Silver banana goes to…

In this issue of the peel:

• Making predictions is hard, being wrong is easy, and Wall Street analysts do a lot of both. We’re officially in the weeds of earnings szn, and so far, reported numbers have kept the index afloat. Find out why, if anything, it should only get better from here.

• United Airlines took off on Q3 earnings, reflecting a much less turbulent ride than Delta. Meanwhile, Prologis has mastered the art of ignoring the past to focus on the future, while ASML is very worried about the future. Finally, Interactive Brokers had a great quarter, but you wouldn’t know it by looking at the share price.

• Morgan Stanley just proved the phrase “save the best for last” as factual. The last of the big banks to report this szn released their quarterly numbers a day earlier than we expected, flexing on its less-Wealth-Management-y peers.

Market Snapshot

Banana Bits

• Like good teeth and edible food, inflation is just about gone from the U.K., setting up a path for rate cuts.

• The FTC just enacted its long-rumored “click to cancel” rule.

• Consumers are anticipating higher long-run inflation/

• A cool path to victory tool for our esteemed Presidential candidates from the WSJ.

• GM and Lithium Americas Corp are teaming up for a $625mn joint venture to mine materials for EV batteries here in the US of A.

• X-energy, a nuclear startup that notably was not founded by Elon Musk, just received $500mn from the likes of Amazon, Ken Griffin, Ares, and more.

• Tom Brady officially owns 10% of the Las Vegas Raiders, which kinda f*cks over FOX as the former QB turned $375mn commentator is now heavily restricted in his calling of games.

More Money, Anyone?

Time is money. Save both with CapLinked.

CapLinked is the VDR provider built for dealmakers that turn LOIs to ROI faster than you can say “due diligence.”

Let CapLinked handle the hard parts for you. With military-grade security and collaboration tools that define the word “seamless”, CapLinked streamlines your workflow by taking care of all the most terribly tedious tasks for you.

Document storage? Covered. Compliance management? On It. Due diligence tracking? Too easy. Already on to your next deal? Get used to it - that’s the power of CapLinked.

Get ready to trade calling counterparties for calling Ubers. That’s how much time - and money - CapLinked is ready to save you.

What are you waiting for? You're losing money already. Sign up and start saving today, with CapLinked.

Just to prove it, CapLinked wants to give you free money today. Check out a proposal and they’ll hook you up with a $50 UberEats gift card. Once you’re signed up, take your team out to celebrate and CapLinked will cover the tab - any restaurants you choose.

All you have to do is request a proposal here.

Macro Monkey Says

Expecting Earnings

Predictions are tricky.

From Steve Ballmer’s 2007 comments that “The iPhone has no chance” to BusinessWeek declaring the death of the stock market in 1979 to me attempting to set the right fantasy football lineup every week—it’s clear that being wrong is very easy.

One group that’s no stranger to being wrong is equity analysts. And now that The Most Wonderful Time of the Year is back in full swing, we get to see how wrong they were this time around.

Let’s get into it.

The Numbers

Shoutout to FactSet for being cool and making some of their research free (looking at you, Bloomberg). 

I know this might be shocking to hear in the financial media space, but FactSet publishes articles that are actually worth reading, especially its Earnings Insight series.

An obvious trend emerges between earnings estimates from Wall Street and actual reported earnings when we look historically.

Analyst forecasts have a history of chronically underestimating actual results, but this is not without cause. Many would argue that a web of questionable-at-best conflicts of interest creates this dynamic.

It’s not necessarily the predictions themselves that we give a sh*t about, but the direction of those predictions. For example, if analysts are increasing estimates for Q4 right now, that’s a great sign for earnings when they come in January, and vice versa.

But, we’re only 6% of the way through Q3 earnings szn for S&P 500 companies. Let’s stay focused on that.

As of now, analyst estimates are forecasting 4.4% aggregate earnings growth for S&P 500 companies, as we can see in the above chart. 

That’s down quite a bit from forecasts three months ago at the start of Q3:

Since then, aggregate S&P 500 earnings calls have declined 3.9%. 

So far, 6% of S&P 500 companies that have reported Q3 earnings already have beaten estimates by an average of 4.1%.

Lowering those estimates might seem like the right move, but based on more data from our lord and savior, FactSet is projecting earnings growth closer to 7%.

The nerds at the firm ran the numbers on the degree to which actual earnings have exceeded earnings estimates in the past year, 5 years, and 10 years. The data looks like this:

• Over the last four quarters, 78% of S&P 500 companies beat their Wall Street estimates by an average amount of 5.5%.

• When one company beats earnings estimates, this necessarily increases the total estimated growth rate of aggregate S&P 500 earnings for the entire quarter. So, whenever a company beats, estimates are implicitly raised for the aggregate growth rate of earnings for the entire index. Therefore, analysts tend to raise their quarterly earnings growth estimates from the start of earnings szn to the end.

• In the last 4 quarters, the average increase to earnings estimates during earnings szn has been 3.1%. Based on the 4.4% starting point, that’s where FactSet gets their Q3 earnings growth estimate of 7.1%.

• But, if we use the average increase to earnings estimates during earnings szn for the past 10 years, we get 5.5%, which would imply Q3 growth of 9.9%.

• Using the last 5 years gives us the rosiest outlook. Earnings estimates have increased by 7.2% during earnings szn, implying a potential Q3 growth of 11.6%.

Confused yet? 

Basically, all this means is that the risk to earnings in Q3 is more heavily weighted to an upward surprise, meaning that, if anything, actual earnings are expected to outperform estimated earnings.

The Takeaway?

FactSet’s data also shows that the number of companies that have issued positive EPS guidance for Q3 is at a high not seen since Q3’2021.

