Image: We expect the S&P 500 (SPY) to test support at both its technical uptrend and the 200-day moving average. In the event the SPY breaks through technical support, we’d be looking to “raise cash” across the newsletter portfolios.
By Brian Nelson, CFA
S&P 500 companies will end 2022 with roughly a 4%-5% decline in fourth-quarter 2022 earnings, according to a February 17 report from FactSet. The Communications Services (XLC), Materials (XLB), Consumer Discretionary (XLY) were the three weakest sectors showing year-over-year earnings declines in the fourth quarter. The two biggest earnings misses during the quarter, in our view, were Goldman Sachs’ (GS) nightmare report and Intel’s (INTC) huge miss and terrible outlook. However, for the most part, fourth-quarter earnings season was better-than-feared. It could have been a lot worse.
The 10-year Treasury rate, which is used as the benchmark rate to price both stocks and bonds, is hovering at multi-year highs, with a yield of ~3.96% at last check, so this continues to be a headwind to asset prices. The labor markets continue to be strong, too, despite widely-publicized layoffs in Silicon Valley, and consumers continue to face pressure as “prices are still high,” as revealed by Walmart’s (WMT) latest earnings report and outlook. The producer price index (PPI) continues to come in hot, and we’ve yet to see the correction we’re anticipating in the housing market, despite soaring mortgage rates. The Fed has a lot more work to do to stem the prospect of inflation to come roaring back later in 2023 and 2024.
We think the markets remain technically driven. The downturn that began in late 2021 and 2022 was broken through on both an equal-weight S&P 500 (RSP) and market-weight basis (SPY) earlier this year, but we think a test of technical support is now in the cards. The market may have been factoring in a more cautious Fed given Jerome Powell’s emphasis on “disinflation,” but given recent labor market and PPI trends, the Fed’s job is not yet done in raising rates, in our view. At the start of this year, we thought the market might start to bottom in March of this year, but the bounce to start 2023 has put that view on hold, especially given the technical breakout. We’ll have to see if these markets hold support. If they don’t, we’ll be looking to “raise some cash” across the newsletter portfolios.
Here are some key reports we are looking at:
- On February 23, Domino’s Pizza (DPZ) reported mixed fourth-quarter 2022 results, where global retail sales growth, excluding the impact from foreign currency, advanced 5.2% and diluted earnings per share increased 4.2%, to $4.43, in the period. U.S. same-store sales growth was disappointing, coming in at 0.9% in the fourth quarter, while international same-stores sales expansion was 2.6%, excluding foreign currency fluctuations. During the quarter, Domino’s opened up 361 stores on a net basis. The market didn’t like the comparatively weak same-store sales growth performance in the quarter and commentary from CEO Russell Weiner that revealed Domino’s is experiencing “significant pressure on (its) U.S. delivery business.” More than half of the company’s orders in the U.S. now come from the carryout channel, as U.S. consumers continue to cut back on spending (i.e. delivery fees). Shares are trading about in-line with our $346 fair value estimate, and we’re not overreacting to the report. Domino’s upped its dividend payout 10%.
- Cisco Systems, Inc. (CSCO) reported better-than-expected fiscal second quarter results on February 15 for the period ended January 28, 2023. The company drove revenue 7% higher in the quarter, to $13.6 billion, while non-GAAP earnings per share came in at $0.88, up 5% on a year-over-year basis. Cisco Systems raised its dividend 3% on the heels of the strong report. The non-GAAP earnings per share was a record number for the company, and it backed that up with record operating cash flow generation, too. For fiscal 2023, Cisco Systems is now guiding for revenue growth in the range of 9%-10.5% on a year-over-year basis, with non-GAAP earnings per share in the range of $3.73-$3.78 per share. The outlook is supported by the company’s increasing recurring revenue base and healthy backlog. CEO Chuck Robbins noted that “(its) fiscal 2023 is shaping up to be a great year,” and from the looks of it so far, we agree. Cisco remains a key holding in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. Our fair value estimate stands at $51 per share.
- Garbage hauler Republic Services, Inc. (RSG) reported fourth-quarter results February 15 that showed revenue growth of 19.7% and non-GAAP earnings per share of $1.13. Both numbers came in better than expected. Roughly 8.3 percentage points of the firm’s top-line expansion in the quarter came organically, with core price comprising 7.4 percentage points of the organic increase. For the full year, Republic Services beat its guidance that called to grow adjusted free cash flow 15% and adjusted earnings per share 18%. We like the economics of the garbage disposal business, and we continue to monitor the integration of the firm’s acquisition of U.S. Ecology, which remains on track. For 2023, Republic Services is targeting revenue in the range of $14.65-$14.8 billion and adjusted free cash flow in the range of $1.86-$1.9 billion, up from $1.742 billion in 2022. We expect Republic Services to continue to price services in excess of inflation, which should provide support for continued dividend increases in the coming years.
- Gold miner Newmont Corp. (NEM) hasn’t had a good start to 2023 with shares falling more than 10% year-to-date, but we still like some exposure to gold as we outline in our latest work, “What Is Gold Really Worth?” The company reported fourth-quarter 2022 results February 23 that were mixed. Revenue fell 5.6%, while non-GAAP earnings per share came in slightly lower than consensus at $0.44. Newmont, however, generated $364 million in free cash flow in the quarter, which contributed to the $1.1 billion full-year tally. We’re huge fans of the miner’s $6.7 billion liquidity position and its modest net-debt-to-adjusted-EBITDA ratio of 0.5x. For 2023, Newmont is targeting an annualized dividend payout range of $1.40-$1.80 per share, which reflects a forward estimated dividend yield of ~3.6% based on the midpoint of the range. The company paid $2.20 per share in dividends during 2022, so while the target for 2023 reflects a step back in expected dividend payments, it’s not totally unexpected given the firm’s variable dividend policy.
Concluding Thoughts
S&P 500 companies will end 2022 with roughly a 4%-5% decline in fourth-quarter 2022 earnings, but earnings season has come in better-than-feared. We expect the Fed to continue to raise rates given recent producer price inflation readings and a continued strong labor market. The 10-year Treasury continues to pose headwinds to asset values, and while many are talking of “disinflation,” we expect the market to remain technically driven and begin to test support at the 200-day moving average across major indices. We believe 2023 will be a choppy year, as we look ahead to better times in 2024.
Tickerized for SPY, RSP, DIA, QQQ, XLC, XLB, XLY, DPZ, CSCO, RSG, NEM
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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