ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Profit slide. Amazon`s earnings fell for the first time in more than two years as it ramps up spending on faster delivery.
Return to growth. Intel`s revenue is revving. Its outlook is better than expected and it`s buying back billions in stocks.
Soft patch. 3M (NYSE:MMM) hit it. The industrial conglomerate cut its earnings outlook and it`s blaming weakness in China.
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday, October 24th.
Good evening, everyone, and welcome. Bill has the evening off.
It was the busiest day of earning season and that`s where we begin tonight with late-day results from Amazon (NASDAQ:AMZN). The company`s earnings fell short of Wall Street expectations as its heavy investments cut into the profitability. Amazon (NASDAQ:AMZN) has been spending a lot of money on everything from one-day delivery to its cloud business and its advertising sales force as well.
The good news is that revenue grew at a healthy clip, but its guidance wasn`t what analysts were looking for. That sent the stocks lower in initial afterhours trading.
Josh Lipton takes a closer look at Amazon`s quarter.
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JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Good quarter, bad guide. That`s how on lists are describing the latest earnings report, specifically of the company`s Q4 forecast disappointed analysts calling for $80 billion to $86.5 billion. The street wants to see $87.4 billion.
Brent Thill at Jefferies says that`s critical. Q4 is the company`s big quarter, the holiday quarter, though he does caution Amazon
(NASDAQ:AMZN) is typically conservative in its forecast. He also notes the company is clearly back into investment mode, spending a lot of money to bring one-day shipping to its prime members and that`s weighing, he says, on the bottom line.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.
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HERERA: So, now, let`s turn to Tom Forte to talk more about Amazon`s earnings miss. He is a senior research analyst at D.A. Davidson.
Tom, welcome. Nice to have you here.
TOM FORTE, D.A. DAVIDSON SR. RESEARCH ANALYST: Thanks for having me.
HERERA: I don`t think you were surprised by the results that much. You had been saying that you thought this big investment that they had been doing might weaken the bottom line a little bit, correct?
FORTE: Sure. So, looking in the September quarter, our profit expectations were lower than others to the extent that we thought investment spending for faster prime shipping and then also for content on their video platform would result in profits that were lower than expected for the September period, which, as it turned out, happened.
HERERA: Now, how long do you think, though it`s going to take to recoup some of this investment? I noted on the call — the earnings call today, the CFO said they were investing heavily in hiring software engineers. There`s a lot of money going into personnel. Part of that, of course, is to drive content.
But how long do you think it will take to recoup the cost?
FORTE: Yes. So, historically, actually, investors would be well-suited on buying shares when they`re under short-term pressure because Amazon (NASDAQ:AMZN) is ramping its investment spending. And I think the good news is that while they`re investing in faster shipping for prime, you`re seeing faster revenue growth because consumers can now get more products to them quickly, opens the opportunity to buy different things in Amazon (NASDAQ:AMZN) than in the past. And advertising and cloud computing — those are still two big profit centers for Amazon (NASDAQ:AMZN).
So, it might be sooner for a payoff in profits than historically.
HERERA: Are you at all worried about the fact that their cloud business did slow a little bit?
FORTE: The answer is absolutely. And if you look at the competitive set, especially Microsoft (NASDAQ:MSFT), I think you`re starting to see some incremental competitive pressure, and it is important because cloud computing, again, along with advertising and when other people sell on Amazon (NASDAQ:AMZN), third-party retailer Amazon (NASDAQ:AMZN) sales, those are the big sources of profit for Amazon (NASDAQ:AMZN). So, incremental competitive pressure and cloud is concerning.
HERERA: What about — what about regulatory risk? That`s something that in your notes you`ve pointed out a number of times.
FORTE: I`m so glad you brought that up. So I like to think about Amazon (NASDAQ:AMZN) is kind of the great white shark in retail and I think of regulatory risk is the Megalodon, so the prehistoric shark.
And the basic concern is that the government, like they did with Microsoft (NASDAQ:MSFT), could institute rules that would cause Amazon (NASDAQ:AMZN) to not be able to maximize sales and profits in the future and it`s something that we`re monitoring closely.
HERERA: On that note, Tom, thanks so much.
FORTE: Thank you, Sue.
HERERA: Tom Forte with D.A. Davidson.
It was a different story for Intel (NASDAQ:INTC). The semiconductor company trounced earnings and sales expectations, thanks to better than expected sales in its data center. Its guidance was also above estimates for the full year and that sent the stock higher in initial after-hours trading.
