We Need Kim K

The box office is performing even worse in the post-pandemic era than many anticipated. Crazy to imagine with bangers like The Minions movie and Kung Fu Panda 4 coming out since then, but it seems like the industry needs help from the most famous movie star of this generation: Kim Kardashian.

October 16, 2024

Silver banana goes to…

In this issue of the peel:

  • America’s biggest scumbags, I mean banks, are reporting earnings. 5 of the big 6 have dropped their Q3 numbers so far, giving us a great measure of the actual, on-the-ground performance of the U.S. economy. Break it down with us below.

  • Walgreens had its first good day since 2015 after announcing the closure of a bunch of stores. Meanwhile, Charles Schwab’s earnings sent shares flying while UnitedHealth, on the other hand, was dying. Finally, Nvidia’s mommy and daddy said they can’t hang out with the Middle East anymore.

  • The box office is performing even worse in the post-pandemic era than many anticipated. Crazy to imagine with bangers like The Minions movie and Kung Fu Panda 4 coming out since then, but it seems like the industry needs help from the most famous movie star of this generation: Kim Kardashian.

Market Snapshot

Banana Bits

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Macro Monkey Says

Bank Earnings

When Spooky Season meets The Most Wonderful Time of the Year, you know sparks are getting ready to fly.

Already, Q3 earnings szn is off to a hot start. So far, most companies have reported numbers that make analysts' estimates look like they’re based on astrology.

But then again, tracking stars got Columbus to the New World. 532 years later and two days after the explorer’s holiday, I’m hoping earnings szn can take my financial life to the same place.

Let’s get into it.

The Numbers

Investing in banks is arguably the most pure-play way to bet on an economy through public stocks. They are the engines providing the financial fuel for growth, so their numbers can tell us a lot about the state of the economy.

Let’s check out the big ones.

JPMorgan Chase & Co: The world’s most valuable bank reported earnings last Friday of $4.37/sh on $42.65bn in sales, beating estimates for $4.02/sh on $41.06bn and sending shares higher like a Jay Z album, up 4.44%.

Net income actually fell 2% annually to $12.90bn. A larger-than-expected provision for credit losses of $3.11bn, driven by a surprisingly high $2.1bn in chargeoffs, was the primary factor.

Consumer banks love some high interest rates as it’s easy for them to increase their interest spread. In Q3, net interest income rose 3% to $23.5bn, also beating estimates.

Investment banking fees largely drove the strong results, rising 31% and making me seriously question if that “80-hour limit” is actually a thing for junior bankers.

Equities trading revenue also surged, rising 27%, while fixed-income trading was flat but still beat estimates. Deposits and loans both grew 1%, while mortgage lending was the only broad category of borrowing to post an annual decline.

Bank of America: The bank with the most freedom reported earnings yesterday that also largely pleased investors.

I bet Buffett is kicking himself for selling his shares and missing out on this huge gain of 0.55%. Yesterday’s rise was driven by the firm’s $0.81/sh in EPS on $25.49bn in sales vs estimates for $0.77/sh on $25.30bn. 

Bank of America faced similar trends to its big brother, JPMorgan, as both reported a drop in profits due to losses on credit provisions. At BofA, net income fell 12% year-over-year, with loss provisions totaling $1.5 billion.

Net interest income fell 2.9% YoY to $14.1bn but still beat estimates. Trading revenues really saved the day, with fixed income up 8% and equities trading revenues up 18%. Investment banking fees jumped 18% too.

Deposits increased, loans and loan balances increased, and the firm’s wealth management unit was on fire, largely thanks to rising fees and AUMs.

Wells Fargo: The bad boy of the big banks reported earnings that seemed somehow even worse than the firm’s KYC/AML controls but managed to beat estimates.

Wells Fargo shares rose 5.61% on Friday after reporting EPS of $1.52/sh on $20.37bn in revenue vs estimates for $1.28/sh on $20.42bn. 

Somehow, those numbers drove the best same-day return of the set, even despite an 11% decrease in net interest income to $11.69bn, below Street estimates looking for $11.9bn.

Average loans and loan balances decreased while deposits eked out a gain smaller than the firm’s regard for regulation.

Somehow, investment banking fees declined to $419mn, and Wells decided to cut their provision for credit losses to $1.07bn, bucking the trend set by JPM and BofA.

