A look at North American equities heading in both directions
On the rise
Target Corp. (TGT-N) forecast muted profit growth in 2023 and warned of the need for more discounts to woo shoppers cutting their discretionary spending due to surging inflation.
The U.S. retail giant’s discounting strategy powered its sales and profit in the holiday quarter to exceed market expectations for the first time in a year, lifting its shares up 1 per cent in Tuesday trading.
Discounts boosted customer traffic in the fourth quarter but weighed on Target’s gross margins as retailers are forced to cut prices on everything from toys to electronics to clear stocks.
The big-box retailer warned that promotions could increase further in 2023 due to a “constrained environment for consumer spending.”
It forecast annual earnings of US$7.75 to US$8.75 per share, below analysts’ estimates of US$9.23, according to Refinitiv data.
“Target had to lower guidance last year pretty quickly, so they don’t want to make the mistake again of getting overly aggressive with guidance,” John Tomlinson, senior analyst at M Science, said.
Retailers including Walmart (WMT-N) and Home Depot (HD-N) had also last week issued conservative annual forecasts on worries about a steep economic downturn in the second half of the year due to rising borrowing costs.
“We’re planning cautiously, and we believe appropriately given the economic challenges we anticipate this year,” Target Chief Executive Brian Cornell said.
Target said it will not buy back shares until its cash flow improves, but will spend US$4-billion to US$5-billion this year to remodel stores, expand capacity for same-day fulfillment and launch new private label brands.
The company has been making similar investments in its business for the last two years. But this time it comes against the backdrop of Target looking to cut costs to save US$2-billion to US$3-billion over three years.
The company’s comparable sales in the quarter ended in Jan. 28 rose 0.7 per cent, while analysts expected a 1.5-per-cent fall.
The company said it expects full-year comparable sales in a wide range from a low-single digit decline to a low-single digit increase.
Zoom Video Communications Inc. (ZM-Q) said late Monday it will integrate more artificial intelligence into its products and forecast annual profit above Wall Street estimates, sending the company’s shares up 1.2 per cent.
Analysts predict the AI tech will be a major driver for future growth for the tech industry, which has been grappling with slowing demand amid recessionary fears.
The AI race picked up pace after Microsoft-backed OpenAI’s ChatGPT last year prompted heavyweights from Alphabet Inc. (GOOGL-Q) to China’s Baidu Inc (BIDU-Q) to announce their own offerings.
“I like that Zoom is proactively talking about these opportunities today and I honestly believe it’s necessary, especially given Microsoft is already including ChatGPT as part of Teams Premium,” said RBC analyst Rishi Jaluria.
San Jose, California-based Zoom forecast fiscal 2024 profit between US$4.11 and US$4.18 per share, compared with analysts’ average estimate of US$3.66 per share, according to Refinitiv data.
“The age of AI and large language models has arrived,” said Chief Executive Eric Yuan during a call with analysts, adding that AI can “truly help” the company.
Zoom is also benefiting from steady demand for its video-conferencing service from the ongoing shift to hybrid work models and cost cuts. Earlier this month, it announced an about 15% reduction in its workforce.
On an adjusted basis, Zoom earned US$1.22 per share for the fourth quarter ended Jan. 31, compared with estimates of 81 US cents per share.
Revenue grew 4 per cent to US$1.12-billion, above analysts’ average expectation of US$1.100billion.
Finance chief Kelly Steckelberg said the growth was primarily driven by strength in Zoom’s enterprise business.
The company, however, expects 2024 revenue between US$4.44-billion and US$4.46-billion, below average Street estimate of US$4.60-billion.
“The revenue outlook is softer than initially expected, partly due to macro pressures and especially given declining online business,” Jaluria said.
On the decline
Bank of Nova Scotia (BNS-T) dropped 5.7 per cent after reporting a lower first-quarter profit on Tuesday, as a lull in its investment banking division dented income from its capital markets unit and compelled the Canadian lender to set aside higher provisions.
Net income, excluding one-off items, came in at $2.370-billion, or $1.85 a share, in the three months ended Jan. 31, compared with $2.76-billion, or $2.15 a share, a year earlier. Analysts on average had expected $2.03 a share, according to Refinitiv data.
Canada’s central bank over the past 11 months has lifted interest rates at a record pace to 4.5 per cent to tame inflation, which was 6.3 per cent in December, still well above the bank’s 2-per-cent target. Last month, the Bank of Canada said it would hold off on further moves to let the effects of past rate hikes sink in.
Scotiabank booked provisions of $638-million, up from $222-million a year ago, as it braces for increased odds of more loan defaults in a rising interest rate environment.