Tech companies are doing most of the heavy lifting, comprising 25 of the 50 companies with positive EPS guidance for Q3.

Along with earnings from the big banks we discussed yesterday and below, all signs point to earnings szn a helluva lot less volatile than the simultaneous election szn.

At least one of them will be positive for the country…

Career Corner

Question

I have been trying to coordinate a time for a networking call with an investment banking associate at UBS for two weeks now. So far, he has delayed or not shown up to our meeting times 5 times already. How should I follow up and proceed to have a successful call?

Answer

More his fault than yours. Associates can be the worst to schedule for calls. If he’s responsive, I’d say keep trying; if he’s ignoring you a lot, move on.

Head Mentor, WSO Academy

Check out WSO Academy 

What's Ripe

United Airlines (UAL) 12.44%

• Steeped in jealousy, Delta Air Lines is looking at United’s earnings and dreaming about a quarter in which CrowdStrike didn’t completely f*ck them over.

• United beat on sales and EPS largely thanks to cutting “unprofitable capacity.” Revenue per passenger mile grew 2.7%, while unit costs increased just 0.1%.

• 20% growth in Basic Economy helped, but the real driver of success was a 13% growth in Corporate revenue and a 5% jump across all premium ticket sales.

Prologis (PLD) 4.60%

• Starting out a little sus by saying that their “bottoming process” (?) is commencing, Prologis put on a master class in managing the market’s forward-looking tendencies.

• The U.S.’s largest REIT beat estimates for sales and EPS by narrow margins. Yesterday’s share price move was driven by increased guidance.

• Prologis now expects FY’24 core FFO of $5.44/sh, up from $5.43/sh, on the increase in planned acquisitions, fewer dispositions, and more development starts.

What's Rotten

ASML Holdings (ASML) 6.42%

• You know it’s bad when accidentally releasing earnings a day early isn’t the worst part of your report. ASML shares are falling on expected demand weakness.

• U.S. and European shares of the chip designer and manufacturer had their worst day ever on Tuesday, thanks to reduced FY’2025 revenue guidance.

• Further, ASML reported $2.83bn in quarterly bookings, anemic against the $6.1bn expected. Losses continued to pile up on Wednesday.

Interactive Brokers (IBKR) 4.05%

• The good news is we know Interactive Brokers certainly placed a lot of trade yesterday. The bad part is that many of those trades were selling their own shares.

• Reporting earnings of $1.81/sh on $1.36bn in revenue, the online trading platform missed estimates for $1.82/sh but beat on sales by ~$23mn.

• Besides the EPS miss, business was booming. Accounts and margin loans grew 28%, customer equity increased 46%, and the earnings miss was due to a 67% jump in G&A costs due to one-time fees for consolidating European units.

Thought Banana

Earnings Spotlight: Morgan Stanley

Time to get bullish on HingeX subscriptions, Patagonia vest sales, and hair restoration treatments—banks and their bankers were killing it in Q3.

Morgan Stanley just reported earnings a day earlier than expected and is completing the chorus of third-quarter earnings from America’s largest banks.

Let’s dive in.

The Numbers

Citigroup really regrets having to sell its Smith Barney wealth management unit back in 2009 in order to stay afloat. Meanwhile, the acquirer, Morgan Stanley, couldn’t be happier.

Q3 saw the bank’s wealth management unit flex its muscles as the crowned jewel of the Morgan Stanley empire once again.

The firm reported earnings of $1.88/sh on $15.38bn in revenue against estimates for $1.58/sh on $14.41bn, huge beats on both sides of the income statement.

All three of Morgan Stanley’s reportable segments crushed expectations.

The firm’s largest unit, Wealth Management, grew net revenues 14% from last year to $7.3bn. Like the other banks we discussed yesterday, higher fees and AUMs were a double whammy to fee-based revenues. Transaction-based sales jumped 10% too.

In addition to the purchase of Smith Barney, Morgan Stanley’s 2020 acquisition of E*Trade was like the Patriot’s 6th-round prick in the 2000 NFL draft. The expansion of their client base, client lifecycles, and digital capabilities has been the Tom Brady of the industry.

The firm’s Institutional Securities unit was on fire as well, much like the other banks.

Investment banking revenue soared 56%, the fastest among its peers, while equities trading revenue surged 19%. Fixed-income revenue increased too, even if only by 3%, while all other banks posted annual declines.

Finally, MS’s smaller Investment Management unit posted revenue of $1.5bn, beating estimates by ~$400mn.

The Takeaway?

The high-yet-declining rate environment was gold for Morgan Stanley and other banks with high exposures to Wall Street and wealth management.

Morgan Stanley is the epitome of this kind of bank, so it makes sense they had the best Q3, from my perspective. Shares finished the day up 6.50%.

With rates continuing to fall, it will be interesting to see how banks handle client asset flows when yields on money market funds, CDs, and other low/no-risk investments drop along with JPow’s rates.

Probably just throw it all on the Vikings over.

The Big Question: Will Morgan Stanley and other banks be able to continue their success into Q4? Where can big banks find other areas for growth?

Banana Brain Teaser

Previous

A certain work plan for September requires that a work team, working every day, produce an average of 200 items per day. For the first half of the month, the team produced an average of 150 items per day. How many items per day must the team average during the second half of the month if it is to attain the average daily production rate required by the work plan?

Answer: 250 items/day

Today

A souvenir vendor purchased 1,000 shirts for a special event at a price of $5 each. The vendor sold 600 of the shirts on the day of the event for $12 each and 300 of the shirts in the week following the event for $4 each. The vendor was unable to sell the remaining shirts. What was the vendor’s gross profit on the sale of these shirts?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

ADVERTISE // WSO ALPHA // ACADEMY // COURSES // LEGAL