
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