2022 Q2 Earnings Review Part III: Microsoft Corp, Visa, Meta Platforms, Ford Motor Company &…

2022 Q2 Earnings Review Part III: Microsoft Corp, Visa, Meta Platforms, Ford Motor Company & Brunswick Corporation

• Microsoft struggled in the second quarter as it faced macroeconomic headwinds, a slowing PC market, and a strong U.S. dollar.
• Visa reported a strong quarter primarily driven by the whole opening of economies around the world.
• Meta’s quarter was a read-through to a slowing digital advertising market and 2022 will be primarily an investment year for the company.
• Ford had a surprisingly outstanding quarter as the company pivots into the EV market.
• Brunswick Corporation reported a top and bottom-line beat as management continues to integrate its Navico acquisition.

Part III of the 2022 Q2 earnings had a mixed overall theme as the technology company struggled while cyclical reopening stocks like Ford, Visa, and Brunswick reported strong quarters. Margin contraction was another theme that was evident in the reports as companies grapple with inflationary pressures.

Microsoft Corporation (MSFT): The technology giant missed on the top and bottom line as it reported earnings of $2.23/share (missed WallStreet consensus by $0.07) on revenue of $51.87 billion (missed WallStreet consensus by $490 million). In comparison to our estimates, we expected Microsoft to report earnings of $2.20/share on revenue of $52.38 billion. We thought the earnings would be lower because of higher costs and currency headwinds from the strong U.S. dollar.

Looking at the revenue in detail, Microsoft had revenue growth of 12%, and if it was not for the strong U.S. dollar it would have been 16%. The Cloud segment remains the main revenue driver up 20% (the segment revenue came in ahead of our fund estimate of $19.42 billion). The Enterprise segment posted 13% revenue growth indicating that enterprise spending is still intact and LinkedIn continues to grow well posting revenue growth of 26%. Personal computing was a drag on the overall revenue as the segment reported 2% segment revenue growth. Within that segment, Windows Operating Systems (Windows OEM) had a 2% decline.

Looking at the gross margins they came in at 68.32% compared to our estimate of 67.8%. However, there was a contraction from the prior year’s margin of 69.68%. Net margins contracted significantly because of a $595 million foreign currency exchange charge plus an additional $100 million charge related to COVID shutdowns in China. There was a $126 million asset impairment charge related to Russia vs Ukraine war. If we back out these charges margins would come in at 33.9% which is still a contracted number from 35.7%. Inflationary pressure was another headwind that Microsoft had to face and contributed to the contraction of margins. The free cash flow was solid coming in at $17.8 billion up from $16.3 billion. Overall net cash increased by $1.4 billion. Microsoft ended the quarter with $104.8 billion which is enough to buy Activision Blizzard.

Overall, this was a mixed quarter for Microsoft the stock will be sold off but we think it will be an opportunity to add our position. Since the stock has dropped below $260/share, we have been buying the stock and adding to our core position.

Visa (V): The payments provider reported an impressive quarter as the company beat on earnings and revenue. Visa reported earnings of $1.98/share (beat Wallstreet estimates of $0.23) and revenue of $7.3 billion ($230 million ahead of Wallstreet estimates). In comparison to our fund estimates, we expected Visa to perform well because of the world reopening from COVID-19 shutdowns but we thought the conflict in Eastern Europe and macroeconomic headwinds would subdue earnings. Based on these assumptions we estimated the company would earn $1.85/share on revenue of $7.4 billion. The revenue number was a slight disappointment but that is just a minor thing because the quarter was solid and it is one of the reasons why Visa is a core position in our portfolio.

Visa reported 19% year-over revenue growth, the international transaction revenue segment was the main growth driver with 51% growth. This is evidence of the reopening global economy from COVID-19 restrictions. Payment volume came in line with our expectations of $3.55 trillion representing 8% growth. Operating margins contracted from 66.2% to 57% due to higher personnel and general & admin. expenses. Net margins were higher coming in at 46.9% compared to 42% in the same period last year. This is because of a lower tax provision from $1.81 billion to $418 million. The free cash flow numbers came in higher at $12.3 billion compared to $10.8 billion. However, the net cash decreased by $803 million as the company used up more cash as it repurchased its shares. The company bought back $9.5 billion worth of shares up from $5.7 billion a year ago.

Overall, this was a solid quarter for Visa and we continue to buy the stock on any weaknesses. We think management is executing well and the company has some good tailwinds going for it over the next two quarters.

