To The Moon

2023Q1 Earnings Review Part VIII: Communication Services, Consumer Cyclical, Financial, Healthcare & Technology

• The Walt Disney Company reported another dismal quarter, losing money on streaming. Bob Iger needs to start making changes at the company.
• Home Depot had a mixed quarter as the company had a record 2022, and it's a way to play the structural demand in housing.
• Nvidia showed investors that they are number 1 in the AI space, and the stock is now getting re-rated as investors factor in this new technology frontier.
• Royal Bank of Canada had a cautious quarter as management raised the bank’s credit loss provision due to the tightening monetary cycle.
• Medtronic reported a strong quarter, but investors sold off the stock on the news of a dilutive acquisition in the insulin space.

The Walt Disney Company (DIS)

On May 10, 2023, The Walt Disney Company (NYSE: DIS) announced its financial results for the second quarter of fiscal year 2023. The company’s revenue for the quarter was $21.82 billion (in-line with Wall Street consensus), up 13% from $19.34 billion in the same quarter of the previous year. The company’s adjusted EPS for the quarter was $0.93 (missed Wall Street estimates by $0.01), down 14% from $1.08 in the same quarter of the previous year. The headline numbers from Disney were disappointing because we expected a higher EPS number from cost cuts on solid revenue. On that basis, the fund estimated Disney would earn $1.05/share on revenue of $21.9 billion.

The company reported overall revenue growth of 13%, primarily driven by the Parks & Experience segment. The company’s parks, experiences, and products segment reported a revenue of $6.17 billion, up 18% in the same quarter of the previous year. The segment’s operating income was $1.65 billion, up 25% in the same quarter of the previous year. The growth was driven by higher attendance and spending at the company’s domestic theme parks and resorts. The company’s direct-to-consumer segment reported a revenue of $5.51 billion, up 12% from $4.91 billion in the same quarter of the previous year. The segment’s operating income loss was $659 million, down 22% in the same quarter of the previous year. Price increases and higher operating income at Disney+ and ESPN+ drove the improved results.

The company’s Disney+ service had 157.8 million paid subscribers as of April 1, 2023, down 2% from 161.8 million as of December 31, 2022. The decline was mainly due to an 8% decrease in subscribers at Disney+ Hotstar in India. The service also lost 600,000 subscribers in the U.S. The company’s media and entertainment distribution segment reported a revenue of $7.44 billion, down 7% in the same quarter of the previous year. The segment’s operating income was $1.86 billion, down 15% from $2.19 billion in the same quarter of the previous year. The decline was due to lower advertising revenue and programming costs at the company’s linear TV networks. Free cash flow improved to $1.99 billion, up from $686 million a year ago, but the company’s cash balance decreased from $13.3 billion to $10.5 billion. The company still has some substantial debt from the Fox Assets acquisition.

The company’s CEO, Bob Iger, expressed his satisfaction with its performance and highlighted the success of its streaming services and theme parks. He also said he was optimistic about the future of the company and its growth opportunities. However, the stock did not react well to the news plunging 9% afterward. We continue to hold a significant position in the stock. We believe that Bob Iger will steady the ship, but our patience is beginning to wear thin. We would not be surprised if an activist investor like Nelson Peltz is back to force changes if Iger does not roll up his sleeves and get to work. We would only add to our position if the stock sells off to its 52-week low of $84.07/share (a drop of 8.5% from the closing price on June 9, 2023).

Home Depot Inc. (HD)

Home Depot (HD) reported its first quarter 2023 earnings results on May 16, 2023. The company’s sales declined 4.2% year-over-year to $37.3 billion (missed Wall Street estimates), missing analysts’ expectations of $38.35 billion. The company’s comparable sales dropped 4.5%, and comparable sales in the U.S. dropped 4.6%. The company’s net earnings were $3.9 billion, or $3.82 per share (beat Wall Street estimates by $0.01), compared to $4.2 billion, or $4.09 per share, in the same period of fiscal 2022. Home Depot’s headline earnings numbers fell short of our fund estimates of $3.85/share on earnings on revenue of $38.2 billion. We expected some strength due to the structural demand in the housing sector.

The company attributed the lower-than-expected sales to lumber deflation and unfavorable weather, especially in California. The company also observed more broad-based pressure across the business compared to the fourth quarter of fiscal 2022. Gross profit margins for Home Depot contracted by 80 basis points to 33.7%, while operating margins contracted by 30 basis points to 14.9%. Home Depot did report free cash flow numbers as they generated $4.71 billion, up from $3.1 billion from the same period last year. The company repurchased in The company updated its fiscal 2023 guidance to reflect a range of potential outcomes, given the negative impact of lumber deflation and weather, further softening of demand, and continued uncertainty regarding consumer demand. Based on that premise, management expects an annual revenue decline of 2.5% for fiscal year 2023.

Investors did not seem too pleased with the earnings news shared by Home Deport as the stock sold off by over 4%. We took that as an opportunity to add to our stock position because the company trades at a valuation of 18 times earnings while the S&P 500 is at 25 times earnings as of the market close on June 12th, 2023.

