!-- Global site tag (gtag.js) - Google Analytics -->
Select Page

The earnings at the big Banks that started the 3Q19 season were good. Last night's note from one of our favorite Real Estate companies was another subtle nod in the right direction. Now it's time for the Tech giants to step up and join the party.

 

So far we've had two of our companies check in. They're both growing, which is a lot more than what we've seen so far (or expect) from the market as a whole. Johnson & Johnson (JNJ: $129, down 1% after last week's earnings report) managed to squeeze 3% more profit out of its business than last year. Meditate on that for a moment. If one of the world's great Consumer Products companies is doing better than ever, the global economy hasn't gone over any kind of cliff.

 

Back here at home, Equity Residential (EQR: $88, flat this week) shows that the U.S. consumer is alive, well and paying the rent every month. We were expecting tricky accounting to turn into lower profit. Instead we got $0.71 per share, a full 18% above last year's level. With revenue coming in at $685 million ($5 million above our target) and management raising guidance for the remainder of 2019, there's no weakness here either.

 

Of course for us, the key metric is Funds From Operations, the pool of money that feeds dividend payments.  Equity Residential gave us $0.92 per share, better than we hoped to see and more than enough to fund the $0.57 distribution we've been promised.

 

We'll need a little time to digest the numbers from Eli Lilly and the Blackstone Group this morning. But either way, at a moment when earnings for the S&P 500 are tracking close to 5% below last year, any actual growth is something worth applauding. That's where our universe is right now and where we expect it to stay throughout the cycle.

 

-----------------------------------------------------------------------------

 

Earnings Preview: Microsoft (MSFT: $136, down 1% this week)

Earnings Date: Wednesday, 5:00 PM ET

Expectations: 3Q19
Revenue: $32 billion
Net Profit: $9.6 billion
EPS: $1.24

Year Ago Quarter Results
Revenue: $29 billion

Net Profit: $8.8 billion
EPS: $1.14

Implied Revenue Growth: 10%
Implied EPS Growth: 9%

Target: $166
Sell Price: We would not sell Microsoft.
Date Added: January 28, 2016
BMR Performance: 176%

 

Key Things To Watch For in the Quarter

 

The battleship is coming. Even though Apple has pulled ahead as the biggest trillion-dollar company on Wall Street, Microsoft is still where the market's growth engines are spinning. The contrast between the two giants this quarter is stark. As much as we love Apple, it's on track to report $2 billion less profit this quarter than it did a year ago. Microsoft, on the other hand, has given us the confidence to expect at least $1 billion more than it generated last year. 

 

Admittedly, guidance is on the technical side, as befits a global Technology leader. We expect a healthy double-digit sales boom. Nearly all the cylinders are firing hot: Office, LinkedIn, Windows and especially the Cloud, where we're looking for at least $10 billion in revenue.

 

With multiple billion-dollar franchises growing fast, Microsoft demonstrates that it's possible to keep expanding even from the commanding heights. While Gaming and Hardware look soft, they're really only sideshows here anyway. As long as the Cloud holds up, the sky remains the limit.

 

-----------------------------------------------------------------------------

 

Earnings Preview: PayPal (PYPL: $97, down 4%)

Earnings Date: Wednesday, 5:00 PM ET

Expectations: 3Q19
Revenue: $4.3 billion
Net Profit: $620 million
EPS: $0.52

Year Ago Quarter Results
Revenue: $3.7 billion

Net Profit: $695 million
EPS: $0.58

Implied Revenue Growth: 15%
Implied EPS Decline: 10%

Target: $125
Sell Price: We would not sell PayPal.
Date Added: January 21, 2016
BMR Performance: 212%

 

Key Things To Watch For in the Quarter

 

It's hard to argue with a company of this size that's still expanding at a rate of 20% a year. The ironic thing is that the biggest thing holding back PayPal right now is its far-reaching strategic investments in other companies. Its stake in Uber is going to cost it $228 million this quarter, blowing out what would have been a solid season.

 

However, factor out the portfolio and we suspect a lot of people have turned their back on a great company. If not for the Uber writedown PayPal could easily have handed us $0.70 per share this quarter, which is enough to keep that 20% growth curve alive. A year from now, the Uber stake won't be an issue and the comparison will be artificially low. Then we'll see PayPal explode.

 

In the meantime, keep watching the internal metrics for a gauge of how vibrant this company really is. All in all, even if revenue comes in only a little above our target, PayPal can still grow the top line awfully close to 20% a year. That's the clockwork we know and love.

 

-----------------------------------------------------------------------------

Earnings Preview: Apollo Commercial Real Estate Finance (ARI: $18.75, flat)

 

Earnings Date: Wednesday, 5:00 PM ET

Expectations: 3Q19
Revenue: $86 million
Net Profit: $72 million
EPS: $0.47

Year Ago Quarter Results
Revenue: $78 million

Net Profit: $69 million
EPS: $0.47

Implied Revenue Growth: 10%
Implied EPS Growth: flat

Target: $22
Sell Price: $15
Date Added: June 14, 2017
BMR Performance: 26%

 

Key Things To Watch For in the Quarter

 

It's been a challenging season for the Mortgage business but the fact that Apollo invests its own capital instead of borrowing at short-term rates to buy long-term loans has shielded it from the yield curve's twists. We're excited to see how well the business held up last quarter. If it thrived, we may widen our exposure to other companies in this space.

 

And the bar to "thriving" here is fairly low. The important thing for Apollo is earning enough to cover the $0.46 dividend with enough additional to funnel back into the business. We suspect that will be easy. Look at that ratio between revenue and profit. This company is so efficient that out of every $1 that comes in, $0.88 hits the bottom line where it's available for shareholders.

 

With $5.4 billion worth of loans in the portfolio, just squeezing 1.5% in interest per quarter is enough to keep earnings right where they are. Everything else is extra. As long as that story holds, so will what's now a 9.8% yield. Lock it in.

 

-----------------------------------------------------------------------------

Earnings Preview: Twitter (TWTR: $39, flat)

Earnings Date: Thursday, 8:00 AM ET

Expectations: 3Q19
Revenue: $875 million
Net Profit: $162 million
EPS: $0.21

Year Ago Quarter Results
Revenue: $755 million

Net Profit: $162 million
EPS: $0.21

Implied Revenue Growth: 15%
Implied EPS Growth: flat

Target: $47
Sell Price: $34
Date Added: September 28, 2018
BMR Performance: 39%

 

Key Things To Watch For in the Quarter

 

This one will be simple. Twitter is constantly underrated. It underpromises and often overdelivers. This quarter, management has warned us that a shift in the ad mix will take a bite out of growth, but that should be a transitory phenomenon. Look instead to the audience and engagement. More people on the platform ultimately mean more cash coming in.