Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

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How earnings from oil smash records whilst tech disappoints

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ExxonMobil gushes $56 billion in profits

It’s a record yearly profit for the company which previously stood at $45.2 billion in 2008. That was when oil hit $142 a barrel. The EU pre-empted Exxon’s swag with a $1.3 billion windfall tax in the fourth quarter. Shares finished the week at £112 also an all-time high for the firm. As noted two weeks ago, Putin’s invasion of Ukraine will prompt eye-watering earnings from the energy sector. Exxon’s Chief Financial Officer Kathryn Mikells said ‘strong markets, strong throughput, strong production, and really good cost control’ helped the firm to its record earnings.

Google earnings drop in Q4

Alphabet’s earnings came in at $1.05 per share, revenue came in at $76.05 billion continuing a downtrend trend in quarterly revenue growth since Q2 of 2021. In November 2021, shares reached an all-time high of $148 and have since fallen 29% to $105. The company also warned of a $2.3 billion charge it will sustain in Q1 of 2023 related to the 12,000 employees it fired in January. Further charges related to real estate – specifically its reduced office space, will start at $500 million in Q1 and further real-state charges are likely moving forward. Headcount growth cost it an extra 10% in operating expenses but CEO Sundar Pichai reiterated its focus on AI. With Google’s current legal proceedings in the US, there’s a lot for the executive team to be working on and shareholders to be mindful of.

Apple earnings growth slides

CEO Tim Cook blamed the macroeconomic environment and the lockdowns in China for not producing enough iPhones and iPads to sell for the latest quarterly earnings decline. Apple posted EPS of $1.88, down 10.9% YOY, revenue was down 5.49% YOY. Apple’s quarterly earnings have been declining in growth since the beginning of 2021, albeit from lofty heights (54.1% in Q1). The firm said that production levels of the iPad and iPhone are back to ‘acceptable levels’. The number of Apple active devices increased from 1.8 billion to 2 billion, including first-time buyers of the Apple Watch. Cook mentioned costs are being cut and hiring has slowed but did not see a need to slash headcount like others in the tech space. Despite the negative decline in earnings growth, Apple has faired much better than its tech peers due to prudent management of its hiring process, innovative product expansion (Apple Pay, Card, Music), and bringing new customers on board its product range despite the macro headwinds of the last few years: resilience.

Amazon issues guidance for Q1

Amazon expects YOY growth of revenue of between 4% – 8%, and online store sales declined 2% YOY. Consumers are slowly switching from e-commerce to high-street shopping since the end of the pandemic. CEO Andy Jassy, on top of announcing an 18,000 headcount cull last month, has frozen hiring, halted warehouse build, and is ‘… working really hard to streamline our costs and trying to do so at the same time that we don’t give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term’. Amazon Web Services – its cloud business – declined in growth for the fourth quarter from 27.5% in the third, to 20%. Amazon earned 3 cents per share and operating income declined YOY due to $2.7 billion of charges, some of which related to severance payments. Shares are trading at $103, down from $183 in November 2021.

Meta shares explode 23% after results

Meta shares rocketed 23% in after-hours trading when the firm announced a $40 billion stock buyback, and beating revenue expectations for the fourth quarter. CEO Mark Zuckerberg said Meta’s “management theme for 2023 is the year of efficiency and we’re focused on becoming a stronger and more nimble organization.” Meta announced 11,000 layoffs last November. There’s also less expenditure expected in the future due to a switch to more cost-effective data centres. The Reality Labs unit responsible for the development of the Metaverse is expected to increase operating losses in 2023 ‘significantly’. Shares are currently trading at $186, down from $378 in September 2021. Without the share buyback, the value of Meta is in decline due to weak advertising demand and Tik Tok dominating ad revenue growth. Meta’s ad revenue declined 4% in the quarter and continues to be ‘impacted by the uncertain and volatile macroeconomic landscape’ according to Meta CFO Susan Li. Ad revenue represented 97% of Meta’s total revenue in the quarter.

Shell’s 115-year profit record

$39.9bn (£32.2bn) in 2022, the highest in its 115-year history. The price of Brent crude oil went to almost $128 a barrel after Putin’s invasion of Ukraine last year. It’s currently trading at $83. Shell said was due to pay $134m in a UK windfall tax for 2022 and more than $500m in 2023. Shell had paid $13bn in taxes globally in 2022 and only derives around 5% of its revenue from the UK.