Consumer Banking and Lending revenues fell 5%, partially offset by a 5% increase in the smaller Wealth and Asset Management division. Once again, higher fees and AUMs saved the day.

Goldman Sachs: When Goldman Sachs CEO David “DJ D-Sol” Solomon isn’t out here raising the volume, he’s busy raising profits. Net interest shot up 45% annually for GS, and it seems that the only thing that dropped was D-Sol’s beats.

Revenue rose 7% to $12.7bn, pulling $8.40/sh in earnings off that, both easily beating estimates but keeping shares to a flat performance of -0.07%.

Banks with more exposure to Wall Street, like Goldman, Citi, or Morgan Stanley, tend to struggle more during rate hiking cycles, so much of the firm’s conference call was spent hyping up the Fed’s cutting cycle.

An 18% surge in equities trading revenue to $3.5bn carried the team and beat estimates by more than half a billion dollars. On the fixed income desk, revenue fell 12%.

Investment banking fees spiked 20% while the firm’s asset and wealth management division grew 16%, again on higher fees and AUMs.

Goldman’s profit surge is largely linked to negative effects from the wind-down of Marcus in Q3’23, the firm’s push into consumer banking. Now that they’re done dealing with gross, poor people like us, it’s off to the races.

Citigroup: Like most little siblings, Citigroup is getting in trouble for doing mostly the same thing as its brothers. Maybe once they’re big and strong, they can get away with it, but for now…

Shares fell 5.11% yesterday after Citigroup delivered earnings of $1.51/sh on $20.32bn, both beating expectations. The share price decline appears attributable to falling net interest income, profits, and higher-than-expected credit loss provisions.

Net interest income fell 3% to $13.4bn while its margin shrank too. Revenue rose just 1% for the year despite an 18% surge in banking revenue driven by a 31% spike in investment banking fees.

Wealth management revenue grew 9%, equities trading grew 32%, but fixed income revenues fell 6%.

Since bringing in CEO Jane Fraser in March of 2021, the bank has been undergoing nonstop operational change across the entire business. That and a growing exposure to consumer banking weakened the firm’s Q4 outlook vs peers.

The Takeaway?

The final member of the big bank band, Morgan Stanley, reports tomorrow morning. We’ll find out then if they stole everyone’s net interest income and fixed-income trading revenues, but based on the above numbers, the trend seems clear.

These results suggest:

  • Declining rates have already benefited Wall Street-linked banks primarily,

  • Rising rates were a boon to Main Street-linked banks but may not be any longer,

  • Net interest income is falling primarily due to declining lending rates and slightly increasing deposit rates at firms like Bank of America and Wells Fargo,

  • M&A is back as investment banking revenue continues to shoot higher,

  • The “stock picker’s market” has been great for professional equity traders who actually know what they’re doing,

  • Banks are nervous about consumers repaying loans, hence the increase in credit loss provisions,

  • Consumers are still hesitant to take out loans, and

  • Asset and wealth management continues to be the long-term, secular growth driver of the industry.

All told, bank earnings paint a rosy picture of the U.S. economy for now, but concerns over consumers’ ability to pay off loans, especially those issued at fixed rates in the past 2 years, have increased.

Besides the somewhat spooky rise in loss provisions, it looks like the Most Wonderful Time of the Year should live up to its name.

Career Corner

Question

When connecting with the mentors from the roster on LinkedIn, should I add a note mentioning I’m in the WSO academy, or should I just send a connection request without a note?

Answer

Yes, I strongly suggest it. I get connection requests, which is not entirely clear from the Academy; it just makes a quick acceptance easier.

Head Mentor, WSO Academy

What's Ripe

Walgreens Boots Alliance (WBA) 15.78%

  • Cue the High School Musical soundtrack because, for Walgreens’ turnaround plans, it’s now or never. Shares are still down ~90% since a July 2015 peak.

  • Earnings expectations for the convenience store and pharmacy chain were lower than a pre-schooler basketball hoop, allowing the company to beat estimates.

  • But the exciting news is that 1,200 locations of the saddest store in America will be closing by 2027. CEO Tim Wentworth said the closures would be “immediately accretive” to EPS, getting shareholders fired up.

Charles Schwab (SCHW) 6.10%

  • The business of making money still makes money as Charles Schwab shares soar on Q3 revenue and earnings beats despite declining deposits.