Jon Fortt has more on Intel`s quarter.
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JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big takeaway from Intel`s report today is that it`s really not about the PC business anymore. The company has been saying that for a while, but no quarter perhaps a recent memory has underscored it like this one. The PC-centric business was down 5 percent and yet, Intel`s surprise big to the upside because of data and the data center the businesses that Intel (NASDAQ:INTC) has been touting as their growth area for years now.
They really did deliver we`re talking everything from cloud to the regular server hardware that companies buy to put in their own data centers, perform strongly not just for this quarter but so strong that Intel (NASDAQ:INTC) upped its full-year guidance.
For NIGHTLY BUSINESS REPORT, I`m Jon Fortt.
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HERERA: It has indeed been a rollercoaster ride for semiconductor stocks this year. The chip makers have been caught in the crosshairs of the trade war between the U.S. and China, making the sector very volatile and creating a lot of uncertainty. But are things about to change for the group.
Joining us to talk about that is Michael Bapis, managing director with Vios Advisors at Rockefeller Capital Management.
Nice to have you with us, Michael. Welcome back.
MICHAEL BAPIS, MANAGING DIRECTOR: Thanks, Sue. Good to be here.
HERERA: Let`s start, first of all, with Intel`s report. A lot of people were surprised that they did so well given some of the pressures that the chip sector as a whole has been under?
BAPIS: Yes, look, I think it`s a long time coming for Intel (NASDAQ:INTC). Since we`re in the middle of the World Series, let`s say, they hit a walk- off grand slam with these earnings numbers. And I think, you know, there – – even with this growth they`re still trading at times earnings which is a low P/E obviously, and they`re yielding a dividend about two and a half percent.
So in this interest rate environment not only is it trading cheaply from a valuation standpoint, you`re also getting two and a half percent roughly to wait and own the stock for the long term.
HERERA: And is it an Intel (NASDAQ:INTC) specific success story or do you think that translates to the entire chip sector?
BAPIS: That`s a good point look we are in the middle of a technological revolution that we will never see again probably in the next 500 years. So, data is more important than ever as we just saw. And from the cloud to everything that they provide, everything that Intel (NASDAQ:INTC)
provides, until someone comes along and starts to compete with them in a meaningful way, I don`t think — you know, the sector is going to grow just because of technology but Intel (NASDAQ:INTC) is definitely a leader in the sector and I see that continuing for the foreseeable future.
Look, it`s not even up that much. It`s up I think 11 or 12 percent this year. Well, obviously, the S&P; is up much higher and it`s been trading in the middle of its range. It hasn`t even hit as its highs yet. So, you`ll see this to months out higher.
We do have a little bit of fear with the trade wars, but I think like anything else, like any other name, any other equity any other — anything in our world today, those will get solved at some point, hopefully sooner than later. But I don`t think we`ll have an impact that everyone`s expecting.
HERERA: It was interesting that you say that because the company has basically given the indication that they think that they are better prepared to handle the trade war than some other players in the sector. Would you agree with that?
BAPIS: Yes, I think they probably are. I mean, look they`ve expected it for a long time. They`re repatriatizing some of their plants. They`re — you know, they`ve expected this for let`s say a year now and even though, it`s not solved, they`re very prepared.
And I think — I`m sure they`ve spent the money to be able to manage through it, as it gets solved.
HERERA: Is your favorite name in the space?
BAPIS: Definitely, it`s one of my favorite names in general —
HERERA: Especially technology, as well as just in general.
Michael, thanks so much.
BAPIS: Thanks, Sue.
HERERA: Michael Bapis with Vios Advisors at Rockefeller Capital Management.
Dow component Visa (NYSE:V) topped earnings expectations and delivered revenue that was higher than last year, but in line with estimates. The company said an increase in its payments volume helped drive its results for the quarter. The stock was volatile in initial extended hours trading.
Fellow Dow component 3M (NYSE:MMM) is the latest global manufacturer to be hit by slowing global economies. Revenue fell in about a third of its markets and the company cut its earnings outlook for the year and that sent the stock down four percent in trading, making it the worst performing Dow stock today.
But as Seema Mody reports, the CEO has a plan to try and offset that weakness.
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SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: From diapers to cars, 3M`s adhesive products can be found everywhere, and that`s why its earnings report is widely regarded by Wall Street as an indicator of the global economy. And the results we`re not good.
