Today, on August 31, the initial jobless claims for the week ending August 26 came in at 228,000, below market expectations of 235,000, thereby registering its lowest reading in four weeks.
This has followed further signs of economic slowdown in the form of JOLTS, which showed an unexpected drop in job openings to below 9 million for the first time since March 2021, the latest consumer confidence index, which came in at 106.1, lower than the previous Dow Jones estimate of 116 which was lower-than-expected addition of 177,000 jobs in August according to private payroll data from ADP, and a downward revision in the GDP growth rate for the second quarter.
However, such disappointing updates have been welcomed by market participants spooked by Fed chair Jerome Powell’s message at Jackson Hole in Wyoming on Friday, August 25.
While it was not as brief as last year’s, it was still equally unambiguous. 2% still remains the non-negotiable target for the inflation rate, and the Central Bank is prepared to raise policy rates further if required and hold them higher for longer until it is confident of sustained price stability.
While the 12-month PCE has since declined to 3% percent as of July from its peak of 7% in June 2022 due to a significant unwinding of the demand-supply imbalance, however, the core PCE, which excludes volatile food and energy prices and includes inflation for goods, housing services, and all other services, came in at 4.3% in July, indicating that there is significantly more ground left to cover through monetary policy tightening.
In such a scenario, despite increased optimism, businesses are expected to remain weighed down by high borrowing costs, and economic activity is expected to remain stifled due to relatively scarce credit.
Moreover, with every increase in benchmark interest rates, a selloff of long-duration fixed-income instruments, such as the 10-year treasury notes, gets triggered, which causes a slump in their market value and a consequent increase in their yields. This also increases the benchmark 30-year mortgage rates, thereby depressing demand and deepening the crisis in which real estate has lately been finding itself.
An increase in borrowing costs would not just raise the cost of servicing the $32.7 trillion national debt; significant markdowns and prices of legacy bonds could crush the loan portfolios of banks that could share the same fate as the Silicon Valley Bank and the First Republic Bank. In this context, S&P's move to downgrade multiple U.S. banks citing ‘tough’ operating conditions hardly comes as a surprise.
Speaking of banks, the Bank of Japan’s policy tweak loosened its yield curve control, sparking widespread shock in the markets. To compound the miseries further, after placing the country on negative watch amid the debt-ceiling standoff at Capitol Hill back in May, Fitch Ratings recently downgraded U.S. long-term rating to AA+ from AAA, citing the erosion of confidence in fiscal management.
While broad expectations are pricing in a rate hike in November after a pause in September’s FOMC meeting, being diligent investors confident enough to increase their stakes in fundamentally strong businesses could be a time-tested method to navigate potential turbulence ahead.
Here are a few which could be worthy of consideration:
The global retail giant provides its consumers a wide range of products and services through its online platform and offline supply chains. In addition to reselling merchandise and content offered by third-party resellers, the company also manufactures electronic devices to distribute its service. It operates through three segments: North America, International, and Amazon Web Services (AWS).
The AWS segment consists of global sales of computing, storage, databases, and other services for start-ups, enterprises, government agencies, and academic institutions. Recently, at the AWS Summit in New York, San Francisco-based cloud communication and customer engagement platform Twilio Inc. (TWLO)announced its strategic partnership with the company.
The renewal of vows and strengthening of ties, which seeks to enhance the company’s predictive AI proficiency, has closely followed a vote of confidence from the tech giant in which AMZN announced that it has acquired 1% stake in TWLO earlier in the week with its ownership of 1.77 million shares worth more than $108 million.
During the fiscal 2023 second quarter that ended June 30, AMZN’s net sales increased 11% to $134.4 billion, while its operating income more than doubled to $7.7 billion. Consequently, the behemoth’s net income came in at $6.7 billion, or $0.65 per share, compared to a net loss of $2 billion, or $0.20 per share, during the previous quarter.
XOM is engaged in the energy business through exploration for and production of crude oil and natural gas and the manufacture, trade, transport, and sale of crude oil, natural gas, petroleum products, petrochemicals, and a range of specialty products. The company’s segments include Upstream; Downstream; and Chemicals.
Over the past three years, XOM’s revenue has grown at a 19.8% CAGR. Over the same time horizon, the company’s EBITDA and net income have grown at 50.8% and 93.2% CAGRs, respectively.
On July 13, XOM announced the acquisition of Denbury Inc. (DEN), an experienced developer of carbon capture, utilization, and storage (CCS) solutions and enhanced oil recovery. The acquisition is an all-stock transaction valued at $4.9 billion, or $89.45 per share, based on XOM’s closing price on July 12, 2023.
