Wall Street Breakfast

Earnings season kicks off

Major banks are the start of quarterly results. (0:17) Consumer inflation is expected to fall annually. (3:10) The big thing about Nvidia. (5:37)

Show Notes
Farewell to the famous Tropicana

Episode transcripts: seekingalpha.com/wsb
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Duration:: 9m
Broadcast on:: 07 Jul 2024
Audio Format:: mp3

[music] Welcome to Seeking Alpha's Wall Street brunch, our Sunday look ahead to this week's market moving events, along with the weekend's top news and analysis. Hello, today is Sunday, July 7th, and I'm your host, Kim Khan. This week brings the last consumer inflation figures before the Fed meets at the end of the month, but corporate earnings will likely drive market momentum. The broader market continues to rally, but concerns about the breadth of the rally and valuation of the top stocks driving it continue. Goldman Sachs' equity strategist David Coston says, "We expect the magnitude of ETS beats is likely to diminish, as consensus forecasts set a higher bar than in previous quarters." Analysts forecast the mega-cap AI firms will post sales growth of 17% in the second quarter year-over-year. Over a 12-month period, high growth stocks with elevated multiples historically generated roughly the same 10% point reward as low multiple stocks when beating estimates. However, growth stocks with high valuations lagged the median firm by 32% points when they failed to meet sales expectations, two times the underperformance of lower multiple stocks. Leading earnings this week are the banking stocks. All 31 major banks just passed their Fed's stress tests. Friday brings reports from Citigroup, JP Morgan Chase, Bank of New York Mellon, and Wells Fargo. Investors have no reason to change their bullish outlook on Wells Fargo, according to Chris Lau, who leads the DIY Value Investing Group, and you may know from the comments sections of my Wall Street research stories. Lau says Wells Fargo "hiked its dividend and will buy back stock. This increases the attractiveness of the stock, especially as the Fed prepares to cut interest rates this year. After building support in the 40s since 2021, the uptrend that began last November 2023 is unlikely to end. Helped by strong quarterly results, that sets up a rally to over $65, a price not seen since January 22, 2018. In addition to the banks, Delta and Pepsi weigh in on Thursday, Delta continues to benefit from a premium consumer mix as a best-in-class operator with diversified revenue and cash streams. Analysts are looking for Delta to reiterate its 2024 guidance for EPS of $6-7, and a free cash flow of $3-4 billion. Options training implies a share price swing of 6% after the report. Pepsi's organic sales are seen rising by 3%, led by a strong performance in Europe and Latin America. Volume is seen at 4.1% to offset 1.1% decline in pricing. UBS says that although the stock has largely traded sideways to start the year, the firm's crowding analysis points to the stock may have crowded long, and conversations would suggest sentiment remains negative, heading into results due to concerns about challenging U.S. trends. Other earnings this week include Greenbrier on Monday, Hello of Troy and Kurosushi report Tuesday, Manchester United, full of executives and short-on players so far, and Price Mart weigh in on Wednesday. Kanagra Brands joins Pepsi and Delta on Thursday, which is also the inflation day. The June consumer price index is expected to have risen by 0.1% on the month, bringing the annual rate down to 3.1%. The core CPI is forecast for a 0.2% rise. Morgan Stanley says both the CPI and PCE have confirmed solid economic growth of 2%, which amounts to a pretty comfortable, soft landing. While markets may be ringing their hands over a slowdown, from the Fed's perspective it would be most welcome, Chief Global Economist Seth Carpenter said. In fact, a slowdown, at least as big as we expect, is probably seen as necessary within the Fed to achieve its goal of extending the current cycle while bringing inflation down. After a lull in the 1990s economy, and a very shallow reversal from the Fed, the economy continued to grow for the rest of the decade. Currently, the market is pricing in cuts, and we actually expect a bit more than is priced, but like the 1990s, we think the cutting cycle will be shallow. This is hoping for a late cycle scenario that turns into a rebound where rates are slashed by 700 basis points may be in for some disappointment. In the news this weekend, casino operators on the Las Vegas Strip have a near-term earnings