Nvidia Corporation (NVDA)

NVIDIA Corporation is a leading microchip manufacturer that specializes in graphics and gaming. NVDA has been one of the best-performing stocks 2023, driven by strong demand for artificial intelligence products and services. The company reported revenue of $7.19 billion (beat Wall Street estimates by $670 million), a decrease of 13% YoY but an increase of 19% QoQ. While earnings per share came in at $1.09, adjusted, a decline of 20% YoY but a growth of 24% QoQ. The Data Center segment reported record revenue of $4.28 billion, a rise of 14% YoY and fueled by demand for AI chips. This is still one of the company's growth engines, and the company has a substantial lead in the AI chip race in 2023.

The Gaming segment is still in a down cycle as it reported revenue of $2.24 billion, a fall of 38% YoY due to a slower macroeconomic environment and GPU ramp-up. The Automotive segment reported revenue of $292 million, a surge of 114% YoY but still a small segment. There is still a large backlog of autos ordered in 2021–2022, which are only getting delivered now. Gross margins came in at 64.6% GAAP and 66.8% non-GAAP, down 0.9 pts and 0.3 pts YoY, respectively. Operating income: $2.14 billion GAAP and $3.05 billion non-GAAP, up 15% and down 23% YoY, respectively. Nvidia’s research and development expenses are up 47% as the company pushes further into artificial intelligence. Net income for the quarter ended at $2.04 billion GAAP and $2.71 billion non-GAAP, up 26% and down 21% YoY, respectively.

The company’s outlook was the highlight of the earnings report as management guided for revenue to be $11 billion, which eclipsed analyst expectations of $6 billion. The company is showing that it is in the driving seat of artificial intelligence. The stock jumped 17% on the news as investors acknowledged the company has secular growth tailwinds well into 2024. We expect competition from Advanced Micro Devices will start to creep up to steal Nvidia’s market share. We think we are yet to see the benefits of artificial intelligence, and Nvidia and Advanced Micro Devices will benefit. The stock is getting re-rated by investors as they factor in the growth of AI into Nvidia’s earnings into the stock price. We have taken the opportunity to trim our stock position and lock in some profits.

Royal Bank of Canada (RY)

Royal Bank of Canada (RBC) reported its second quarter 2023 results on May 25, 2023. The bank’s net income was $3.6 billion, down 14% from last year's quarter. The bank’s diluted earnings per share (EPS) was $2.58, down 13% from last year's quarter. The bank’s provisions for credit losses (PCL) were $600 million, with a PCL on loans ratio of 30 basis points (bps), up five bps from the previous quarter. The increase in the provision for credit losses was a $942 million hit to the bank’s profitability. The bank raised its credit loss provision based on the tightening monetary cycle causing economic uncertainty.

All bank segments reported pretax earnings declines from Wealth Management to Capital Markets. The bank’s return on equity (ROE) was 14.4%, down from 18.4% in the same quarter last year. The bank’s standard equity tier 1 (CET1) ratio was 13.7%, well above the regulatory requirements (a good sign of a healthy bank). The bank’s liquidity coverage ratio (LCR) was 135%, up from 130% in the previous quarter. The bank declared a quarterly dividend of $1.35 per share, up 2% from the previous quarter. The earnings report reflected the banking industry shaken up by the banking crisis in March. We liked the dividend increase announcement from the bank, and if the shares sell off to $85/share, we would like to add to our position.

Medtronic Plc (MDT)

Medtronic plc (NYSE: MDT) is a leader in global medical technology, services, and solutions. The company announced its financial results for the fourth quarter and fiscal year 2023 on May 25, 2023. The company reported revenue of $8.5 billion(beating Wall Street estimates by $250 million), which increased 5.6% as reported and organic, ahead of expectations. The organic revenue growth was impressive as the demand for the company’s products increased since hospitals are now doing non-covid health procedures. Looking at earnings, Medtronic reported Q4 GAAP diluted EPS of $0.88 decreased 20%; non-GAAP diluted EPS of $1.57 (beat Wall Street estimates by $0.02) increased 3% in the quarter, ahead of expectations.

The company’s revenue growth acceleration was broad-based, driven by procedure volume recovery, supply improvements, and innovative product introductions. Strength in international markets in Q4, with high-single-digit organic growth in non-U.S. developed markets and low-double-digit organic growth in emerging markets. The strong U.S. dollar resulted in Medtronic facing a $250 million hit on its bottom line. However, Medtronic received a $300 million payment related to an IP agreement with a competition offsetting the strong currency loss. Management forecasted a strong FY2024 as management expects to have organic revenue growth of 4% to 4.5%.

The company announced a strategic acquisition of EoFlow, a South Korean insulin pump maker, to help compete better with Abbott Labs and Dexcom. Management announced a dividend increase but did not stop the stock sell-off after the earnings news. We did not add to our stock position; Medtronic is a hold right now as we see how the company spin-off goes.

Disclosure: Cresco Investments is long The Walt Disney Company (DIS), Home Depot Inc. (HD), Royal Bank of Canada (RY), and Medtronic Plc (MDT).

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).