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News of the Week (July 8 - 12)
JP Morgan; Delta; SoFi; Pepsi; Uber; Amazon; Starbucks; Headlines; Macro
Brad Freeman
July 13, 2024 • Estimated Reading Time: 12 minutes
Table of Contents
A few subscribers reached out asking for more detail on Nu’s competitive landscape in Brazil and Mexico. Thank you for the suggestion. I will have a detailed piece on this in next Saturday's article. There were also zero portfolio changes since the last update sent to Max subs.
1. JP Morgan (JPM) & More Banks – Earnings Snapshot & Consumer Commentary
a. Results
Reported revenue beat by 10%.
Revenue growth was aided by a gain on purchase from First Republic and benefits from its equity stake exchange in Visa.
Missed $4.51 GAAP EPS estimates by $0.11.
GAAP margins and returns were aided by the same Visa dynamic.
Comfortably being ROE estimates; Comfortably beat 1.31% ROA estimates by a robust 48 bps.
b. Annual Guidance & Valuation
Raised annual $90 billion net interest income guide to $91 billion; Changed sub 3.5% card service net charge off (NCO) rate to 3.4%.
JP Morgan trades for 12x this year’s EPS. EPS is expected to grow by 3.7% Y/Y this year and by -0.5% Y/Y next year. Here’s how its valuation multiple compares to historical norms:
c. Balance Sheet
$3.05 billion in provision for credit losses vs. $1.88 billion Q/Q and $2.89 billion Y/Y.
Provisions this quarter included $2.2 billion in net charge-offs vs. $1.4 billion Y/Y.
Provisions this quarter also included $800 million in built reserves vs. $1.5 billion Y/Y.
Reserve building was predominantly related to the consumer side of its business.
$1.32 trillion in loans vs. $1.31 trillion Q/Q and $1.30 trillion Y/Y
$2.40 trillion in deposits vs. $2.43 trillion Q/Q and $2.40 trillion Y/Y.
$394 billion in long term debt.
Share count fell 1.8% Y/Y.
Paid out $1.15 in dividends per share vs. $1.00 Y/Y.
$953 billion in total liquidity vs. $826 billion Y/Y.
d. JP Morgan, Citibank and Wells Fargo Economic Commentary from the Calls
“While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks.” – CEO Jamie Dimon
“When it comes to card charge-offs and delinquencies, there’s not much to see. It’s still just normalization, not deterioration. It’s in line with expectations… you can see a little bit of spend weakness in lower-income segments as they rotate out of discretionary spend. But those effects are really quite subtle.” – CFO Jeremy Barnum
“The economic environment is very strong and stronger than anyone would have thought given the tightness of monetary conditions. Still, you are seeing slightly higher unemployment and moderating GDP growth… so it's not entirely surprising that you're seeing a tiny bit of weakness in some pockets of spend.” – CFO Jeremy Barnum
Citi:
“After a break in progress, inflation now appears back on a downward trajectory… services spending remains in an upward trend, but there are clear signs of a softening labor market and a tightening consumer budget.” – CEO Jane Fraser
“Looking at macro, as we enter the 2nd half of the year, the U.S. is still the world’s most structurally sound economy.” – CEO Jane Fraser
“We believe we’re seeing signs of cresting when you look at U.S. banking delinquencies. We expect losses and loss rates to start to come down… cost of credit was a $32 million benefit driven by a credit allowance release reflecting improving macro.” – CFO Mark Mason
“While we continue to see an overall resilient U.S. consumer, we all see divergence in performance and behavior across FICO scores and income bands. Lower bands are seeing sharper drops in payment rates and borrowing more. That said, we're seeing signs of stabilization and delinquency performance across our cards portfolio.” – CFO Mark Mason
Citi posted $1.82 billion in provisions for credit losses vs. $1.84 billion Q/Q and $2.48 billion Y/Y. This is its lowest provision level in over a year.
Wells Fargo:
“Overall, the U.S. economy remains strong, driven by a healthy labor market and solid growth However, the economy is slowing and there are continued headwinds from still elevated inflation and elevated interest rates.” – CEO Charlie Scharf
“While losses in the commercial real estate office portfolio increased in the second quarter (which is what is driving overall credit losses) after declining last quarter, they were in line with our expectations.” – CFO Michael Santomassimo
Overall Theme of Big Bank Earnings Thus Far:
The 30,000 ft. view is that the U.S. economy is stronger than most expected it to be at this point in the cycle. It’s not quite as strong as the robust levels of recent years. Things are gradually slowing in a tranquil, orderly fashion. That does bode well for a soft landing or a very mild recession and for thankfully avoiding a severe recession or depression.
