Podcast Summary
Strong Q4 earnings for Walmart with growth in US sales, ecommerce, and global advertising: Walmart reported stronger-than-expected earnings with a 4% increase in US sales, a 23% rise in ecommerce sales, a 33% growth in global advertising, and a $2.3 billion acquisition of VIZIO for new customer engagement opportunities
Walmart reported stronger-than-expected Q4 earnings, driven by a 4% increase in US comparable sales, a 23% rise in ecommerce sales, and a 33% growth in its global advertising business. The retail giant also announced its acquisition of VIZIO for $2.3 billion, which is expected to enable new customer engagement opportunities in television and entertainment. Additionally, there's been an increase in the use of weight loss drugs, which has led to decreased spending on less healthy food categories, contributing to a 6-9% decrease in monthly grocery spend for those households. This trend could potentially impact Walmart's sales in certain product categories. The CEO, Doug McMillan, also mentioned that the slope of deflationary pressures on food and consumables prices softened during the quarter.
Companies' Earnings Surprises and Economic Indicators: Some companies exceeded earnings expectations and raised their guidance, while others underperformed. The broader market saw slight declines, but rates decreased following China's rate cut. The Conference Board's leading economic indicators fell unexpectedly, raising concerns about a potential recession.
While some companies like Medtronic beat earnings expectations and raised their guidance for the rest of the fiscal year, others like Home Depot underperformed despite topping revenue estimates. Home Depot saw a decrease in comparable sales, customer transactions, and sales per retail square foot. Medtronic's strong performance was attributed to the pace of data center AI spending and strong product momentum in various segments. The broader market saw stocks slightly lower to start the week, with the major averages down less than half a percent. Rates also decreased following China's cut in its 5-year lending rate. However, the Conference Board's measure of leading economic indicators fell more than expected, raising concerns about a potential recession, despite it not materializing for the past 23 months. This long-lasting warning has led some to consider the phrase "23 skidoo," which was once used to describe a sudden departure or end, as applicable to this economic indicator.
Economic warning signs and potential recession: Analysts and financial institutions are warning of a potential recession due to rising inflation and declining retail sales, manufacturing, and production. Some predict a soft landing, while others call for a rate cut in June. The 'Magnificent Seven' stocks are expected to drive earnings growth, but market trends and predictions can change rapidly.
Despite some signs of economic improvement, many analysts and financial institutions are warning of a potential hard landing or recession. While some money managers predict a soft landing, Citi argues that the economic data, including rising inflation and declining retail sales, manufacturing, and production, suggest otherwise. Citi is calling for a rate cut in June when the economy may be entering a recession. Meanwhile, the Goldman Sachs equity team remains bullish on the "Magnificent Seven" stocks, which have shown ongoing fundamental strength and are expected to drive earnings growth. However, it's important to note that predictions and market trends can change rapidly, and investors should stay informed and adapt their strategies accordingly.
Identifying and Investing in High-Growth Companies: The Magnificent Seven companies in the S&P 500, which account for a large portion of sales and earnings, grew sales by 3% despite economic challenges, with earnings and margin estimates revised upwards for 2024. High-growth companies outperform in any economic climate.
During the past year, the "Magnificent Seven" companies in the S&P 500, which accounted for 11% of total sales and 80% of earnings, grew sales by 3% despite contracting margins and falling earnings for the other 493 companies by 2%. However, the earnings and margin estimates for the Magnificent Seven have been revised upwards, with a 7% increase in earnings estimates and an 86 basis point increase in margin estimates, compared to a 3% decrease in earnings estimates and a 30 basis point decrease in margin estimates for the other companies. Looking forward to 2024, consensus expects the Magnificent Seven to grow earnings per share by 20%. These companies have significantly outperformed the rest of the S&P 500 in terms of earnings growth and margin expansion despite the economic challenges. This underscores the importance of identifying and investing in high-growth companies, even in a challenging economic environment. For more insights and investing ideas, join the Seeking Alpha community and tune in to future Wall Street Lunch episodes. Transcriptions and links to related stories can be found at cealpha.com/wse.