Welcome back to our weekly update on trending earnings topics, January 2022 about macro trends and key management commentary highlighted from earnings call transcripts of S&P 500 companies for the Q4’21 earnings season. With Microsoft, Visa, Johnson & Johnson and Invesco among the larger companies that reported results last week, here are some trending topics that emerged during earnings updates from the week of January 24th, 2022:
- High YoY Earnings Per Share (EPS) Gains: Companies in the “Industrials” sector are poised to report the highest YoY EPS gains of 112.7% for Q4’21, while all 11 sectors comprising the S&P 500 are generally highlighting positive EPS changes this earnings season.
- Looming Supply Chain Disruptions: Supply chain disruptions continue to be a primary focus in earnings discussions as organizations reflect on how the extensive supply chain shortages are impacting their business and how they’re looking to account for that in 2022.
Companies in the “Industrials” sector are poised to report the highest YoY EPS gains of 112.7% for Q4’21, while all 11 sectors are generally highlighting positive EPS changes this earnings season
On a year-over-year basis in quarter one, we delivered sales growth of 8% and adjusted earnings per share growth of 20%, along with operating margins of 18.6% which are up 90 basis points over last year. On an EPS perspective, our adjusted earnings per share of $1.76 was a record for our first quarter. The demand environment also continues to be strong as evidenced by the orders I will talk about, and our orders remained about $4 billion in the quarter. And what you’ll see is this reflects strength across many of our end markets and provides a positive indicator of ongoing future growth.
- Terrence R. Curtin – TE Connectivity Ltd., Chief Executive Officer & Board Member
From an earnings perspective, we expect adjusted EPS of $4.60 to $4.80, up 8% to 12% year-over-year. And we expect to generate free cash flow of about $6 billion; that’s up about 20% versus 2021.
It’s important to note that this free cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is deferred beyond 2022 which, as we’ve said before, the free cash flow impact of this legislation is approximately $2 billion. It’s also worth noting that if the legislation is not deferred, we’ll see about a $0.10 EPS benefit as well from the impacts of the R&D capitalization that we would have on components of our US taxable income. And as Greg mentioned, we expect to buy back at least $2.5 billion of RTX shares over the year, subject to market conditions.
- Neil G. Mitchill Jr. – Raytheon Technologies Corp., Chief Financial Officer
Reflecting back to 2021, we achieved all-time record sales of $16.8 billion, led by strategic acquisitions and strong organic growth of 10% despite the various ongoing supply chain challenges we incurred. In addition, we delivered record EPS growth of more than 10% even with raw material cost inflation of about 20% for the full year, the highest level of coatings industry inflation in recent memory.
- Michael H. McGarry – PPG Industries, Inc., Chairman & Chief Executive Officer
Continuing our long track record of delivering value for shareholders, NextEra Energy achieved full-year adjusted earnings per share of $2.55, up more than 10% from 2020. Over the past 10 years, we’ve delivered compound annual growth in adjusted EPS of approximately 9% which is the highest among all top 10 US power companies who have achieved on average compound annual growth of roughly 3% over the same period. Amid this significant growth, the company has maintained one of the strongest balance sheets and credit positions in the industry.
- James L. Robo – NextEra Energy, Inc., Chairman & Chief Executive Officer
A rapid 50% decline in Bitcoin’s price rattled the crypto market last week. Nevertheless, more and more organizations are discussing the integration of cryptocurrency and blockchain tech into their businesses this quarter, primarily to account for the increased interest in blockchain transactions and the possibility of expansion into this relatively unexplored market.
As far as cryptocurrency goes, look, we watch cryptocurrencies and you guys have heard me talked about this, we think about the spectrum of digital currencies, we think about crypto, we think about stablecoins, we think about central bank digital currency. And at this particular point in time, we view more cryptocurrency as an asset class. I mean, you’ve just seen Bitcoin go from $68,000 a coin to $34,000 a coin. Currencies that you use in the payment space, that’s a hard thing to utilize that way.
And as far as blockchain, look, we’ve got investments in blockchain companies, we constantly look at blockchain and figure out are there use cases for us. And as far as stablecoins and NFTs and things like that, we’re partnering with, obviously, the NBA and Top Shop and we’ll look at ways to get involved. But as I’ve said, we’re probably not going to offer a crypto card. Doesn’t mean we wouldn’t use MR as a redemption option, and I’ve said many times, it’s a digital currency in itself. So, we keep our eye on it, keep our eye on buy-now-pay-later in case that – in case that tide changes, we keep our eye on cryptocurrency in case it becomes more stable, but right now I don’t see it as a immediate or a medium-term threat to our business.
- Stephen J. Squeri – American Express Co., Chairman & Chief Executive Officer
The fintechs are also unregulated. So there’s a whole vector there in terms of some of the things they’re doing and some of the ways that they move and operate that wouldn’t be consistent with the banking side of the business. But I savor all that because I believe also, as do so many investors beating a path into this space, that banking is absolutely in the process of being transformed. And it’s kind of striking, the industry has taken as long as it has to be as transformed relative to a lot of other industries. And I think a big reason for it is the regulation that has tended to surround the banking space. Interestingly, by far, the biggest growth vectors have been sort of in the least regulated side of things, in payments and platforms and crypto. And I think those – the almost unmitigated success of companies in those space are really striking.