US raises interest rates by 0.25%

The market expected it and The Fed delivered. A rise of 25 basis points from Jerome Powell and his team this week, the highest since October 2007. Inflation is still at its highest levels since the 1980s. Powell noted that inflation “has eased somewhat but remains elevated… inflation data received over the past three months show a welcome reduction in the monthly pace of increases… while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”

UK interest rates highest for 14 years

The Bank of England raised interest rates by 0.5% to 4%. The market is expecting rates to peak at 4.5% in the summer before heading back down. The Bank has a 2% inflation target but prices are rising at 10.5%, a 40-year high. The market believes inflation reached its peak in the UK last October at 11.1%. Both the Bank of England and The Fed are in lockstep both with inflation and rate rises, but not on the upcoming recession – the IMF stated this week that the UK will be the only major economy to shrink in 2023, forecasted to be -0.6%.

Why lower interest rate rises are less toxic for your portfolio

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Image by Elliot Alderson

0.25 or 0.50? These are the numbers getting everyone’s knickers in a twist. The numerical obsession with interest rates is tied to the fact that stocks like low interest rates. The next FOMC meeting is in a few weeks’ time starting 31st January and Federal Reserve Governor Christopher Waller said last Friday “there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting.” And it’s not just Waller. Philadelphia Fed President Patrick Harker said in his view “hikes of 25 basis points will be appropriate going forward”. The expectation has been set.

Machine learns like lightening, very very frightening

Google and Alphabet CEO Sundar Pichai is frightened of future internet users turning to AI rather than using its search engine. It’s clear why: Sridhar Ramaswamy from Google’s ad team between 2013 and 2018, said that ChatGPT could prevent ChatGPT users from clicking on links with ads. Ads that generated approximately $208 billion dollars (81% of 2021 revenue). The recent lawsuit filed against Google by a coalition of 8 US states and the Department of Justice accusing them of ‘destroying competition in the ad tech industry’, may prove to be an untimely distraction. The demo version of Google Search with AI chatbot that Google promised by the firm later this year can’t come soon enough for shareholders.

Google needs a lawyer

The US Department of Justice along with eight states is suing Google. But before we get into that, let’s remind ourselves about the staggering worldwide backlash against Google’s dominance: a $2.73 billion fine by the EC in 2017, a $4.3 billion fine by the EU in 2018, a $1.49 billion fine by the EC once again – all for antitrust issues. Historical fines for Google in the US have been nowhere near these figures. This time around, the lawsuit is seeking to divest its advertising businesses as a way of opening up competition in the ad space. Are we about to see the US admonish one of its own corporate children?

Microsoft’s layoffs cost it a packet

Microsoft earned $2.32 per share. The market was expecting $2.29. All good in the hood. Microsoft said it recorded a charge of $1.2 billion for the quarter, $800 million of which related to the job cuts. Oh, there’s also a slowdown in its cloud and business software divisions for 2023 according to the company. “During the pandemic, there was rapid acceleration. I think we’re going to go through a phase today where there is some amount of normalization in demand,” Chief Executive Officer Satya Nadella. Microsoft earnings are important because it’s seen as an example of the wider tech sector, which also happens to have a major influence on the tech-heavy S&P 500. Its slowdown in December coupled with an acknowledgment of a general slowdown in PC sales forecasted for 2023 looks as though the recession is starting to influence forward earnings “In our commercial business we expect business trends that we saw at the end of December to continue” – Amy Hood, Cheif Financial Officer, Microsoft.

UK government likes debt

From £16.7 billion in December 2021, to £27.4 billion in December 2022, the UK government hits record borrowing. Way above expectations of £17.8 billion. Inflation, household energy bills assistance, student loans, and April’s national insurance policy reversal is to blame. A significant proportion of student loans will never be repaid and the government is forced to recognise this under new accounting rules adding to the indebtedness.

Recession in the UK

Two data points: 1) the S&P global CIPS UK flash composite purchasing managers’ index saw the ‘sharpest drop in business activity for two years’. January data highlighted a sustained downturn in UK private sector business activity. The overall rate of decline accelerated to its fastest for two years. “Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession”, Chris Williamson, chief business economist at S&P Global Market Intelligence. 2) Anna Leach, CBI Deputy Chief Economist, said: there are signs that demand is easing too, with order books weakening sharply, spare capacity in the manufacturing sector rising and the share of firms citing the strength of sales or orders as a potential constraint on output rising to its highest in almost two years.” If the patient is the UK economy, it’s like two doctors coming to more or less the same conclusion.

