January 19, 2018

Good morning. Today’s update is focused solely on earnings announcements.

IBM (IBM) reported better than expected fourth quarter results. For the first time in 6 years, IBM posted positive y/y revenue growth (+4%). This is a victory. Analysts were not pleased to see that the company’s gross profit margin (at 49.5%) missed forecasts, however. Also, the revenue upside was driven by the legacy mainframe business and not the higher margin cloud computing business. Management’s 2018 guidance was encouraging, implying continued progress shifting from a dying mainframe business to its faster-growing Strategic Imperatives unit. The stock is down 3.5% today. 

American Express (AXP) reported fourth quarter revenue and earnings slightly ahead of Wall Street forecasts. The good news is that revenue rose 10% from year-ago levels and earnings shot up 74%. The bad news is that the new tax law will cost the company a lot of money up front. Tax reform will lower the company’s effective tax rate to 22% this year. But AXP will first have to take a $2.6bil charge to write down deferred tax assets. That’s of course a one-time item and analysts will look past it. Blaming the tax law, management said it would suspend its stock buy-back program to rebuild capital. This seems like a convenient scapegoat. There’s other stuff going on here. First, the company noticed deteriorating credit quality among its credit card loans and had to set aside more money against the possibility of future loan losses. Second, the company has been spending a lot on marketing to boost growth, and is now in danger of running afoul of the Federal Reserve’s capital maintenance rules. The stock is down 3% today. 

Bank of New York Mellon (BK) reported a 2% y/y decline in revenue but an 18% rise in earnings. Management is focused on continuing to cut costs, but efforts this past quarter were offset by higher severance and legal charges. Yes, tax reform will benefit the bank (effective tax rate to 21% from 25%), but the “vast majority” of gains will be spent on higher employee wages and more investment in technology. In other words, investors will not benefit in the near term, and that’s why the stock fell 5% after the announcement. 

Schlumberger (SLB) reported 15% sales growth in the fourth quarter—the highest in several years. Wall Street analysts were, however, expecting it. Management’s guidance implied stable revenue growth in 2018. In addition, capital spending should fall to $2bil from $3.5bil, so profit margins will increase. I will say that analysts are a bit confused by the fact that last quarter the company spent $1bil to buy oil wells in Canada. This is a change of strategy for a company that has always been an oilfield service provider, not a driller. Management’s explanation, and implication that this was a one-time event, is puzzling. The stock is down .7% today, but has run 12% so far this year. 

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