Third quarter revenue slowed, forcing the industrial giant to cut its profit outlook due in part to ongoing weakness in China. Analysts say gaining market share in the country is becoming a bigger struggle for 3M (NYSE:MMM) as China`s economy slows. At the same time, competition from Chinese players is making it harder to win new business.
On a call with analysts, 3M (NYSE:MMM) CEO Mike Roman says he doesn`t see the situation in China changing in the near term.
MIKE ROMAN, 3M (NYSE:MMM) CEO: We as I said in my remarks are still anticipating some — that — that`s slowing in China, automotive and electronics, could continue through 4Q. So, our outlook continues to remain the same.
MODY: This quarters results are seen as a setback for Roman who became CEO in 2017, and is under growing pressure by shareholders to turn around the company.
ROMAN: The first year of our five-year plan hasn`t turned out as we anticipated, and given the slowdown and in those key on markets we`ve been talking about.
MODY: While those markets, which include China, electronics and automotive, slow, the company is betting that acquisitions and investments in its healthcare business will pay off, having recently acquired wound care company Acelity for more than $4 billion.
ROMAN: The medical solutions business getting stronger with the integration of Acelity.
By the way, the results in health information are reflecting some of the early synergies.
MODY: While the sales in the company`s health business did rise in the quarter, analysts caution it may not be enough to offset the weakness it`s experiencing in other parts of its business.
For NIGHTLY BUSINESS REPORT, Seema Mody.
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HERERA: While there were some big moves in individual stocks, the broader market struggled for direction. Results from 3M (NYSE:MMM) weighed on the market, offsetting a strong report from Microsoft (NASDAQ:MSFT) which we told you about last night. All of that resulted in a mixed finish for the major averages. The Dow Jones Industrial Average fell 28 points to 26,805, the Nasdaq was up 66, and the S&P 500 added five.
It is time to take a look at some of today`s “Upgrades and Downgrades”.
Ford was downgraded to hold from buy at Deutsche Bank. The analyst cites a weak earnings outlook and pressure on pricing in the U.S. and volumes in China. The price target is $11. The stock fell 6 percent to $8.60.
EBay was downgraded to market perform from outperform at Raymond James. The analyst says the stock will likely remain range-bound following the company`s soft guidance for its 2020 earnings growth. The price target is $45. The stock fell 9 percent to $35.62.
Tesla got a number of price target increases, including one from Oppenheimer, which has a $385 target on the stock. The call follows Tesla`s earnings which saw solid quarterly results and stronger free cash flow, which we told you about last night. The firm has an outperform rating on the stock. The shares soared today 17 percent to $299.68.
Both Southwest and American Airlines reported better than expected earnings and that sent shares of both of those carriers higher. But they`ve also been forced to cut their capacity because they cannot fly the Boeing (NYSE:BA) 737 Max.
And as Phil LeBeau reports, their CEOs are not happy about that.
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PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Southwest and American both posted better than expected earnings thanks to strong demand, but both carriers say they could have flown even more passengers if they had all of the planes in their fleet. Not only has the grounding of the MAX for Southwest and American to cut their flight schedules, they`re tired of waiting for the plane to be fixed.
GARY KELLY, SOUTHWEST AIRLINES CEO: I`ve been very clear. We`re not happy about our situation. You know, we put — we put our future in the hands of Boeing (NYSE:BA) and the MAX, and we`re grounded.
LEBEAU: The grounding of Southwest planes means the airline which has exclusively flown the 737 since it started in 1967, will now look at potentially buying Airbus models in the future. Meanwhile, American, which has lost more than a half billion dollars being unable to fly the MAX says Boeing (NYSE:BA) will have to make up for those losses.
DOUG PARKER, AMERICAN AIRLINES CHAIRMAN & CEO: So we`re working to ensure that Boeing (NYSE:BA) shareholders bear the cost of Boeing`s failures, not American Airlines shareholders.
LEBEAU: The other challenge for American and Southwest is making sure customers will want to get back on the MAX when it`s cleared to fly. Yes, the plane will be thoroughly checked out by the FAA before it`s declared safe. But it could take more than recertification to put everyone at ease.
KELLY: We`re going to have to convince not just our own people but our customers that everything is fine and everything is safe.
LEBEAU: The other issue for airlines that fly the MAX: bringing those planes back next year. It may not be a smooth schedule, which could create some operational challenges as airlines start to fly the 737 MAX again.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
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HERERA: Still ahead, demand is strong for new homes. So why are prices falling?