Boeing’s flying low

A $663 million loss for the fourth quarter and a $5 billion loss for the full year with a loss per share of £1.75 v expected earnings per share of 26 cents. It’s the sixth quarterly loss in a row. “While we have made meaningful progress, challenges remain and we have more work ahead to drive stability in our operations and within the supply chain,” Chief Executive Officer Dave Calhoun. Boeing is betting on a full re-opening in China and the easing of supply-chain issues that slowed the production of aircraft, especially jet engines. As an old-school value investor, I can’t help thinking back to the massive losses Warren Buffett suffered when he went full ham on airline stocks only to sustain huge losses. No thanks.

Tesla’s earnings turn south

You’ll see the headlines: record revenue at Tesla. What you won’t see, at least not as clearly, are earnings of $1.19 per share v $2.52 in the same quarter last year. Or that gross margins are the lowest in five years and operating cash flow is down 29% from last year. Tesla has already begun well-publicised price cuts on its vehicles which helped ramp up orders. Musk is upbeat about Tesla and thinks he can make up to 2 million vehicles this year which he says will all be sold if they can make them fast enough. ‘Twitter is actually an incredibly powerful tool for driving demand for Tesla’ Musk responded when asked if his political rants hurt the firm. He even had the gall to encourage other automakers to make use of Twitter for marketing their own brands. Elon is a well-received businessman here at Wealth Accumulated.

US Fourth quarter GDP down

A weakening housing market and a slowdown in corporate spending reduced fourth quarter GDP to 2.9% from 3.2% in the third quarter. Consumer spending (68% of GDP) increased 2.1%, fuelled largely by consumer debt, even as retail sales declined in December by 1.1%. Are consumers maxed out? Most commentators believe a recession is coming, albeit a mild one despite these numbers.

Diageo

Earnings per share shot up 20% for the firm this week to 100.9p at the half-year stage. The company owns the most enviable portfolio of drinks brands in the world. Baileys, Johnnie Walker, Guinness, Smirnoff, and a suite of Scotch Whiskeys to name a few. Price rises for its products and an increase in consumers drinking its premium brands helped to boost revenue. It, like a lot of the large caps that sell to China, is betting on increased revenue in 2023 when China re-opens.

Intel

Just 10 cents per share and a $664 million net loss in the fourth quarter of 2022. Intel is predicting a net loss of $15 cents per share in the first quarter of 2023. Intel elected not to give full-year guidance for 2023 but did indicate $11 billion in sales in the March quarter, a 40% year-over-year decline. Their customers have a deluge of chips already and need to work through their supply before buying Intel chips again, at least that’s what analysts are saying.

Chevron pumps profits

Putin’s invasion of Ukraine has prompted what will no doubt be eye-watering earnings from the energy sector. Chevron made a record $36.5 billion profit for 2022, more than double the previous year. The $75 billion share buyback program it announced has President Biden calling it a ‘slap in the face’ for Americans coping with the ravages of flooding in California.

Rolls Royce is a burning platform

The CEO of Rolls Royce, Tufan Erginbilgic gave his employees an analogy: when an oil platform in the North Sea is on fire, you need to jump into the volatile and freezing water to survive. That’s what he meant when referring to the firm as a ‘burning platform’. Covid was dismissed as no more than an excuse for what he called the firm’s chronic underperformance. He will likely announce a brutal restructuring following up his tough words with tough action.

Apple: the FAANG that hasn’t culled overhead. Yet.

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Macbook on a wooden table
Apple did not go on the same hiring spree as other FAANGS during the 2020 lockdowns

I remember laying down next to my allotment plot slash community garden during the summer of 2020. There was literally nothing else to do. I was happy with my employer, with my work. There was no reason for me to leave or seek alternative employment. That was not the case for millions of people who began applying for roles at big tech firms with the extra time they had on their hands to re-orientate their working lives.

Amazon ended up hiring 500,000 employees in 2020, and another 310,00 in 2021 to “meet the needs of our customers while ensuring the safety of our employees… [and] investing for customers and employees during these unprecedented times”. Microsoft hired to a less aggressive extent but the real ‘winner’ was Apple who kept the same hiring rates since 2016, notching the lowest percentage increase in headcount among the FAANGS.