2. Delta (DAL) – Earnings Summary
a. Results
Missed revenue estimates by 0.4% and missed its revenue guide by 0.5%.
Met $2.27B non-GAAP EBIT estimate & slightly beat its EBIT guide.
Met $2.36 EPS estimate & met its identical EPS guide.
b. Guidance & Valuation:
Next quarter revenue guidance was a bit light vs. expectations.
Next quarter EBIT guidance missed estimates by 9%.
Next quarter EPS guidance of $1.85 missed $2.09 estimates by $0.24.
Leadership pointed out that EPS was in line with record 2019 levels despite fuel costs being 25% higher this quarter vs. that period. It has realized significant operational efficiencies over the years.
Annual guidance of $3.5B in FCF and $6.50 in EPS was reiterated. This slightly missed expectations looking for a small raise to both metrics.
“Travel remains a top purchase priority and Delta's core customers are in a healthy position. The secular shift in consumer spend to prioritize experiences align perfectly with Delta's strategy and premium focus across our global network. Air travel demand is at record levels, with this past Sunday marking Delta's highest ever summer revenue day. For the September quarter, we expect continued demand strength… we remain confident in our full-year guidance." – CEO Ed Bastian
Delta trades for 7x 2024 EPS. EPS is expected to grow by 5% Y/Y this year and 15% Y/Y next year. Here’s how that current multiple compares to its historical norms:
c. Balance Sheet:
2.8x debt to EBITDAR ratio vs. 2.9x Q/Q & 3.0x Y/Y.
$4.2B in cash & equivalents; $3B in equity investments;
$18B in debt ($2.95B is current). Paid down $2.1 billion in debt year to date (YTD) using its $2.7 billion in YTD FCF. $900 million out of the $2.1 billion was repaid early.
Diluted share count rose by 0.9% Y/Y.
Reinstated a small quarterly dividend during the quarter. It paid out $64 million in dividends or about $0.10 per share. This will rise by 50% next quarter.
“Debt reduction remains our top financial priority.” – Presser
d. Presser & Call Highlights:
Industry Supply Glut:
Delta leadership cited an acceleration in sector-wide capacity growth. This is impacting pricing power in the main cabin, and is why the company missed revenue per unit guidance and overall revenue guidance. Delta calls itself the most insulated airline from this dynamic as the “carrier of choice with a diversified revenue base.” Non-core passenger revenue is 56% of its total business at this point, lending credence to that idea. It thinks competitors are now effectively capping capacity growth, which should result in “a more constructive backdrop through the back half of the year and into 2025. That’s reflected in the sharp Y/Y profit growth acceleration expected in 2025 (see the guidance & valuation section above).
Revenue by Segment & Overall Demand Trends:
Premium revenue rose 10% Y/Y compared to 10% Y/Y last quarter.
Loyalty revenue rose 8% Y/Y compared to 12% Y/Y last quarter.
It collected $1.9 billion (+9% Y/Y) in remuneration (payments) from AmEx as part of its card program this quarter.
Cargo revenue rose 16% Y/Y compared to -15% Y/Y last quarter.
Delta is “encouraged by trends” here. Sounds encouraging for the overall economy.
Domestic passenger revenue rose 5% Y/Y and international passenger revenue rose 4% Y/Y.
Corporate travel has grown at a double digit clip for the last 6 months. Its corporate survey shows that 90% of its clients plan to raise or maintain their travel volume next quarter.
The Olympics:
Delta called out a $100 million revenue decline from the Paris Olympics. The rest of travel demand in Europe remains healthy. Apparently, non-Olympics travel to Paris is a larger headwind than actual Olympic travel is a tailwind. This also contributed to the revenue per unit miss.
Product & Presser Notes:
Debuted its new Delta One gigantic luxury lounge in JFK.
Ranked #1 by J.D. Power for First and Premium Economy passenger satisfaction.
Its new app is leading to a 5 point boost to self-service usage (no employee needed)/
e. Take:
This quarter was fine. Annual targets are intact, and industry dynamics should power a profit growth acceleration next year. This is not a long term investment. It sells a commoditized service in a cyclical sector. Still, it is the best run company in its sector and there have certainly been periods for traders to reap strong profits from this name in the past. That will probably be true in the future too. At 7x earnings and the expected 2-year 10% EPS CAGR, a 0.7x PEG is cheap (like Delta usually is).
Broadly speaking, it’s nice to see Delta calling out continued demand strength on both the consumer and cargo side of things. That bodes well for continued economic resilience and demand for the products and services that public companies sell. It’s not a massive piece of good news, but certainly positive.
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