  • Revenue grew 5% annually to $4.85bn, above the $4.78bn expected. Net income soared 25% to $1.4bn, or $0.71/sh, beating estimates for a nice $0.69/sh.

  • Deposits declined, but only by 2%. More concerning was a 1% decline in net interest income, but analysts paid more attention to the beats, positive outlook, and a 9% jump in client daily trades (you're welcome).

What's Rotten

UnitedHealth Group (UNH) 8.11%

  • The only thing that “united” investors in this firm yesterday was their desire to dump all their shares. The world’s largest health insurer needs a prescription for Prozac.

  • UnitedHealth reported EPS of $7.15/sh on $100.8bn in sales, beating estimates for $7.02/sh on $99.5bn. But, a weak outlook dragged shares lower.

  • Expecting headwinds in their government-sponsored unit, the firm is now guiding for a max FY’25 profit of $30/sh, below the $31.18/sh analysts had priced in. 

Nvidia (NVDA) 4.52%

  • It's kind of like when your mom stopped letting you go to that certain friend’s house in elementary school; Nvidia isn’t allowed to hang out with the Middle East anymore.

  • Reports emerged Tuesday that the Harris, I mean Biden Admin, is considering adopting measures to cap exports of advanced AI chips from Nvidia, AMD, and others to nations in the Middle East.

  • Saudi Arabia and other oil-money nations are investing big in AI, with the country’s Public Investment Fund setting aside $40bn for the industry.

Thought Banana

Big Screen, Small Dollars

It seems like the most famous movie star of our generation, Kim Kardashian, has really fallen off in recent years.

And it’s not just her. The entire film industry is struggling once again after two years of hope in 2021 and 2022 following the movie massacre committed by the pandemic.

Let’s dive in.

What’s Happening?

I’m no cinephile, but if movies are still a reflection of culture, then god damn, we’re in even more trouble than I thought.

So far in 2024, the top 10 highest-grossing box office movies of the year have raked in $7.42bn, ~$500mn less than that of a decade ago in 2014. 

I can’t say that’s super surprising given the masterpieces that top 2024’s list, like Inside Out 2, Deadpool & Wolverine, and Despicable Me 4, but that means over the last decade, the global box office has shrunk 6.19%... and that’s not even inflation adjusted.

The pandemic disrupted box office revenues for obvious reasons. But, similar to the travel boom, many expected movie theaters to enjoy part of the anticipated “experiences boom” after being trapped inside with our families.

To quote a certain former President in response to that hypothesis: Wrong. 

Part of the variation in post-pandemic box office revenues is attributable to titles. For example, the most successful box office movie since C-19 has been Avatar: The Way of Water in 2022, raking in $2.32bn.

Rounding out the top 5 biggest box office successes since the pandemic includes 

  • Spider-Man: No Way Home - $1.91bn in 2021

  • Inside Out 2 - $1.69bn in 2024

  • Top Gun: Maverick - $1.50bn in 2022

  • Barbie  - $1.45bn in 2023

  • The Super Mario Bros. Movie - $1.36bn in 2023

Looking at the list going back to 2014, we can see that just about every title in the top 10 of each year relied on one or a combination of these three things: Children, Nostalgia, and/or Super Heroes.

The Takeaway?

The other big reason for this trend is just as obvious as the pandemic:

While the annual revenue of the top 10 box office movies has declined 6.19% since 2014, Netflix’s revenue has exploded 613%.

Extrapolate that to the other streaming services, and honestly, I’m kind of impressed with how well the box office has kept up.

The biggest takeaway is that consumers will still rush to the theater, but only for the right title. Maybe we just need Kim K to make her return.

The Big Question: With streaming services seeing a 613% increase in revenue while box office earnings continue to shrink, could theaters ever bounce back to pre-pandemic levels, or is this a permanent shift in consumer behavior?

Banana Brain Teaser

Previous

Guadalupe owns 2 rectangular tracts of land. One is 300m by 500m, and the other is 250m by 630m. The combined area of these 2 tracts is how many square meters?

Answer: 307,500

Today

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?

Send your guesses to [email protected]

❝

Predicting rain doesn’t count. Building arks does.

Warren Buffett

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Happy Investing,
David, Vyom, Ankit & Patrick