Third-quarter earnings season is finally behind us — and like the prior quarter, results were solid overall compared to analyst forecasts. However, those expectations were low, thanks to macroeconomic headwinds like elevated inflation, a strong U.S. dollar and geopolitical tensions. The bar was not set high. Investor uncertainty remains high as key storylines play out in the market, including the future path of Federal Reserve interest rate hikes and the odds of a recession in 2023 and beyond. Fortunately, commodity prices appear to have rolled over and the U.S. dollar may have peaked. We also expect another round of layoffs, which could help curb wage inflation. China’s failed zero-Covid policy and Russia’s war in Ukraine are also things to watch. These quarterly report cards are not the end-all and be-all for analysis, but we believe stock prices ultimately follow the underlying business fundamentals of companies. So as we wrap up the fourth quarter and look ahead to 2023, here’s a rundown of how we rank third-quarter releases from all 33 companies in our portfolio. Similar to prior quarters, we grouped companies’ results into 1 of 4 categories. The companies in each category are listed in alphabetical order. Great Good Not So Bad Ugly The Great Cisco Systems (CSCO) reported impressive results that included the strongest revenue growth in company history. Thanks to a robust backlog, management had the confidence to raise its full-year revenue forecast and earnings outlook. The company, which makes things that power the internet, spent roughly $500 million on buybacks, down from the $2.4 billion in the prior quarter. Beer, wine and spirits giant Constellation Brands (STZ) performed well in a very difficult operating environment. In addition to the better-than-expected headline numbers, cash flow was stronger than anticipated. Management also upwardly revised its full fiscal-year sales and earnings guidance. Danaher (DHR) reported sales and earnings beats on the back of better-than-expected results in all three segments of the health technology company. Management said on the post-earnings call that customers are indeed moving away from Covid-related projects, but are refocusing spending in other areas put on hold during the pandemic. We didn’t own Emerson Electric (EMR) when it last reported earnings but thought the results were good enough to support a decision to start a position. As noted in our initiation alert on Dec. 14, Emerson Electric wrapped up a strong fiscal 2022. On a continuing operations basis, underlying sales increased 7% year over year, while adjusted earnings-per-share grew 21%. Management sees 2023 as another strong year for the company. Halliburton (HAL) reported a great quarter on the back of increased demand in North America and internationally for the oilfield and nat gas services it provides. With strong oil demand expected to persist and supplies tight due to years of underinvestment, Halliburton should be able to further expand profit margins and increase selling prices. Sales and earnings at Johnson & Johnson (JNJ) exceeded expectations despite about half of J & J’s sales coming from outside the United States and taking a big hit from the strong dollar. Meanwhile, the planned separation of its consumer health business remains on track and, in our view, represents a positive catalyst in the year ahead. Industrial gas company Linde (LIN) last quarter flexed its great pricing power and inflation management, more than offsetting unfavorable impacts from the strong dollar and elevated energy pricing in Europe. Linde — a defensive company that’s shown it can grow earnings no matter the twists and turns of the global economy — generated record after-tax return on capital. Starbucks (SBUX) delivered a notable quarter with management providing encouraging commentary on the underlying drivers of growth, signaling a runway ahead. While China’s rolling Covid lockdowns and restrictions remained a headwind back in November, the coffee giant’s confidence at the time in the long-term outlook for the region was unwavering, with management saying on the post-earnings call that their “aspirations for our business in China has never been greater.” China has since relaxed its strict Covid rules, which take as a bullish sign for Starbucks. TJX Companies (TJX) reported stronger-than-expected fiscal third-quarter 2023 earnings and U.S. sales as the inventory glut at full-price chains played out as we had expected, proving to be a boon to TJX, whose brands include T.J. Maxx, Marshalls, and HomeGoods. While U.S. customer traffic was down in the quarter, management noted that it improved sequentially and improved throughout the quarter. The average basket size in the U.S. also increased. It was an excellent quarter for Wells Fargo (WFC) as higher interest rates had an outsized impact on the bank’s net interest income, while management’s operating efficiency initiatives cut down on the expense base. Meanwhile, its credit quality remained strong. On Dec. 20, Wells Fargo agreed to a $3.7 billion settlement with the Consumer Financial Protection Bureau over past customer