Meta Platforms (META): The company formerly called Facebook Inc. reported a top and bottom-line miss as the company dubbed 2022 to be an investment year as the company looks to pivot to Web 3.0 which involves the Metaverse. Meta reported earnings of $2.46/share (missed WallStreet estimates by $0.08) and revenue of $28.82 billion (a $130 million miss compared to WallStreet estimates). In comparison to our estimates, Microsoft's earnings came in a bit light of expectations of earnings of $2.50/share on revenue of $28.92 billion. The company posted its first-ever revenue declining quarter as revenue declined by 1%. The cutback of spending in the digital advertising space is a result of some of the macroeconomic headwinds ranging from the war in Europe to inflation.

Costs were up 32% overall, as R&D spending was up 42% from the same period a year ago as the company spends money on the next frontier of the internet (aka The Metaverse). We thought management would rein in some of the unnecessary expenses in the company however that was not the case which was a slight disappointment. Operating margins contracted significantly from 43% to 29% as the spending ramped up. Looking at user metrics, Daily Active Users (DAUs) came in line with our fund estimates of 1.97 billion and the Monthly Active Users (MAUs) came in at 2.93 billion (ahead of our fund estimate of 2.91 billion). The average revenue per user (ARPU) declined 3% to $9.82 but we thought this would be worse because of the iOS software update which would hamper tracking and targeting. We estimated ARPU would come in at $9.35.

Since it is an investment quarter free cash flow has declined significantly from $8.61 billion to $4.63 billion. The company is still in spending mode as capital expenditures were up by 63%. The Q3 outlook was weaker than what we expected, a sign that management will be reining in some expenses came from the lowered total expense guidance for FY2022 from the $87-$92 billion range to the $85–88 billion range. This was a kitchen sink quarter from Meta the company is doing some internal restructuring within its management team since Sheryl Sandberg is leaving the company. The stock sold off 8% after earnings were released and we took that as an opportunity to build up our position in the stock. We still think the company will pull off the pivot because this same thing happened when Mark Zuckerberg pivoted from web to mobile. Buying the stock below $180/share is a bargain because it is set up to easily beat comparisons in 2023.

Ford Motor Company (F): The auto manufacturing company reported earnings of $0.68/share ($0.24 ahead of WallStreet consensus) and revenue of $37.9 billion ($2.73 billion ahead of WallStreet estimates). The company reported ahead of our fund estimates of $0.40/share and $37.13 billion. We thought supply chain constraints would be worse and commodity costs would eat into margins. Revenue growth was 57% showing that there is strong demand and evidence that the supply chain problems are getting better as the company delivers more cars. Ford was able to increase its overall market share from 4.9% to 5.3%, and the North American segment (the company’s largest profit center) market share was up from 2.5% to 12.9%.

Operating margins improved from -0.08% to 7.1% as the one-time charges from exits out of unprofitable facilities in Brazil, Europe, and India in the prior year skewed margins. The free cash flow declined by $1.21 billion compared to the increase of $2.37 billion from the same period a year ago. The company is continuing to invest in its electric vehicle build-out as they transition from combustion engines. The guidance for the rest of FY2022 stayed intact and the company raised its dividend by 50% to $0.15/share. Overall, this was a surprisingly great quarter for Ford and we like the company’s position as they ramp up their electric vehicle production. If the stock drops below $15/share we are buyers of the stock because the company is going to be ready to compete with Tesla in the next few years.

Brunswick Corporation (BC): The boat maker beat both on the top and bottom lines as it reported earnings of $2.82/share ($0.12 ahead of WallStreet estimates) and revenue of $1.84 billion ($20 million ahead of WallStreet consensus). Brunswick’s earnings came in ahead of estimates of $2.66/share on revenue of $1.8 billion. We thought the supply chain constraints would eat into earnings but it seems like the company’s acquisition of Navico is helping to shore up earnings. Brunswick reported revenue growth of 18% all driven by the Boat Revenue segment which posted 27% revenue growth been though the company had supply chain constraints. The other revenue segments reported good double-digit revenue growth driven by demand and integration of the Navico acquisition.

Operating margins contracted from 16.1% to 15.2% while the net profit margin contracted as well from 11.5% to 10.7%. R&D expenses were up 24% and selling and general & admin. expenses were up 19%. Free cash flow was a bit disappointing as the company reported -$49.6 million down from $231.1 million. Capital expenditure was up by $86.2 million and the cash balance ended the quarter at $615.6 million up from $600.7 million. Looking at the financial outlook for FY2022, management gave a positive outlook and raised earnings & revenue guidance. This is a good sign that the global economy is still in good shape despite the macroeconomic headwinds.

It was a well-executed quarter from Brunswick. The stock deserves to be higher, we have been adding to our position if the stock drops below $70/share.

Disclosure: Cresco Investments is long Microsoft (MSFT), Meta Platforms (META), Visa Inc. (V), Ford Motor Company (F), and Brunswick Corporation (BC).

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/or consult with their financial advisor(s).