In this podcast, Motley Fool senior analysts Andy Cross and Jason Moser discuss:
- AMD warning about lower revenue.
- Constellation Brands posting a loss in the second quarter.
- Apple looking to boost production in India.
- Macy’s gaining inventory insights from its own credit card data.
- The latest from McCormick, Peloton, and more.
Malcolm Ethridge, host of The Tech Money Podcast, weighs in on prospects for more interest rate hikes, expectations for earnings season, why he’s watching seasonal hiring, and the S&P 600.
Jason and Andy discuss the possibility of DraftKings signing an exclusive partnership with ESPN and share two stocks on their radar: Alphabet and Dream Finders Homes.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on October 07, 2022.
Chris Hill: We’ve got the latest jobs report, retail, semiconductors, consumer goods, and breaking news in the world of sports business, Motley Fool money starts now.
… I’m Chris Hill, joining me in studio Motley Fool Senior Analysts, Jason Moser and Andy Cross. Good to see you both gentlemen.
Jason Moser: Hey, Chris.
Andy Cross: Hey, Chris.
Chris Hill: We’ve got the latest headlines from Wall Street. Malcolm Ethridge from the Tech Money Podcast is our guest, and as always, we’ve got a couple of stocks on our radar.
But we begin with the big macro. The U.S. economy added 263,000 jobs in September. It was the lowest monthly number of jobs added this year but still good enough to send the unemployment rate down to 3.5%. Markets were down on Friday, but, Andy, still positive for the week.
Andy Cross: Well, it’s still a very tight labor market, obviously, Chris, with demand outstripping supply. That’s showing up a little bit in wage growth. Wages were up 5%, a little bit lower than what they were last month. But still, I think that continues to give ammunition to the Federal Reserve.
This is the last job report they will have before they make their next announcement in early November. We still have an important inflation number to come out still. But more ammunition for them to continue to increase rates, and some of the stock movements we saw earlier this week after a very difficult September and third quarter was because of some of the excitement around the Fed not being quite as aggressive, or else they might not be so aggressive soon, and they might be able to either pause or, in fact, maybe even think about lowering rates. Now, the Federal Reserve has said no, we’re not doing right here, we are sticking with our plan.
But this job report continued to show the strength in the job market, 263,000 jobs created on nonfarm payrolls, Chris, as you mentioned, versus 255 first of the estimate. That’s down from 420,000 average per month for the entire year and down for August and July. We are seeing this slowing in that job growth, but still, it’s pretty robust. Unemployment, as you mentioned, fell, at 3.5% versus 3.67%. We still have almost 6 million unemployed people and 10.1 million job openings in the month of August from that jobs report. Again down from July but again, it still shows this healthy labor market, healthy wage market.
We saw growth across lots of different industries, leisure and hospitality up more than 80,000. Healthcare up more than 60,000, now back to February 2020 levels. So the employment market continues to look good. That’s showing the increase in wages, and that continues to show me that the Federal Reserve will stick with their plan of raising interest rates, the federal funds rates more than 75 basis points in November.
Chris Hill: Let’s go to some company news shares of AMD fell more than 10% on Friday after the semiconductor company warned third-quarter revenue will be more than a billion dollars lower than originally expected. AMD says the PC market is weaker than they expected, and the announcements surprise some on Wall Street. Jason, were you surprised?
Jason Moser: No, I wasn’t. I think anybody who has been paying attention would probably expect something like this. It was maybe a month ago or so where Nvidia did the same thing. We saw them preannounce, guide down, talk about challenges in the industry as supply chains are cramped, a lot of demand that’s been pulled forward over the last couple of years has cooled off. If you remember, Nvidia, they guided down from an outlook of $8.1 billion to $6.7 billion. The magnitude is very similar. Now, Nvidia was tied to gaming, and AMD, as you mentioned, tied to PC. But nevertheless, it is an industry that right now is feeling some headwinds.
I think when you look back to mid-September, AMD had an investor presentation, management was even talking about back then that the PC market continued to track lower than they expected, they even use the word “messy.” Typically they expect the second half of the year really to be more robust. We could see signs that this might have been coming down the pike here.