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HERERA: Vice President Pence expressed hope for a near-term trade deal with China while at the same time accusing Beijing of restricting rights and liberties in Hong Kong. The policy speech came ahead of a new round of talks aimed at ending the trade war between the U.S. and China.
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MIKE PENCE, VICE PRESIDENT OF THE UNITED STATES: The opportunity that we have to set this economic relationship right is where a new relationship between the United States and China can begin, not end. But in that environment of a more fair, mutually respectful, reciprocal relationship as the president often says, we think — we think there is a foundation for our nations to move forward.
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HERERA: The vice president also criticized the NBA, accusing it of acting like a, quote, wholly owned subsidiary of China. This follows the NBA`s handling of a team owner`s support for anti-Beijing protesters in Hong Kong.
And in other news were watching tonight, U.K. Prime Minister Boris Johnson called for a general election on December 12th. Johnson said he was asking parliament to approve a national election as part of his effort to ensure that Britain leaves the European Union. Last week, Johnson`s Brexit bill was passed but he failed to push through an aggressive Brexit timetable.
The European Central Bank held interest rates steady, but the ECB`s president used his final appearance as Europe`s top central banker to warn about risks to the eurozone economy, risks that include a no deal Brexit.
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MARIO DRAGHI, ECB PRESIDENT: The lower likelihood of a hard Brexit or a cliff edge has improved the overall situation. At the same time, the medium-term uncertainty is considered with concern. So — and at the same — and the rest of the geopolitical uncertainty has continued to affect markets.
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HERERA: Mario Draghi will leave the ECB after eight years in charge of that institution.
Some mixed reports on the U.S. economy today. Durable goods orders fell more than one percent last month which more than expected and the largest amount in four months. Within that report, a closely watched gauge of business investment was lower for a second straight month. A separate report on manufacturing showed economic activity in the sector expanded at a more robust pace than expected.
And the number of Americans filing applications for unemployment benefits unexpectedly dipped last week, suggesting the labor market remains tight.
Mortgage rates increased for the third straight week but remain below year- ago levels. According to Freddie Mac, the 30-year fixed-rate averaged 3.75 percent. A separate report showed that sales of newly built homes were not as strong as expected in September but it was the big drop in prices that got all of the attention.
Diana Olick explains.
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DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: The median price of a new home sold in September fell to the lowest in nearly three years, but not because builders lowered prices, instead it was due to a shift in the type of home selling mainly, cheaper homes. Exactly half of the homes sold in September were priced below $300,000. Compare that with 43 percent just one year ago, according to the U.S. Census.
Builders are starting to put up more entry-level homes but not nearly enough to meet the demand.
ROBERT DIETZ, NAHB CHIEF ECONOMIST: One of the things that we`ve seen since the Great Recession is the shift in the new construction market up to the higher end, larger homes, more expensive homes. And the reason why is this cost went up, it was easier to pass along those costs to buyers at the higher end of the market.
OLICK: Recently, builders have turned to townhomes which are cheaper to build and can therefore support lower prices.
DIETZ: The challenge is at the local level to make the argument for building a density, and one of the success cases we`ve seen is building townhouses. Townhouse construction has grown 15 percent in 2018. We think it will continue to grow going forward in the cycle, and the reason why is they represent smaller homes.
OLICK: Lower mortgage rates have also helped demand keeping sales well above where they were a year ago when rates were much higher.
But today`s buyers are very sensitive. Rates move slightly higher in September and sales fell compared with August.
Newly built homes have always come at a price premium to existing homes, but existing home prices are now heating up again and that price gap is shrinking. That could help builders move more buyers in as long as mortgage rates don`t make a major move higher.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.
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HERERA: A technical bug takes down Twitter`s results. That`s where we begin tonight`s “Market Focus”.
The social media company reported 145 million daily active users in the latest quarter, beating analyst expectations. But Twitter missed revenue and profit estimates because of in part what the company says was a glitch on its advertising platform which denied the ability to target ads and share data to partners.
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NED SEGAL, TWITTER CFO: The setting was not working as expected. We were using the device setting to show ads to them when we realized that we both tweeted about it so people were aware in the effort to continue to be transparent and we also stopped using that setting. There`s some revenue impact when things like that happen.
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HERERA: Twitter also gave weak guidance and shares fell nearly 21 percent to $30.75.
