• December 7, 2022

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Key takeaways

  • General Motors have had a big Q3, beating earnings per share estimates by 19.71%, despite a slight miss on revenue.
  • Coca-Cola has had a win as well, overshooting their target by 8.34% due to a focus on budget-friendly options for their customers.
  • So far it’s been shaping up to be a very positive Q3, despite the challenges posed by a strong U.S. dollar.

Everyday we’re seeing headlines on stubbornly high inflation, rising interest rates, a pending recession and the likely rise in unemployment. And yet, it seems that corporate America hasn’t got the memo.

The latest companies to provide a pleasant surprise to investors are Coca-Cola and General Motors, who both announced earnings beats on their Q3 earnings calls this morning.

The strong dollar is causing problems for all US-based multinational companies right now (more on that in a minute), but even so General Motors have announced earnings that are 19.71% above estimates, and Coca-Cola have topped theirs by 8.34%.

It’s the latest in a line of positive results across earnings season and the stock market is loving it. Despite the constant clouds of negative economic data and inflation, the S&P 500 is up 5.98% over the past ten days and the NASDAQ Composite is up 6.12% over the same period.

Last week saw the banking sector in particular post very good results, with Goldman Sachs, JPMorgan Chase
JPM
and Wells Fargo
WFC
all showing great results for Q3.

It strengthens the argument for a ‘pasta bowl recession’ which is a term that’s been coined to represent a long but shallow recession. This has been seen to be less likely given the Fed’s tough talk on interest rates, but if corporate earnings continue to beat expectations then the economy may come out with less pain than originally predicted.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.

General Motors Q3 earnings were very strong

Starting with GM the stock was up 2.74% in pre-market trading as they announced earnings per share of $2.25, a major uplift from the expectations of $1.88 per share. Revenue was actually slightly below target at $41.89 billion against a $42.22 billion projection.

It’s unsurprising in many ways that revenue was slightly off, given that the auto sector continues to work through the aftermath of the pandemic. Global shortages of critical car parts like microchips have led to huge wait times for new vehicles and much lower delivery numbers.

A positive side effect to this has meant greater profit margins through reduced discounting and strong demand.

Adjusted net income was up significantly from this time last year, hitting $4.3 billion against $29 in Q3 2021. The adjusted profit margin was down slightly from 10.7% this time last year, but remains strong at 10.2%

GM has been less impacted by the rising dollar, with $3.9 billion of their adjusted net income coming from the domestic U.S. market.

Chief financial officer Paul Jacobson stated on the earnings call that he expected GM to land right in the middle of their guidance for the year, and that they continue to see strong demand for their vehicles.

Jacobson acknowledged that it would be a challenging environment and that they’d “continue to be agile” in navigating the current economic circumstances.

One of the key drivers for GM in recent years has been the performance of their loan arm, GM Financial. Record low interest rates have made financing for new vehicles cheap and accessible and there is the expectation that this will moderate as interest rates increase.

The autonomous vehicle company Cruise, in which GM holds a majority ownership, lost $500 million in Q3 to take their total year on year losses to $1.4 billion.

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Coca-Cola announced earnings and revenue beat for Q3

Like GM, Coca-Cola’s earnings per share beat Wall Street analysts’ estimates today with earnings per share of $0.69 against projections of $0.64. Revenue was also slightly ahead of expectations at $11.05 billion against $10.52 billion.

This is despite seeing some significant impacts of the rate of inflation and the strength of the U.S. dollar.

The company announced that their overall market share had increased in Q3, with their average unit volume growing 4%. This means that unlike many other consumer staples where customers are trying to cut back, they’re buying more Coca-Cola products.

It’s worth remembering that in addition to its namesake Coke products, Coca-Cola also owns many different beverage brands including Dasani water, Fuze Tea, Minute Maid, Schweppes, Sprite, Vitaminwater, Smartwater, Innocent Smoothies, Fanta, Fresca, Powerade and many others.

Despite the need to increase their prices due to rising wholesale prices, the company has managed to grow their market share in part due to some budget-focused changes. This includes products such as smaller size value packs that come at a lower total cost while keeping the unit price similar, or smaller bottles which can also be sold at lower price points.

Looking forward, Coke CEO James Quincy said that he expects difficult economic conditions to continue for the next six months to a year. The focus on more affordable options will continue into 2023, with work being done on new ways to package their products that keeps unit prices down.

He also said that the continued strength of the U.S. dollar is likely to continue to have an impact on revenue, estimating an impact of around 9% on earnings per share.

How the strong U.S. dollar is causing headwinds for American companies

During the Q3 earnings season we’re seeing many companies announcing that the strong U.S. dollar is impacting their bottom line. But why is this the case?

Effectively it comes down to the fact that U.S. based companies report in U.S. dollars (USD), but earn their money all over the world. As the USD gets stronger against foreign currencies, their earnings fall in USD terms.

Coke’s business is a great example of how this works. If Coca-Cola sells a bottle of Coke in the United States for $1, that adds $1 in revenue to their bottom line. Simple.

When it sells Coke in another country it’s priced not in USD but in the home country’s currency. In the UK, that same bottle of Coke might sell for £1. A year ago, £1 was equal to USD$1.40, meaning that same bottle of Coke would provide revenue to Coca-Cola of $1.40.

At the time of writing, the British Pound has fallen significantly against the USD, and £1 is now worth around $1.15.

So a bottle of Coke sold in the UK a year ago may have meant revenue of $1.40 and now it’s only $1.15.

Any US-based company who sells goods or services overseas is going through this challenge right now. It is possible to hedge out the impact of inflation, but it can be expensive and sometimes worthless if the currency doesn’t move in the way a company had expected.

Because of this, many elect not to hedge our currency risk and simply take the ups and the downs as they come. While currencies move around all the time, the significant growth of the USD against practically all major currencies has been unusual.

What does this mean for investors?

So far we’re seeing that many large companies are holding up remarkably well right now. Earnings have generally been strong and we’re seeing far more beats than misses so far.

It’s highlighting what we’ve been expecting for a while here at Q.ai, that during times of low economic growth and high uncertainty, large cap companies tend to perform better than smaller and mid-sized ones.

We even created an Investment Kit to take advantage of this situation. We call it the Large Cap Kit, and it’s essentially a pair trade that goes long on large companies and short on small and mid-sized ones.

It means that investors profit from the relative change in valuation, not the outright change. So even if the overall stock market wobbles along sideways, or even goes down, investors can generate returns if large caps hold up better than smaller ones.

This type of sophisticated pair trade usually isn’t available to regular investors. Normally you only find it in the hush, hush, shiny high-rises on Wall Street if you’ve got a cool couple of million dollars in your account.

Not anymore though. We’ve made it available for everyone.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.

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