But net interest income, which rose nearly 5 per cent to $4.57-billion during the three-month period ended Jan. 31, has been a bright spot so far as the relentless monetary policy tightening campaign raised interest rates at the fastest pace in decades and expanded the margins banks earn from cost of borrowing and rate of lending.
Canada’s third-largest lender reported overall net profit of $1.77-billion, or $1.36 a share, compared with $2.74-billion, or $2.14 a share, last year.
In a research note, Credit Suisse’s Joo Ho Kim said: “Scotia’s Q1 results missed our estimates, as lower revenues and higher expenses led to a relatively wide PTPP earnings miss, with PCLs reflecting a continued normalization in both Canada and International Banking (the glide path remains important here). The CET1 ratio was also relatively flat, vs. our expectation for a modest build, and all-bank margins were down quarter-over-quarter. On the positive side, we saw solid loan growth from International Banking, good trading results from GBM (rates in particular), and expense management from GWM as well.”
Bank of Montreal (BMO-T) was also lower by 1.2 per cent as it reported a drop in first-quarter profit on Tuesday, as the lender shored up rainy-day funds to prepare for potential loan defaults in an uncertain economy.
Provision for credit losses (PCL) came in at $217-million for the quarter, compared with a recovery of PCLs of $99-million a year earlier.
Economic forecasts have turned gloomy over the past year, heightening expectations of a recession, prompting lenders to set aside more capital in case customers fall behind on their loan payments.
Last week, rival Canadian Imperial Bank of Commerce (CIBC) kicked off the reporting season for the country’s largest lenders by also building its loss provisions and reporting a drop in quarterly profit.
On an adjusted basis, Bank of Montreal reported a net income of $2.27-billion, or $3.22 per share, for the three months ended Jan. 31, compared with $2.58-billion, or $3.89 per share, a year earlier.
Credit Suisse’s Joo Ho Kim said: “: The headline results for Q1 was better than consensus but in-line with what we expected and missed our PTPP earnings estimate. Loan growth remained strong and we saw good margin expansions across both P&C businesses, though all-bank margins were weaker and impacted by a few moving items. Expenses were higher than what we had forecast and operating leverage was negative at the all-bank. Credit was better, with a moderate level of performing PCLs build and impaired PCLs staying relatively benign across the footprint. Lastly the CET1 ratio is expected to be above 11.5% in Q2 post-BotW (closed on Feb. 1).”
Laurentian Bank of Canada (LB-T) dipped 1.7 per cent after it reported its first-quarter profit fell compared with a year ago as its provisions for credit losses ticked higher.
The Montreal-based bank says it earned $51.9-million or $1.09 per diluted share for the quarter ended Jan. 31 compared with a profit of $55.5-million or $1.17 per diluted share a year earlier.
Revenue totalled $260.1-million for bank’s latest quarter, up from $257.5-million in the same quarter last year.
Laurentian says its provision for credit losses for its first quarter was $15.4-million, up from $9.4 million a year earlier.
On an adjusted basis, Laurentian says it earned $1.15 per diluted share in its latest quarter compared with an adjusted profit of $1.26 per diluted share a year earlier.
Analysts on average had expected a profit of $1.12 per share, according to estimates compiled by financial markets data firm Refinitiv.
Baytex Energy Corp. (BTE-T) was down 9.8 per cent after confirming before the bell it would buy U.S. peer Ranger Oil Corp. (ROCC-Q) for $2.5-billion including debt, as the Canadian company looks to boost its presence in South Texas’ Eagle Ford shale basin.
The Eagle Ford has seen rising deal activity in recent months. Its proximity to other major energy hubs, including the U.S. Gulf coast, makes it an attractive location. The basin is home to a number of smaller producers, which makes it easier for them to be absorbed by strategic players.
After the deal closure, expected in the second quarter of 2023, the combined entity will be led by Eric Greager, the chief executive of Baytex.
The deal would add to the run of Canadian energy operators seeking to boost the amount they produce south of the border. Ovintiv Inc. (OVV-T) moved its headquarters to Denver, from Calgary, at the start of 2020 as it prioritized its U.S. assets. Enerplus Corp. (ERF-T) completed in December the sale of its Canadian operations, leaving it with assets in North Dakota and Pennsylvania.
MEG Energy Corp. (MEG-T) slid 4.1 per cent after saying it earned $159-million in the fourth quarter of 2022, a 10-per-cent decrease from the prior year’s quarter in spite of achieving record bitumen production.
The oilsands producer says its profit for the three months ended Dec. 31, 2022, works out to 53 cents per diluted share, compared to 57 cents per diluted share in the same period of 2021.