Nokia (NYSE:NOK) warned of a profit shortfall driven by increased competition over the 5G network. Nokia (NYSE:NOK) will be halting its dividend to cover the cost for 5G equipment and the company sees weak demand in China and pricing competition from rival tech company Huawei. Shares lost nearly 24 percent to $3.90.
Dow posted better than expected results as it cut cost to help offset weak demand for chemicals use in plastics and other manufacturing products. The CEO says it`s all about demand.
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JOHN FITTERLING, DOW CEO: The inventories are down. You`ve seen some of the backlog in the industrial sector down. I think we`re poised right now where any pull on the inductor industrial sector, any kind of a tailwind with all means that we`ll get a little bit of earnings momentum and margin improvement and tightening of the supply-demand balances.
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HERERA: Now shares rose about 5 percent to $49.47.
Higher-priced candy bars and other chocolates help combat rising costs for ingredients and shipping, and that led to Hershey to top expectations. But the company`s North American market which is its most important how drop in sales and Hershey dropped more than 2 percent to $146.37.
Coming up, for all of those who say the department store is dead, well, don`t tell that to Nordstrom (NYSE:JWN).
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HERERA: CVS (NYSE:CVS) is pulling all 22-ounce containers of Johnson and Johnson`s baby powder off of its shelves and removing it from its website. J&J initiated a recall of the product last week out of an abundance of caution and in response to an FDA test that indicated the presence of asbestos. Shares of J&J fell further this afternoon when that announcement was made.
When you think of the new retail, you probably think of online stores or small boutiques. But Nordstrom (NYSE:JWN) is betting that a seven-story thousand square foot department store is the future.
Courtney Reagan is at Nordstrom`s new flagship building in New York City.
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COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Two decades after it was first considered and seven years after planning began, Nordstrom (NYSE:JWN) opened its first flagship department store in New York City today. While there are more than 110 Nordstrom (NYSE:JWN) department stores, the New York location is what executives call a generational investment. It spent north of $500 million to capture what the company estimates is a $700 million possible market.
JAMIE NORDSTROM, NORDSTROM PRESIDENT OF STORES: This is the single biggest investment we`ve ever made as a company. We actually bought the dirt (ph). We have a condo interest in this property, we`re not leasing, we`re not paying rent. We own it.
REAGAN: It`s seven stories, 320,000 square feet. The beauty haven has facials, hair blowouts and even Botox.
Their stylist, alterations and 24/7 online order pickup, 3,000 handbags, two floors of women`s shoes, a pop up area for online brands like Everlane changing every month.
Nordstrom (NYSE:JWN) expects the new store will add about a percent to sales. The retailer needs a boost. Its department store business sales fell six percent in the first half of the year.
New York is already Nordstrom`s largest market for online sales. When a new store opens, area digital sales increase up to 25 percent.
But the retail landscape has changed dramatically since the planning through the store began, both in New York City and industry-wide. Neiman Marcus (NYSE:MCS) opened its first New York City location. Saks (NYSE:SKS) underwent a quarter of the billion dollar renovation in its Fifth Avenue store, but closed its downtown woman`s store after just two years.
Gordon Taylor closed its flagship and Barney`s is in bankruptcy.
ERIK NORDSTROM, NORDSTROM CEO AND CO-PRESIDENT: Does New York need another store? No, no one needs another store. Will a great store do well? Yes. You know, the thing about New York, it`s — there`s opportunity here.
JAN ROGERS KNIFFEN, J. ROGERS KNIFFEN WORLDWIDE CEO: I don`t there`s any risk for Nordstrom (NYSE:JWN) in this store. There`s plenty of risk for a Nordstrom (NYSE:JWN) out there. Clearly, Neiman`s is in trouble. Saks (NYSE:SKS) is in trouble. Nordstrom`s placed in that space, I think Nordstrom (NYSE:JWN) will stay around and they`ll absorb that business, as those two struggled.
REAGAN: The new flagship connects to a network of other Nordstrom (NYSE:JWN) local service locations, rack stores and a men`s flagship across the street, that worked together to fulfill inventory take returns and provide services. The department store has spent decades dreaming up today but it will have to hold out a little longer to see if it`s been worth the wait and the investment.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in New York City.
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HERERA: On this busiest day of earnings for this earnings season, the major averages finished kind of mixed. Here are the closing numbers once again: the Dow fell 28 points to finish at 26,805, the Nasdaq was up 66, and the S&P 500 added five.
And that is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us. Have a great evening and we will see you right back here tomorrow.
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