But regardless, it is something that is playing out here for short-term investors as opposed to long-term investors. I think it’s difficult to invest in this sector because it’s so cyclical, it can be so volatile. You have to endure these stretches.
I think my big question, really, and we’re going to learn more about this when they announce earnings November 1st. They guided for full-year non-GAAP gross margins for around 54% a quarter ago. You got to believe that’s going to change. Getting a better idea of what they see as far as the gross-margin picture for the full year. Some perspective on inventories. But the nice part, again, this is a very well-diversified business. They benefit from other markets including enterprise, gaming, the embedded market, which is something that the focus is on enterprises, both data centers. It’s a nicely diversified business, but no doubt PC headwinds are going to play into this one over the next several quarters.
Chris Hill: Last month, McCormick released preliminary results for the third quarter, and this week, the spice maker issued the actual results. Andy, after we got the early release in September, not really a lot of surprises, but McCormick did indicate they expect pricing to improve in 2023.
Andy Cross: Pricing was actually mentioned 51 times on the conference call, Chris, which I think is a lot. But not unexpected. Mike Smith, the CFO, said, “We expect pricing to continue outpacing inflation into next year as we plan to fully offset inflation over time.” You saw that a little bit start the pricing accelerated in the third quarter from earlier this year. Revenues were up 3.2%, the strong dollar hurt them as well. X the strong dollar revenues were up 6%, but they are up 10% on pricing, Chris, and down 2% in volume.
When you think about their consumer business, their flavor business, the pricing really matters, and they’re starting to see that impact show up on, finally, into their products, into their revenues, and into their growth.
They did continue to emphasize that the next year will be a little bit tough on the sales and the earnings front. They reaffirmed that guidance of their sales to be up about 3% and operating income about 2%. EPS will be somewhere between $2.64 and $2.69. That’s down from 2021 as they continue to put through some of their costs initiatives. They’re going to plan to eliminate $100 million of cost going into 2023.
McCormick, you got stock at $72 down from $100, about $20 billion in market cap yield of 2%. Price to earnings and then mid-20 range, dividend growth rate of gosh, more than 9% over the last five years. I look at that and say, it’s a pretty attractive price for a really good, stable business through the cycles.
Chris Hill: Constellation Brands posted a loss in the second quarter. The parent company of Corona beer and other wine and spirits brands did find with the alcohol part of the business, but constellations investment in Canopy Growth cannabis business dragged down the results and the stock, Jason.
Jason Moser: Yeah, a cannabis business you got to take the ultra-long view with that one. Constellations is interesting. It’s not been the greatest investment over the last five years, total return close to 20%, but it’s been a good one to own this year, a pretty defensive holding its outperformed the market even though it’s down slightly.
I think, though, when you look at the merits of this business, really it boils down to the diversification in its portfolio. It’s attacking this market from a number of different angles, not just beer, not just wine, but all three and they’ve made this move to focus more on premium in the wine and spirits division and that’s paying off. The business performed really well, I think. Grew revenue 12% earnings, excluding the Canopy loss, came in at $3.33.
The beer business posted depletion growth of nearly 9%, and they continue to gain share. Remember that’s brands like Modelo, Corona, Pacifico. That translated into 15% sales growth in the beer business, 25% growth in operating income. Wine and spirits treaded water for the quarter as they continue that shift to higher end, but still continuing to perform well. They witnessed a little challenge on the cost side of that business because it requires a little bit more, and it’s a little bit more stretched out around the globe. As you mentioned, the Canopy side of the business, it just requires taking a much longer outlook, I guess.
They wrote down another $1.1 billion impairment there. But again, they estimate this to be a $25 billion market at the end of 2021, and it’s expected to nearly double in size by 2026 as more states continue to legalize cannabis. I think if you look at the trend, it’s hard to argue that that is not materializing. It’s just a matter of watching the legal landscape shake out for this, and that’s going to take time. When it…
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