MEG says its revenues for the quarter were $1.45-billion, up from $1.31-billion in the prior year’s quarter.
Its operating expenses also rose, to $11.05 per barrel from $10.78 per barrel.
During the fourth quarter, MEG achieved record average bitumen production of 110,805 barrels per day.
MEG says while it benefited from higher oil prices in 2022, that was partially offset by a widened price differential between the benchmark West Texas Intermediate and Western Canada Select oilsands crude.
U.S. oil major Chevron Corp. (CVX-N) on Tuesday raised its share buyback outlook to between US$10-billion and US$20-billion per year and reaffirmed its production guidance of more than 3-per-cent annual growth by 2027.
Shares of the company slid 1.2 per cent.
Chevron in January tripled its budget for buybacks to US$75-billion with no fixed expiration date. The company last year posted record earnings that allowed it to authorize the most ambitious shareholder payout among Western oil producers.
The top Western oil companies paid out a record US$110-billion in dividends and share repurchases to investors in 2022, spurring outraged calls on governments to impose windfall taxes on the industry to help consumers with surging energy costs.
Chevron last year returned US$26-billion via dividends and buybacks to shareholders and invested US$15.7-billion in operations.
The oil major on Tuesday maintained its annual organic capital expenditures of US$13-billion to US$15-billion through 2027.
“Our guidance range is unchanged as affiliate capex is expected to decrease further leaving room for future capex increases up to another billion dollars,” Chief Executive Officer Mike Wirth said in his prepared remarks.
The company also said it would raise its targeted annual share buyback rate to US$17.5-billion, starting in the second quarter.
The No. 2 U.S. oil producer’s previous annual buyback target was up to US$15-billion.
Chevron also said it aimed to reduce the carbon intensity of its oil and gas production to 24 kg per barrel of oil equivalent by 2028.
“This year we’ll be running four grid-powered rigs and one natural gas driven frac spread. Around 40 per cent of our grid-supplied power will be from wind and solar,” the company added.
Goldman Sachs Group Inc. (GS-N) declined 3.9 per cent after Chief Executive David Solomon said the company is considering “strategic alternatives” for its consumer business after stumbles led to billions of dollars in losses.
Mr. Solomon did not specify what those options would be. Goldman has already halted unsecured lending, a portfolio that could be sold. Its Marcus consumer business was folded into the company’s merged asset and wealth management arm last year, and its newly-formed Platform Solutions unit houses transaction banking, credit cards and a fintech platform, GreenSky.
Mr. Solomon’s comments, which were reiterated by company president John Waldron and Stephanie Cohen, global head of Platform Solutions, signal a further retreat from its Main Street ambitions.
The bank will aim to grow fees from asset and wealth management and try to make profits from a newly-created fintech unit as it laid out its priorities at the start of its second investor day.
The bank restated a longer-term target for return on tangible equity of 15 per cent to 17 per cent “through the cycle” and said it had “significant” room to grow market share for wealth management in the United States and globally.
Shareholders are awaiting more detail about its plans for Platform Solutions, formed after Goldman lost billions on its foray into consumer banking and reined in its ambitions. The pullback on costs could help the bank to meet its efficiency targets.
“Sometimes we fall short. Sometimes we don’t execute. But we always learn and adapt,” Mr. Solomon told investors.
Mr. Solomon’s performance and his plans for growth will also be scrutinized by investors and analysts.
Observers will focus on his plans to decrease Goldman’s reliance on trading and investment banking, which can be whipsawed by market volatility.
The bank has said it plans to slim down some alternative investments that weighed on profits last year.
“We will identify a $30-billion historical principal investment portfolio earmarked for sell-down and lay out a plan to reduce this portfolio to zero over the medium term,” the bank said.
“Earnings could continue to be subdued for the next year or more, as the economic environment remains uncertain, which should pressure investment banking and asset management revenue,” Michael Wong, an analyst at Morningstar Inc., said before the event.
After a solid performance in recent years, Goldman’s markets division could weaken in the short-to-medium term because “trading is a wild card,” he said.
Mr. Solomon also warned in an interview with CNBC that operating in China will get tougher over the next couple of years, but added that the bank would continue to serve clients in the country.
“We are at a very tough place in bilateral relationship with China and my own view is it only gets tougher ... It is a more ‘cautious’ time for investment in our own franchise,” he said.
The relationship between the two largest global economies has worsened in recent months over Taiwan and the downing of a Chinese spy balloon that was found flying over the U.S. earlier this year.
With files from staff and wires