catalyst on the horizon with the closing of the Tropicana Las Vegas and the Mirage Hotel and Casino representing a 4.9% combined reduction in total room supply on the Las Vegas Strip. The AP notes that when the Tropicana opened in 1957 was the most expensive lavish casino on the Strip. Nicknamed the Tiffany of the Strip, it costs $15 million to build, with 300 rooms split into two wings, creating a footprint shaped like the letter Y. Behind the scenes it has ties to mobster Frank Costello and has been a pop culture staple. It serves as the location of Mogreen's hotel and the godfather, and in diamonds or forever, James Bond says, "I hear the hotel Tropicana is quite comfortable." Still, CBRE Equity Research Analyst said the Mirage is the more meaningful contraction. We estimate that the Mirage had about a million occupied room nights and generated 569 million of revenue and 169 million of EBITDAAR in fiscal year 2023. This represents significant underlying demand for the Las Vegas Strip that we'll need to find a home. Looking at the markets, stocks are coming off their best week since April, with heavyweight NVIDIA snapping a two-week losing streak. Seeking off as Reena Sherbal, spoke to Jonah Lipton, who runs the fundamental growth investor investing group. I don't even know what to make in the video, because I don't think we know what the next three, four, five years is going to look like for artificial intelligence. We don't know their specific roadmap. We don't know what competitors might be coming down the pipeline with their own chips. We've all heard stories about the hyperscalers like Google, Microsoft, they're going to want to build their own chips. It sounds good. I don't know if they'll actually be able to do it, and then how will those chips compare to whatever the newest greatest NVIDIA chip is, and if they're building their own chips, are they going to save enough money by using an inferior chip to justify not using the best NVIDIA chip? I don't know. China, bike dances apparently trying to develop their own chips now. It's wild. I just don't think if you believe in artificial intelligence, I just think this is the one stock that you have to own, and you can't try to trade in and out of it, because it's going to do things like this down 6% one day, up 8% the next day. Thank God I started buying it a year ago when it gapped up on that earnings report, even though I didn't fully understand the importance of H100s and where that would lead us. Now, you listen to these earnings calls from all the hyperscalers, and all they talk about is trying to get their hands on as many H100s as possible, or H200s, and the new BGs that are coming out. Tesla is getting ready to build a supercomputer with Dell and Super Micro with tens of thousands of H100s. It's like an arms race. Each company can buy the most H100s, and then, I don't even know what's going to happen in two or three years, like, let's just say Meta has 10,000 H100s. At what point does the next, do they have to upgrade, and then what do they do with the H100? Do they sell them off for $0.50 on the dollar, or do they keep them and go buy whatever the new chip is? I don't know, it's going to be very interesting to play out. I just think if you believe in artificial intelligence, and LLMs, and I just think NVIDIA is still the best way to play it. You can listen to that full interview on the Investing Experts podcast. And in the Wall Street Research Corner, Wells Fargo says the boom in AI sets up companies focused on natural gas as trendwinners. Midstream energy companies focused on natural gas should be visible long-term beneficiaries of the build-out of data-centered capacity in the U.S. to run AI operations analyst Ian Mickelson said, "About 43% of electricity is generated from natural gas, and the build-out of energy-hungry data centers is in very early stages. We believe the U.S. natural gas production capacity and reserves are sufficient to be growing demand, with infrastructure being a key constraint in balancing supply with this demand growth over time," he said. We expect this to provide mainstream companies with incremental growth opportunities and higher utilization of existing assets, ultimately extending the terminal value of natural gas infrastructure. That's all for today's Wall Street brunch. Look for links to stories in the show-net section. Don't forget, these episodes will be up with transcriptions at SeekingAlpha.com/WSB. And join the elite community of real investors to unearth great investing ideas. Just head to SeekingAlpha.com/subscriptions. (upbeat music) [BLANK_AUDIO]