Tesla's Lackluster Earnings

In this issue of the Peel:

• In September, building permits broadly fell 4.4% but still rose 1.8% for single-family units.
• Abbott Labs and State Street had a ripe day, while Morgan Stanley and United Airlines suffered a share price decline.
• Tesla posted Q3 earnings after the bell on Wednesday, missing on both the top and bottom lines.

Market Snapshot

Happy Thursday, apes.

There was a whole lot of talking going on yesterday, but still no House Speaker. From the daily fiascoes in DC to the earnings calls spanning from NYC to San Fran, we have a lot to talk about.

There might be a lot to talk about, but not a lot to be excited about for you equity investors out there. U.S. markets tanked on the day in response to disappointing earnings and economic releases early in the day, sending every major index down at least 0.98%. Small caps took the brunt of it (as usual), with the Russell 2k losing 2.06%, while energy and staples were the only S&P sectors not in the red.

Treasury yields had a hectic day as well, causing mortgage rates to reach near highs of this century and now sit above where they have been for the entire lives of some of you reading this. The 10-year yield set more records, crossing 4.9% by the end of the U.S. session. The 2-year moved similarly but with less magnitude, reaching as high as 5.238% before coming back down slightly to close.

Let’s get into it.

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Banana Bits

• More talking, but still the same number of House Speakers in DC: 0.
• The streaming wars have been heating up for a while, but based on yesterday’s quarterly numbers, the big red streaming giant is still holding on tightly to The Crown (no pun intended).
• The DoJ and Google are continuing to throw hands as the former wraps up its case and the latter prepares to go on the defensive.
• Big Dawg Joey B spent his day in Israel yesterday working with their Prime Minister to provide aid in Gaza and urge avoidance of certain “mistakes.”

Macro Monkey Says

Hopeless Homes or Homeless Hope?

Most animals have a relatively easy time finding a place to live. Turtles are born with their shelter attached to their bodies, hermit crabs wander the ocean floor and move into the first shiny shell they find, and dogs just have to look cute, and all the sudden, we not only let them move in, but we even clean up their sh*t.

For being allegedly the “smartest” animals on the planet, humans have made finding a place to live one of the most stressful activities in existence. And Fed Chair JPow has only made it harder.

Anybody out there looking to buy, rent, or live in a shelter of any kind needs no reminding of how discombobulated the housing market is. That said, we received quite the reminder anyway on Wednesday when housing data was released at a rate similar to the rate at which head bobbing begins when someone plays Levels by Avicii.

But we promise it was a lot less fun than that. Not only did rates continue increasing and mortgage activity remained dry, but the two areas of the sector that had been giving us some hope—permits, and starts—didn’t paint a very pretty picture either.

"... humans have made finding a place to live one of the most stressful activities in existence."

Starting with the modicum of good news we got, housing starts actually ticked up in September. In measuring the number of new homes that started to be constructed throughout last month, the U.S. saw a 7% jump compared to that of August. Sure, that was only 3.2% for single families and 19.1% for multi-fams, but it’s damn sure better than nothing.

That right there is exactly what homebuyers want and need to see—new supply coming onto the market. Rate hikes couldn’t do anything to bring down home prices thanks to the demographics driving demand in the industry, so the only way in which housing will even start to become more affordable is with the expectation of new supply.

But we can’t say this jump came as a surprise to anyone, given that permits to build new housing units have been up every month in 2023 so far.

"The decline in permits suggests homebuilders are starting to get a little more self-conscious ..."

Even prior to starts, permits give us an indication for planned new supply. In September, building permits broadly fell 4.4% but still rose 1.8% for single-family units.

The decline in permits suggests homebuilders are starting to get a little more self-conscious when it comes to their confidence in selling those homes above cost. Like oil producers in response to crude prices, homebuilders are incentivized to build when prices are high, so this pullback could be suggestive of a coming sea change and the potential drop in new homes set to come online.

And most importantly, the mortgage data released on Wednesday served as the poop in the punch bowl in case the housing party was still even moderately fun for buyers.

Average 30-year fixed mortgage rates crossed the 8% threshold on the day, the first time we’ve seen rates that high since Clinton was still in office back in early 2000, according to Mortgage News Daily.

Unfortunately, more than a year and a half following the onslaught of JPow’s war on inflation, he is inadvertently still dropping bombs on the U.S. housing market—arguably the most important asset class in the world, if the events from 2007 to 2009 are any indication.

If you’re looking for a happy ending today, however, I’d suggest getting patient and ready to wait a while… or just go watch The Lion King. It’ll be just as effective.

What's Ripe

Abbott Labs (ABT) ↑ 3.82% ↑

• The magic of earnings szn is kicking into high gear, and for those who bought the right stocks, it’s always the best time of year. Just ask an Abbott shareholder.
• Shares in the medical device and healthcare player surged compared to the rest of the market yesterday, gaining over 3.8% on earnings numbers here to heal your portfolio. Abbott reported earning $1.14/sh on $10.1bn in sales, while Street estimates were for just $1.10/sh on $9.8bn.
• While a beat for sure, it wasn’t by all that much, but investors still treated the report as if it was a child that poured themself a glass of milk without spilling thanks to a strong guidance picture painted.
• Abbott lifted the midpoint of its FY’2023 guidance from $4.40/sh to a figure behind a great Jay-Z album, $4.44/sh.