- Andre Schulten – Procter & Gamble Co., Chief Financial Officer
In addition, we’re beginning to become more active on the wholesale side. For example, we announced that we’re collaborating with HSBC to optimize the settlement of foreign exchange transactions through a blockchain-based solution, which will reduce settlement risks and associated costs. We’re also approaching payments and credit cards very differently. We believe credit cards will remain important, as both a credit and as a payment vehicle. We are also doing additional working around non-card payments and believe we must succeed here to be a key financial services provider.
- Charles William Scharf – Wells Fargo & Co., President, Chief Executive Officer & Director
And so a few examples of that. On the retail side, we’ve been able to digitalize existing product offerings with applications like Chase MyHome and launched our cloud-native digital bank with our recent Chase UK launch. On the wholesale side, we’ve continued to innovate on our Execute trading platform, commercialized blockchain through Onyx, and are building out real-time payments capabilities. In addition, our modernization allows us to more efficiently partner with or acquire more digitally centered companies, and you can see several examples of this on the page.
- Jeremy Barnum – JPMorgan Chase & Co., Chief Financial Officer
Supply chain disruptions continue to be a primary focus in earnings discussions as organizations reflect on how the extensive supply chain shortages are impacting their business and how they’re looking to account for that in 2022.
Over the last year, stronger than expected demand for systems, coupled with ongoing supply chain constraints, have gated our systems revenue growth. As a result of persistent strong systems demand, our systems backlog continued to grow in Q1. Over the last 30 days, suppliers of critical components that span a number of our platforms have informed us of significant increases in decommits. These came in the form of both order delivery delays and sudden and pronounced reduction in shipment quantities. The step function decline in component availability is significantly restricting our ability to meet our customers’ continued strong demand for our systems
- François LocohDonou – F5, Inc., President, Chief Executive Officer & Director
Coal revenue increased 39% on 2% lower volume. Increases in export coal shipments driven by the impact of rising benchmark prices was partially offset by the effect of declines in domestic volumes, largely related to producer outages. Other revenue increased primarily due to higher intermodal storage and equipment usage, driven by supply chain disruptions resulting from truck driver shortages, chassis availability and the lack of warehouse capacity. As we exited the fourth quarter, we clearly saw the effects of Omicron, with December volumes impacted by labor and supply chain disruptions. These challenges have continued into the new year, where we are seeing customers face labor shortages in their operations.
- Kevin S. Boone – CSX Corp., Executive Vice President-Sales & Marketing
On this slide, you can see the components that impacted our operating margins and earnings per share performance as compared to Q4 last year. The biggest impact to fourth quarter results was the ongoing effects from the well-known global supply chain, raw materials and logistics challenges, which persisted throughout the fourth quarter. Our enterprise operations teams continue to work tirelessly through ever evolving changes in customer demand while navigating these challenges to keep our factories running, serve our customers, and protect the health and safety of our employees. We continue to experience significant productivity headwinds in our factories due to shorter production runs and more frequent production changeovers throughout the quarter as we focused on serving our customers.
- Monish Patolawala – 3M Co., Executive Vice President & Chief Financial and Transformation Officer
Our intermodal franchise continued to face pressure from supply chain volatility, resulting in a volume decline of 7% year-over-year. Strong consumer demand and elevated imports stress these supply chains and exceeded drage capacity and equipment availability. This negatively affected both our domestic and our international markets. But despite these headwinds, we achieved record intermodal revenue in the quarter, up 14% year-over-year, and that was driven by increased fuel revenue, storage revenue and price gains. Revenue per unit less fuel grew for the 20th consecutive quarter.
- Ed Elkins – Norfolk Southern Corp., Executive Vice President & Chief Marketing Officer
Earnings Q&A Analysis
The data referenced below is based on Q4’s proprietary analysis performed on the Earnings Call Q&A sessions of S&P 500 organizations within the “Semiconductors” sector (INTC, TXN), as well as the “Healthcare Equipment” (ISRG, ABT) sector, that reported earnings last week. The charts below highlights the key topics that analyst queries focused on in these calls, displayed as a % of all questions asked.
As per the chart above, Gross Margin was the key trending topic being addressed by Semiconductors, covering 15% of all questions asked. Inventory came in 2nd place with about 12% of questions focused around that topic.
Additionally, the chart above displays the most frequently mentioned topics being addressed by companies in the Healthcare Equipment sector. The TAVR procedure came in 1st with 11% of questions highlighting this topic, while COVID-testing was mentioned at a frequency of 7%, followed by company-specific topics like CLASP IID and PASCAL, tied for 3rd place at 8% (cumulative).
Thanks for reading and stay tuned for next week’s updates!
