October 24, 2018

Earnings Roundup: Materials and Trade

by David Aurelio.

The third quarter of 2018’s earnings season is well underway. To date, 140 S&P 500 companies have reported earnings. Of those companies, 80.7% of companies have reported earnings above analyst expectations, which is the highest beat rate on record going back to 1994. Benefiting from economic growth and tax reform, revenue for the quarter is expected to grow 7.4% from the prior year, while earnings are expected to increase 22.4%. Despite these strong numbers, concerns related to material costs and China has taken center stage.

S&P 500 Material Sector YoY Growth Rates

The material sector is expected to see 18Q3 revenue grow 15.2% from 17Q3 and earnings to increase 25.6%. The sector continues to benefit from U.S. economic strength and tax reform, while increased costs related to logistics are a headwind. Tariffs are mixed, benefiting U.S. steel companies like Nucor Corporation (NUE.N), while others believe that tariffs may have a near-term negative impact on Chinese consumer confidence.

Steel

Steel manufacturer Nucor benefited from tariffs, tax reform, U.S. economic strength, and domestic energy. Revenue of $6.7 billion came in 1.7% above expectations and gained 30.4% from the prior year. Earnings of $2.33 per share grew 194.9% from 17Q3; however, fell short of the street’s $2.35 per share consensus.

John J. Ferriola, Nucor Corporation – Chairman, CEO & President, talked about areas of strength, “The continued strength of the U.S. economy is the primary catalyst for our earnings growth. Tax and regulatory reform, along with a robust domestic energy sector, are driving this economy. 23 of the 24 end-use markets we monitor are experiencing stable to increasing demand. During the fourth quarter, we continued to see evidence of sustained strength in steel end-use markets.”

Mr. Ferriola commented on energy, “And energy, boy, I can’t say enough about energy. I was talking about earlier with the first question, the things that are driving our business; I negated to mention energy being so strong. That’s — well, that drives our business in sheet products, obviously, in oil country tubular goods. But it also has a major impact on our plate business. So with energy being so strong, we see demand in plate being very strong, and frankly, imports are down. So the imports are down significantly in plate. That’s rather supporting the strength in our business.” He went on to say, “We see energy being strong going into 2019. And therefore, we see our plate business as well as the component of sheet that goes into energy being strong into 2019.”

Copper

Mining company Freeport-McMoran Inc. (FCX.N) beat 18Q3 expectations on both the top and bottom lines. Revenue of $4.9 billion came in 7.7% above expectations and grew 13.9% from the prior year. Earnings benefited from no U.S. taxes and came in at $0.35 per share to beat estimates by 7.5% and gain 2.9% from the prior year.

Richard C. Adkerson, Freeport-McMoRan Inc. – Vice Chairman, President & CEO, spoke about the unusual activity in the copper market stating, “To be frank with you, it’s a paradox right now. Physical markets are tight. Fundamental drivers remain very positive and yet sentiment about the commodity and about companies like ours in the investor marketplace is what it is and you know their concerns about global growth in China and so forth. But when you look at the fundamentals and look at this drop in global copper exchange stocks, and to see the copper price in that slide parallel each other is very unusual in our industry. Typically when inventory stocks drop and they’re also dropping at our customers, that indicates higher copper prices, but that’s not what we experienced since June. But when you look at fundamentals, U.S. construction and manufacturing remained positive. Europe is steady and positive. A large Chinese fabricator is running at high rates. Our customers have strong order books for us in the United States and business in China is good.”

Mr. Adkerson went on to say that long-term development plans are disrupted by the current uncertainty in the marketplace, “The long-term fundamentals are becoming increasingly strong. Deficits are inevitable absent a significant downturn in China and the global economy, and a lot of positives are happening in terms of alternative energy generations, electric vehicles, and so forth for our project. Now, what’s this doing to us? This uncertainty is causing us certainly to slow down our long-term plans to develop our resources. I mean, we’re going to defer those investments decisions until there is clarity in the marketplace. We’re continuing to work on them, do preparation for them. We’re optimistic about them, but this situation is causing us to defer and I believe it will cause other companies to defer, and that will add to this impending supply gap situation for the industry.” He added, “I was in London for LME Week. Most industry executives I talked to there and on the business roundtable believe that this trade situation will get resolved in a way that doesn’t disrupt the global economy, but investors are skeptical and that’s what we have to deal with in terms of the current situation.”

Specialty Chemicals

Coatings and specialty materials supplier PPG Industries Inc. (PPG.N) met 18Q3 expectations on both the top and bottom lines despite headwinds related to a stronger dollar along with material and logistics cost inflation. Revenue of $3.82 billion was up 1.1% from the prior year; however, earnings of $1.45 per share were down 4.6%.

Increased trucking costs appear to be an ongoing global concern with broad impacts. Michael H. McGarry, PPG Industries, Inc. – Chairman & CEO, discussed this during the earnings conference call stating, “The amount of truck drivers around the world is decreasing and we see this same trend, whether it’s in China or Europe or the U.S. So I don’t think this is going to go away and we continue to work on [it].”

PPG’s Automotive OEM coatings sales volumes in China decreased due to lower consumer spending on autos. Mr. McGarry explained how tariffs negatively impacted consumer confidence in China, “The thing that I worry about, and I tried to signal this on — going into the third quarter before was the consumer confidence in China, right? With the tariffs, consumer confidence has dropped. And when consumer confidence drops, then you start to see these big-ticket items slow down. And so I won’t be surprised if China tries to add some additional, I wouldn’t call it stimulus, but additional emphasis on how they can support the automotive industry because it is like a very, very important industry to them. So we’ll wait and see what happens. They haven’t done anything yet, but it is a key industry for them.”

Mr. McGarry went on to say that overall, he is optimistic about China’s auto market, “So I’m very optimistic about the China car market. If you look at the number of the cars parked in China is still very, very low compared to most developed countries. It’s still an asset that is very important to up-and-coming middle-class person in China to own a car as a status symbol, that hasn’t changed. Again, it’s a very important industry to the Chinese government; it’s a huge employer of people. As you know, employment is really important in China. So we’re optimistic that this temporary slowdown we see because of consumer confidence in the tariffs is going to moderate and then it will get back on a growth track. So next year, we’re probably looking in that 2% to 3% range for China, and it’s the world’s largest market.”

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