During the fiscal 2023 second quarter that ended June 30, XOM’s total revenue and other income came in at $82.91 billion. During the same period, the net income attributable to it came in at $7.88 billion, or $1.94 per share.
Through its flagship brands, T-Mobile and Metro by T-Mobile, TMUS provides mobile communication services in the United States, Puerto Rico, and the United States Virgin Islands.
Over the past three years, TMUS’ revenue has grown at almost 15% CAGR. During the same time horizon, its EBITDA and net income have grown at 19.4% and 31.8% CAGRs, respectively.
On the 5G front, on August 15, TMUS expanded its coverage in Pennsylvania, while on August 17, the company expanded its REVVL lineup with its first-ever tablet and new 5G smartphones.
For the fiscal 2023 second quarter, TMUS’ and postpaid service revenues registered industry-leading growth rates of 2.8% and 5.5%, to come in at $15.7 billion and $12.1 billion, respectively. The company’s adjusted EBITDA increased by 5.7% year-over-year to $7.20 billion during the same period.
Consequently, its net income for the quarter came in at $2.22 billion, or $1.86 per share. With the expectation of adding a net 5.6 to 5.9 million customers compared to the earlier estimate of 5.3 million to 5.7 million, TMUS has revised its core adjusted EBITDA guidance upwards to a range between $28,900 and $29,200.
The Progressive Corporation (PGR)
As an insurance holding company, PGR operates throughout the U.S. through three segments: Personal Lines; Commercial Lines; and Property. The company’s non-insurance subsidiaries generally support its insurance and investment operations.
Over the past three years, PGR’s revenue and total assets have grown at 11.3% and 11.8% CAGRs, respectively. For the fiscal 2023 second quarter that ended June 30, PGR’s total revenue increased by 33.3% year-over-year to $15.35 billion. During the same period, the net income available to common shareholders came in at $335.9 million, or $0.57 per share, compared to the net loss of $549.6 million, or $0.94 per share.
As a global developer, manufacturer, and marketer of specialty chemicals, ALB operates through three segments: Energy Storage, Specialties, and Ketjen.
Given the ALB’s burgeoning lithium mining operations in Latin America coinciding with the exponential increase in demand and price of white gold driven by the imperative of energy transition, the company’s revenue has ballooned at 42% CAGR over the past three years. During the same time horizon, its EBITDA and net income have increased at 61.5% and 107.5% CAGRs, respectively.
On July 19, ALB announced that it had agreed to amend the transaction terms signed earlier this year with Mineral Resources Limited (MALRF). Pending regulatory approvals, under the new agreement, ALB will take 100% ownership of the Kemerton lithium hydroxide processing facility in Australia that is currently jointly owned with MALRF through the MARBL joint venture. ALB will also retain full ownership of its Qinzhou and Meishan lithium processing facilities in China.
The amendment is expected to simplify commercial arrangements further and provide greater strategic opportunities for each company based on its global operations and the evolving lithium market.
On July 18, ALB announced its quarterly dividend of $0.40 per share, payable October 2, 2023, to shareholders of record at the close of business as of September 15, 2023. ALB currently pays $1.60 annually as dividends and has been able to increase its payouts for the past 28 years.
For the fiscal 2023 second quarter that ended June 30, ALB’s net sales increased by 60.2% year-over-year to $2.37 billion, while its adjusted EBITDA increased by 69.2% year-over-year to $1.03 billion. Consequently, the net income attributable to ALB increased by 59.8% year-over-year to $650 million, while its adjusted EPS increased by 112.5% year-over-year to $7.33.
Given the stellar performance, ALB raised its revenue and EPS guidance for the fiscal year to $10.4 - $11.5 billion and $25.00 - $29.50, in line with the current analyst estimates.
As an independent oil and gas company, CTRA is involved in developing, exploring, and producing oil, natural gas, and natural gas liquids (NGLs). The company’s operations are primarily concentrated in three areas: the Permian Basin in west Texas and southern New Mexico; the Marcellus Shale in northeast Pennsylvania; and the Anadarko Basin in the Mid-Continent region in Oklahoma.
Over the past three years, CTRA’s revenue has grown at a 70.9% CAGR. Over the same time horizon, the company’s EBITDA and net income have grown at 88.9% and 113.2% CAGRs, respectively.
During the fiscal 2023 second quarter that ended June 30, CTRA’s operating revenue came in at $1.19 billion, while its adjusted net income came in at $291 million, or $0.39 per share. Given the outstanding operational execution, the company has increased its 2023 BOE and natural gas production guidance by 2% and oil guidance by 3% at the mid-point.
