Earnings Will Stink, but Not All of Them

Despite a punk Q4 profit picture, some companies should do fine, says Bank of America.


Earnings season starts this week, with projections for rotten results. Still, not everything will be a cellar-dweller.

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The first big batch of reports are due out Friday for 2022’s fourth quarter, including UnitedHealth Group, Delta Airlines and Citigroup. FactSet’s estimate for S&P 500 companies is minus 4.1%, the first decline since Q3 2020. Only two sectors are expected to show positive earnings per share: energy (riding on still-relatively-high oil prices) and utilities (the ultimate steady-income industry), both with 2% gains.

Beyond that, several individual companies stand to deliver EPS growth that exceeds their numbers for the comparable year-before quarter, according to a Bank of America Securities research report.

Overall, Savita Subramanian, the head of U.S. equity and quantitative strategy at the BofA unit, writes that she expects profit margin compression in 2022’s final quarter due to high operating costs and a tight labor market. But falling inflation—BofA forecasts the Consumer Price Index will drop to 4.4% this year, from last June’s peak of 9.1% and December’s 6.5%— “can actually boost earnings” at certain companies, she insists. The reason: Milder inflation means that demand for their goods and services “should be relatively intact even in case of a mild recession.”

For instance, sports apparel maker Lululemon Athletica should maintain its good position. It has benefited from strong revenue growth, BofA analysts note. Margins this year should hold steady at a comfortable 22%, recovering from a previous supply-chain-linked slide, they believe. The company has reported climbing inventories, but management argues that, since its goods are not seasonal, the buildup will pay off as Lululemon meets ever-higher demand.

Coffee chain Starbucks, in the news lately as the target of a union drive at some of its stores, should see its margins move up to 15.4% this year from 14.3%, by BofA’s reckoning. Founder Howard Schultz, on his third stint as CEO (he came back twice to revamp operations when the company flagged), will leave in the spring. Under him, earnings have been restored, once again, with innovations such as pickup-only sites.

Hospitals have had a rough go during the pandemic. Tenet Healthcare slogged through past labor shortages and a cyberattack last April, which cost it $100 million in revenue. The hospital chain has set about whittling down its debt, and it is better staffed now. Margins should stay at around 11.3%, in BofA’s view. Once-laggard earnings have come back. In the July-September quarter, it beat Wall Street estimates handily.

Another earnings optimist is Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, who writes in a research note, “Never underestimate the resiliency and flexibility of corporate America” to deliver decent EPS via cost-cutting and other methods.

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Florida’s Pension Posts $14 Billion Investment Loss in Fiscal 2022

Portfolio’s 6.7% loss misses benchmark by a mile, as funded ratio sees double-digit drop to 82.9%.



The Florida Retirement System Pension Plan reported a 6.7%, or $14.24 billion, investment loss for the fiscal year ended June 30, well off both its benchmark’s return of 13.42% and its assumed rate of return of 6.7%. It is also a huge swing from the previous year, when the portfolio returned 29.46%. [Source]

According to the most recent annual comprehensive financial report from the State Board of Administration of Florida, which manages the Florida Retirement System’s assets, the FRS Pension Plan’s overall financial position decreased 10.8% to $180.2 billion in fiscal 2022, down from $202.08 billion at the end of fiscal 2021.

The pension fund reported 3-, 5-, 10- and 15-year annualized returns of 7.74%, 7.68%, 8.59% and 6.20%, respectively. The pension’s investment performance lagged behind its benchmark over every time period except the past 10 years. Over the same time periods. the benchmark’s annualized returns were 9.17%, 8.14%, 7.26% and 7.19%, respectively.

The investment losses also helped lower the pension plan’s funded ratio for the year to 82.9%, as of July 1, 2022, which is the latest actuarial valuation, from 96.4% at the end of fiscal 2021.

As of the end of fiscal 2022, the portfolio’s asset allocation was 48.4% in global equity, 17.7% in fixed income, 11.3% in real estate, 11.2% in strategic investments, 10.2% in private equity and 1.3% in cash equivalents.

Compared to one year earlier, the pension plan reduced its global equity asset allocation by nearly five percentage points from 55.2% at the end of fiscal 2021, while increasing its allocations to alternative assets such as real estate, private equity, and strategic investments by 2, 2.7 and 2.2 percentage points, respectively. [Source]

 

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