This week, Microsoft CEO Satya Nadella said he will be “making changes that will result in the reduction of our overall workforce by 10,000 jobs through the end of FY23 Q3.” The company will sustain a $1.2 billion charge in its Q2 earnings next week “related to severance costs, changes to our hardware portfolio, and the cost of lease consolidation as we create higher density across our workspaces.” Gotta pay off all those employees somehow. Amazon’s Doug Herrington, the company’s worldwide stores chief, said in a memo Wednesday that they will cull 18,000 employees “so we can continue investing in the wide selection, low prices, and fast shipping that our customers love.

Finally, Google and Alphabet’s CEO Sundar Pichai said he took “full responsibility” for announcing 12,000 job cuts and that the company had rapidly expanded headcount in recent years “for a different economic reality than the one we face today.” The perverse nature of capitalism means that these layoffs will prove profitable for shareholders 1-3 years from now. Traders have already jumped into these stocks on the back of them being huge winners over recent years, but the fact is that as a collective and a large component of the S&P 500, they are still repairing the damage that bloat can do to a business. It’s worth keeping an eye on their earnings in 2023 for sure.

Inflation is falling in the UK. Except for food

“Baked beans are up over 50% in a year. Tinned tomatoes from Spain, also up 50%.” Philip de Ternant, a food wholesaler sounds exasperated on the news that inflation ‘fell’ from 10.7% in November to 10.5% for December. But it’s just not food that continues to see a tsunami of price rises whilst the rest of the inflation basket trickles downwards. Airfares, hotels, restaurants. Basically, if you want to sustain yourself whilst having any fun at all, your financial masters have made it impossible.

When’s a good time to FTSE?

Early in my dating life, I would take a girl to places that had tables. That was my sole choice for the date venue. Didn’t matter if it was a pub, cafe, or restaurant. Tables were where the action was in my mind. I could work my magic charming damsels and the table was like a wingman, allowing me to draw closer, squeeze a hand, and of course play footsie. I remember one particular barman of a local who was a family friend was so impressed with my dating skills that he gave me and my girl free drinks all night. That story is in no way connected to whether or not I think the FTSE 100 is trading at a discount to intrinsic value. Which it isn’t, especially as it’s trading near all-time highs. Now is not the time to FTSE.

The Christmas high street numbers ain’t pretty

US retail sales fell 1.1% in December according to fresh data from the Commerce Department. On top of that, wholesale prices measured by the producer prices index dropped 0.5% for December, more than expected 0.1% showing signs that the US economy is slowing down. The Dow ended the day down 600 points in response. The last time PPI dropped by this amount was in April 2020 raising fresh concerns about a recession.

In the UK, December sales fell by a record 5.8% compared with December 2021 as inflation, and in particular energy costs for households have soared over the past 12 months. It’s well known that where sales growth has been recorded, consumers spending more has been down to corporations raising prices due to inflation. This is the vicious cycle that the Fed and central banks around the world want to stop. Their only weapon in this fight is higher interest rates at the risk of destablising the economy.

Stock in focus: Ferrexpo Plc

As with any stock that’s main business is the production of a commodity, the share price can see swings wilder that an Andrew Tate house party. Chill out nothing’s been proven yet. This FTSE 250 producer and exporter of high-grade iron ore pellets to the global steel industry is based in central Ukraine, which explains some of the most recent price extremes. In the fourth quarter of 2022, Ferrexpo produced 0.4 million tonnes of iron ore pellets v 3.1 million tonnes in the same quarter of 2021.

This reduction is primarily due to the loss of electrical power for the majority of the quarter, which was partially restored in late December, in addition to existing constraints relating to Russia’s invasion. As of the date of this release, the Group continues to produce iron ore pellets using one pelletiser line (out of a total of four)… Full year pellet production of 6.1 million tonnes in 2022, down 46% year on year, reflecting operational and logistical constraints throughout 2022 due to the war in Ukraine (2021: 11.2 million tonnes produced).

Trading update, 11th January 2023

I’ve chosen Ferrexpo this week to highlight the effectiveness of the value investing approach I pursue and specifically the difference between a large-cap stock going through a temporary period of unpopularity such as ExxonMobil in 2020 when the price of oil went to -$37 a barrel and Ferrexpo. Both are commodity stocks. But both face or have faced, different problems. The prolonged nature of Russia’s invasion means that Ferrexpo’s problems are not temporary therefore Ferrexpo is not ‘investment grade’, even though it has a PE Ratio of less than 5, iron ore demand (prices) has been increasing, and its earnings have been growing steadily over the past few years. When the conflict in Ukraine looks likely to end is when to revisit Ferrexpo and its prospects for a brighter future.

Like you’ve always known, the US is in a recession

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Like you've always known, the US is in a recession

Summer is the best time to develop a garden.