State Street (STT) ↑ 2.01% ↑

• George Washington’s second term in office began in 1792, the same year State Street was founded. 231 years later, and (very) unfortunately for the U.S., only one of them is still going strong.
• And we say "unfortunately" because that one is the world’s 4th largest asset manager by AUM and not the man that crossed a frozen Delaware River. Anyway, State Street’s $1.93/sh EPS on $2.98bn in revenue handily beat analyst expectations for $1.79/sh on $2.92bn.
• Net interest income and margins were down, along with average deposit levels and less-than-exciting fee growth, but investors apparently cannot read. All it took to send shares higher on a decidedly negative day for markets overall was the fact that revenue and AUC (assets under custody) grew, making State Street the only one of the “big four” custodians to do so.

What's Rotten

Morgan Stanley (MS) ↓ 6.78% ↓

• Somebody call Morgan or Stanley because their firm clearly needs help. In an industry that’s been a boon to most of Wall Street, the firm’s wealth management division gave shareholders similar treatment to that which Lee Harvey Oswald gave JFK.
• Like UBS and a few others, Morgan Stanley woke up to the trend of wealth management as the most sustainable business model in finance quite a while ago. That said, the division that has been their stalwart disappointed many with just 5% annual revenue growth, a 45% drop vs last year in net new assets.
• Foul. And if that’s not enough, retail trading growth with E*Trade was lackluster as well. On the banking side, fees dropped 27% annually, much worse than other banks. Fortunately, however, there are apparently some good traders on the team who managed to save the day.
• All in all, Morgan Stanley earned $1.38/sh on $13.2bn in revenue vs $1.27/sh on $13.1bn expected. Investors are also still spooked by the coming departure of CEO James Gorman, set to begin next year, meaning that the need for a return of Morgan or Stanley is all the more dire.

United Airlines (UAL) ↓ 9.67% ↓

• When not-so-hot earnings aren’t even the worst part of your company’s news cycle for the day, you know you’re in trouble. Enter United Airlines.
• Shares in the U.S.’s 4th-largest airline by passenger miles took a nosedive on Wednesday. While we’re glad it was just the stock that did and not an actual plane, investors were far from pleased.
• The numbers weren’t bad, reporting $3.65/sh on $14.5bn in sales vs $3.35/sh on $14.4bn expected. But, announcements along with the report around higher fuel costs along with the recent outbreak of a tragic war in the Middle East are set to squeeze margins in the coming quarter.
• This just made an already ugly guidance picture look even worse, like when the ugly kid gets glasses right before picture day.

Thought Banana

Earnings Spotlight: Tesla

By now, we’re all well aware that the stock market’s explicit and lone goal is to confuse us as much as possible. So, please don’t be surprised when I tell you that…

Tesla posted Q3 earnings after the bell on Wednesday, missing on both the top and bottom lines, but exactly 0 people seemed to care right off the bat, and shares were up 2% after hours (5:12 pm).

The EV maker powered by CEO and Technoking Elon Musk delivered adjusted earnings of $0.66/sh vs estimates for $0.73/sh, while GAAP earnings were naturally lower at $0.53/sh. Sales came in weak as well, raking in only a tiny, little $23.4bn vs the $24.1bn estimated.

"Sales came in weak as well ..."

So not bad, but it’s Tesla, so even not bad is phenomenal to the Elon stans in the crowd.

With shares down well over 11% in just the last month, it does seem like the market was frontrunning this disappointment anyway. Tesla came out earlier this month and warned that vehicle deliveries were ~7% in Q3 compared to the second quarter.

Moreover, margins have been weaker as well following the price-cutting war Tesla has engaged in all year. That led to a disgusting operating margin decline from 17.2% for the same period last year to 7.6% in Q3’23. Gross profits alone were off by 22% as well.

But, at the same time, there’s a lot going on to be not depressed about if you’re a Tesla shareholder. The firm drastically ramped its R&D costs from $733mn to nearly $1.2bn on the expansion of the Optimus robot project along with a revamp of the firm’s AI self-driving capabilities, FSD Beta.

Speaking of AI, however, the firm also announced it was doubling its computing capacity as well for these projects, likely making them very thankful to have that supercomputer.

"... there’s a lot going on to be not depressed about if you’re a Tesla shareholder."

Outside of the vehicles, however, Tesla’s energy business was fairly mixed. Solar installations plummeted annually, but energy storage deployments grew over 90% through the same period.

Further, regulatory credits across the entire business nearly doubled from last year, moving to well over $550mn, but that’s not necessarily something investors are too excited about.

So, the story of the day was essentially, “Hey, it could’ve been worse! Go Elon!” as it always seems to be with this company. But, with a guy running the firm who calls himself the “Technoking” and has almost as many other companies to run as children to take care of, expecting normalcy is the real mistake.

The big question: How will investors react to the quarterly call during normal trading hours? When will the firm’s self-driving capabilities come fully online, and what kind of impact will that bring?

Banana Brain Teaser

Yesterday —

For being good at the garden fete, four children were each given two sweets. Jack had an orange sweet. The child who had a red one also had a blue one. No child had two sweets of the same color. The child who had a green sweet also had a red one. Jim didn't have a red sweet, and Joe had a green one. James didn't have an orange one, and Jack had no blue sweets. Knowing that there were two sweets of each color, can you tell the colors of the sweets each child had?

Answer

Jack had an orange and a green sweet. Jim had an orange and a blue one. James had a red and a blue sweet. Joe had a green and a red one.

Today —

Mad Ade has left a glass of water on the window ledge in direct sunlight. On the first day, 1/3 of the water evaporates. On the second day, 3/4 of the remainder evaporates. By the end of the second day, Mad Ade remembers the glass. How much water is left?

Shoot us your guesses at [email protected].

Wise Investor Says

“Past performance is the best predictor of success.” — Jim Simons

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team