banking practices. The Good As far as large-cap tech earnings are concerned, Apple (AAPL) reported what was by far the best results of the group, beating estimates on both the top and bottom lines. However, with iPhone and services revenue coming up a tad short, we can’t call it a great quarter. Guidance at the time was largely in line with expectations. Subsequent to the quarter, we learned that disruptions at factories in China would likely result in another supply shortage. No preannouncement yet, but it’s something to watch for in the coming weeks. Devon Energy (DVN) put up a very respectable quarter, thanks to management’s strict financial discipline over production growth at any cost. We also liked seeing Devon’s steady and consistent oil and natural gas exploration and production (E & P) activity, free cash generation, and market-leading cash returns to shareholders. Despite better-than-expected quarterly results , drugmaker Eli Lilly (LLY) was dinged as management lowered full-year sales and earnings forecasts — due, in large part, to foreign exchange dynamics. While the results may not have met expectations for a stock that went into the Nov. 1 print near all-time highs, they did little to change our longer-term positive view of the company. Ford (F) put up a very good quarter with sales, operating income, earnings, and cash flow all coming in ahead of expectations. Management did guide its full-year earnings before interest and taxes (EBIT) outlook to the lower end of the $11.5 billion to $12.5 billion range, which had been reaffirmed only a month prior to the release. However, we thought the decision prudent because it will make it more likely the company can achieve its full-year guidance in the fourth quarter. Honeywell ‘s (HON) quarter could have been characterized as “great,” if not for a marginal revenue miss. Management at the industrial giant once again displayed an ability to deliver, despite supply chain constraints, multidecade high inflation, geopolitical turmoil, rapidly rising interest rates and a persistently strong U.S. dollar. Health insurer Humana (HUM) reported mixed headline numbers, but the underlying results were quite strong and supportive of management’s goal of achieving earnings of $37-per-share earnings in 2025. Initial individual Medicare Advantage (MA) growth expectations for next year serve to support our positive view on the path ahead. Pioneer Natural Resources (PXD) had an overall solid quarter . Though some key line items came in a bit lighter than expected, overall results were solid, considering the sharp drop in oil prices during the third quarter. Most importantly for the Club, Pioneer continued to demonstrate its commitment to returning the majority of its excess cash to shareholders via buybacks and dividends. Procter & Gamble (PG) was forced to lower its forward sales guidance as the strong U.S. dollar and inflation are expected to remain a drag on overall results. We were encouraged to see that despite the difficult operating backdrop, P & G was able to grow organic sales across all categories and maintain global market share while accelerating productivity savings and improving supply chain efficiencies. Wynn Resorts (WYNN) operations in Asia were squeezed by Beijing’s strict Covid measures. Still the luxury hotel and casino company reported solid third-quarter results boosted by its U.S. properties. With China restrictions easing, the worst may be behind. We’re going to watch Covid spread in China to see if travel to Macao is impacted. The Not So Bad Advanced Micro Devices (AMD) continues to navigate China export restrictions on powerful chips and is working to flush its inventory channel. However, ADM is executing on its stated roadmap and appears well-positioned to continue to gain market share at the expense of Intel (INTC). Bausch Health Companies (BHC) is by far the ugliest stock in our portfolio, and it’s been a huge disappointment. However, BHC’s quarter itself was largely in line with expectations, low as they may be. At this point, we maintain a 4 rating and wouldn’t allocate additional capital until more is known about the Xifaxan patent litigation. But it would also be wrong to sell given that Bausch Health still owns about 88% of Bausch + Lomb (BLCO). Headline numbers at Costco (COST) missed the mark . However, the long-term direction of the business remains strong with positive catalyst events on the horizon, including a likely membership-fee increase and special dividend. We were also encouraged by apparent record e-commerce sales for Black Friday and Cyber Monday. Decent results for Coterra Energy (CTRA) thanks to outsized exposure to natural gas, where price action was much better than what we saw in the oil market. It was the only one of our three exploration-and-production holdings to hike its fixed-plus-variable dividend payout on a sequential basis. DVN and PXD are the other two. Estee Lauder (EL) reported in-line sales with an earnings beat. However, the reported numbers were overshadowed by a downbeat forecast for the rest of its fiscal year. China has been the primary headwind — and with China’s