The pleasantness of the weather makes semi-amateur horticulture feel like therapy.

It is therapy.

I’ve a flock of recycled disused water butts, sawn in half and hole-punctured underneath using my most trusted tool – a bright orange Black and Decker cordless drill.

Filled with peat-free compost and seeds of various types, the containers will look more like show homes for plants rather than the discarded shells they are now.

At least that’s what I’m aiming for.

Kale, carrots, onions, fennel, and lavender. But no flowers yet.

That’s next week’s happy gardening task.

Picture of a small kale plant in a container

The extremely warm summer has meant superhero speeds of growth assisted by daily watering; a lazy but joyful task that’s easy to do in this carbon-induced sunburn.

The seeds I’m worried about most are lavender. They are precious little savages, perpetually refusing to cooperate when it comes to germination.

No amount of due care and attention pleases them.

Like the recession deniers, with a little telling off, I’m hoping they come to their senses.

Stock market memo

We seem to have en­tered an eco­nomic down­turn that will have a broad im­pact on the digi­tal ad­ver­tis­ing busi­ness

Mark Zuckerberg

21% of the S&P 500 reported earnings this week and the results were mixed and a lot stronger than I’d expected.

Microsoft – lowest earnings growth in two years but with guidance for increased revenue – 12% – and income moving forward. Ukraine, China supply chain woes, and softer digital ad spend blamed for revenue declines.

Google – slowest revenue growth in two years yet still grew by 12% to $56 billion. Search grew 14% to $40 billion, net income was down 14%, slower down in hiring, and advertisers pulled ad spend.

Meta – first ever reported sales decrease down 1% to £28.8 billion, increase in users, decreased ad demand down by 14%, click-to message ads see double-digit growth

Apple – profits down 11% to $19.4 billion, revenue rose 1.87% to $83 billion, iPhone sales rose 2.8% to $40.67 billion

Amazon – slowing revenue (7.2% v 7.3% for the first quarter) and a $2 billion loss for the quarter, revenue driven by strength in cloud computing business, inflation continues to drive up costs

We are seeing some pockets of softness here and there… but in the aggregate, we expect revenue to accelerate in the September quarter as compared to the June year over year performance

Tim Cook

Let’s be honest. These companies are still printing money because they produce goods and services that are in demand across the globe, quite apart from the fact that they have built huge moats around their existing businesses.

In the aggregate, they have performed extremely well given the high inflationary/supply-chain chaos the global economy is in the midst of.

Along with energy, tech is doing well.

The only question mark is around Meta and Mark Zuckerberg’s ‘all-in’ stance on the metaverse, still in its infancy and feels a lot like a college dorm project on steroids.

Kinda like the beginnings of Facebook.

Is it, or is it not inflation

We got the news that inflation for June rose by 6.8%, up from 6.3% for the previous month, in particular, energy increased by 43.5% from last year and food by 11.2%.

For the overwhelming majority of Americans, it’s inflation.

Biden, Yellen, Powell, and the White House PR machine have a job to do which is to prevent panic in the markets so that the economy doesn’t go into complete freefall.

That’s their job.

But I don’t blame them for acting the way they do and saying the things they say.

As investors, we know not to take the word of anyone seriously when it comes to their interpretation of the economy and individual stocks.

Yep, that means my word as well.

From a value perspective, we assess risk by estimating value, assessing risk, and holding onto things for long periods.

So whether you jump on the ‘it’s not a recession because it’s not broad-based’ bandwagon or not is irrelevant.

  • Did you buy in at a margin of safety?
  • Does your written-out investment strategy have a section on how to deal with uncertainty?
  • Is it likely that stocks will be worth more than 10 years from now?

Just because it is or is not a recession doesn’t mean you need to make it the focus of how you position your portfolio.

What else happened this week

  • The S&P 500 finished July up 9.1%, the NASDAQ was up 12%.
  • Friday saw Exxon and Chevron banked record profits at $17.9 billion and $11.6 billion respectively.
  • Walmarts second-quarter net profit fell 40% which sent stocks tumbling on Tuesday.
  • Russia further reduced the flow of gas through its Nord Stream pipeline to Germany from 40% of capacity to just 20%, driving up energy costs and hampering Europe’s economic recovery.
  • German cities have already begun shutting off lights and enforcing cold showers in their publicly run buildings to save energy.

Thanks for reading the first blog from Wealth Accumulated.

See you next week.

D J Thomas