Covid policy only just beginning to ease, we continue to view this prestige beauty company as one of the best ways to play the return of travel and store traffic in Asia. Meta Platforms ‘ (META) quarter could arguably be characterized as “ugly.” However, we opted for not so bad because the core business results – the Family of Apps unit – were actually quite solid. They showed healthy engagement, strong progress on TikTok-like Reels, and the beginnings of WhatsApp and Messenger monetization. Unfortunately, all that took a back seat when investors learned of the jaw-dropping expense guidance. However, since then, management has clearly gotten the message, and they’ve begun the difficult process of laying off workers and cutting costs were possible. Even with strong headline numbers, Microsoft (MSFT) shares came under pressure as Azure cloud growth, a key metric for investors, and overall forward guidance came in below expectations. While Microsoft is clearly a crucial backbone of global productivity, the sheer size of its business means that it’s becoming less able to buck macroeconomic dynamics. As a result, we expect pressure on the stock to continue until the macro backdrop becomes more supportive. But we remain bullish on MSFT over the longer term as companies continue shifting additional workloads into the cloud. Morgan Stanley (MS) reported weaker-than-expected quarterly results, with net interest income exceeding expectations and non-interest revenue coming up short. What we did see was strong execution against massive external headwinds — and as a result, we believe Morgan Stanley remains a good investment because it stands to benefit greatly as the operating environment improves. Until then, our patience will be rewarded via dividend payments and share buybacks. Outside of the headline numbers — sales topped expectations and earnings fell short — there were things to like about the quarter at Nvidia (NVDA). Management was able to offer up an alternative chip to Chinese customers in place of the high-performance A100 and H100 designs, which the U.S. government announced during the quarter would no longer be allowed to be exported to China due to national security concerns. Signs that video gaming inventory should approach normal levels as we enter calendar year 2023 is also a bright spot. Salesforce (CRM) reported sales and earnings that outpaced expectations. Non-GAAP (generally accepted accounting principles) operating margins expanded to a new record. Unfortunately, the results were overshadowed by the unexpected resignation of co-CEO Bret Taylor, a move that puts co-founder Marc Benioff back solely in the driver’s seat. The Ugly Alphabet (GOOGL) reported weaker-than-expected results as a strong U.S. dollar and a slowdown in advertising spending resulted in one of the slowest revenue growth rates the company has seen in years. Even Google Search, the greatest advertising platform in the world, was not immune to some of the macroeconomic pressures that have been a hallmark of 2022. Amazon (AMZN) reported results that were disappointing, to say the least, and compounded by guidance that was even worse. We are holding onto our position — and added to it on Dec. 19 — as we think the worst of the margin pressure will be behind us come 2023. Management understands the importance of tightening its belt and controlling expenses during this tough time. While that efficiency drive has yet to fully show up in the results, we remain optimistic about the effort. Once Amazon cleans up its margins, its free cash flow should significantly improve, leading to a higher stock price. Disney (DIS) reported shockingly poor results that missed estimates on the top and bottom lines. The losses at streaming were out of control, especially when you consider that earnings fell 20% despite sales increasing 9% year over year. Perhaps the one silver lining of the print is that it was the catalyst needed to get former CEO Bob Iger back in the driver’s seat. Due to prior session weakness, we added to Disney on Dec. 20. Qualcomm ‘s (QCOM) results were largely on par with expectations. But the quarter was overshadowed by an inventory glut that led the chipmaker to materially lower guidance. Though internet of things (IoT) and automotive results were better than expected and the automotive backlog continues to grow, these are longer-term themes and we must first get through the next few quarters before anyone begins to care about all the new end markets. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) 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Traders react as Federal Reserve Chair Jerome Powell speaks on a screen on the floor of the New York Stock Exchange (NYSE) in New York City, November 2, 2022.
Brendan McDermid | Reuters
Third-quarter earnings season is finally behind us — and like the prior quarter, results were solid overall compared to analyst forecasts.
However, those expectations were low, thanks to macroeconomic headwinds like elevated inflation, a strong U.S. dollar and geopolitical tensions. The bar was not set high.
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