Netflix & CSX Crater On Earnings Misses

Netflix - Stocks Fall On Weak Earnings

Netflix and CSX fell on the weak earnings statements. Let that be a lesson to only follow aggregate earnings data not the headlines. There will obviously be bad quarters throughout this earnings season as always. But only the aggregate results will tell you how the quarter was.

Wednesday was an example of a bad day as the market fell on weak results principally from CSX. Netflix also had weak results, but it reported after the bell.

S&P 500 fell 0.65%, Nasdaq fell 0.46%, and Russell 2000 fell 0.72%. The market is still overbought. So more downside wouldn’t be surprising.

Great reports can power even an overbought market higher.

Netflix - VIX was up 8.63% to 13.97. It’s still not high. Somehow, even with the S&P 500 about 1% from its record high, the CNN fear and greed index is at 47 which is neutral. It fell 8 points on the day. Obviously, we know why it’s down.

Junk bond demand and the put to call ratio are in the extreme fear category. On Wednesday, the market momentum indicator, as measured by the distance between the S&P 500 and its 125 day moving average, moved from the extreme greed category to just greed.

Only the utilities and healthcare sectors were up as they increased 0.43% and 2 basis points. Utilities sector loves the ‘risk off’ trade and rate cuts which are coming soon.

Odds of a double cut increased on Wednesday. Usually the odds of cuts increase when stocks fall. But I’m still looking at the great retail sales report wondering why a rate cut is necessary.

2 worst sectors were the industrials and energy which fell 2.17% and 1.15%. Industrials were hurt by CSX’s collapse which I will get to next.

Netflix - CSX Misses Estimates

Since CSX is considered a bellwether company, it’s earnings miss took the stock market down. To be clear, you didn’t need to wait for CSX’s earnings release to realize freight is weak.

June Cass Freight index showed yearly shipments growth was -5.3%. And expenditures growth was 0.9%. Yearly shipments growth improved from -6% in May. But on a monthly basis shipments fell 3.8% in June.

CSX had $1.08 in EPS which missed estimates by 3 cents. Revenues were $3.06 billion which missed estimates of $3.14 billion. Guidance for 2019 revenue growth was for a decline as much as 2%. That's a big reversal from the expectation for growth from 1% to 2%.

CSX’s CEO stated, “Both global and U.S. economic conditions have been unusual this year, to say the least, and have impacted our volumes. You see it every week in our reported carloads. The present economic backdrop is one of the most puzzling I have experienced in my career.”

The situation isn’t that puzzling. There is weak demand and excess supply of trucks. It looks bad for the CEO to state the situation is puzzling when it isn’t. Its stock fell 10.27% on Wednesday. It was its worst performance since December 1st, 2008. It’s not bad for the economy that there are too many trucks. But it is bad to see demand weak.

Solid Results From Bank of America

Netflix - If you look at Bank of America’s earnings report, they tell a completely different story than CSX’s report told.

All the major financials beat EPS estimates and Bank of America was no different. The firm reported 74 cents in EPS which beat estimates by 3 cents. That’s 8% growth from the prior year.

Revenues were $23.2 billion which was 2.1% growth. Stock increased 0.69% on the day. Like the other banks, net interest margins fell. They were down 7 basis points to 2.44% which missed estimates by 3 basis points.

Net interest income growth would be about 2% this year if the Fed kept rates the same. Growth will fall to 1% if the Fed cuts rates twice.

Netflix - Terrible Report

Netflix’s quarter was a disaster as its stock fell 11.97% after hours upon its release. EPS beat estimates were by 4 cents as they came in at 60 cents. Revenues were up 26% to $4.92 billion which missed estimates by $10 million.

Revenues and profits don’t matter to the stock. It only cares about international subscribers and that missed estimates sharply.

As you can see from the chart below, the firm added 2.83 million paid subscribers which missed estimates for 4.81 million. Number of new domestic subscribers actually fell 126,000 instead of increasing 352,000.

Prices were hiked about 20%, so it’s not a big shock net adds were negative. Total subscriber growth was still 21.9%. But that’s not enough to support the stock’s lofty valuation.

Good news is Netflix guided for 7 million global paid adds next quarter

Netflix - And it gave revenue guidance of $5.25 billion. “Stranger Things” season 3, the final season of “Orange is the New Black”, and a new season of “The Crown” will all come out this quarter. “

Stranger Things” had 40 million viewers in 4 days after Q2 ended which likely means net adds in America will be stronger next quarter. Issue investors have is that Netflix doesn’t have much visibility.

The general trend has been higher. But the company doesn’t know for sure how good results will be even in the next quarter.

Netflix is about to lose “The Office” in 2021 and “Friends” in the spring of next year. I don’t think that’s necessarily a terrible thing.

Netflix - The money will be invested in original content which differentiates the service.

Shows like “The Office” and “Friends” are watched the most by users, but they don’t drive subscription growth. In the long run, Netflix will spend more on originals.

The company will only run into trouble if it can’t add new subscribers. Bet on Netflix is the same as it has always been. Except there is about to be new competition.

Just like how this miss before Disney’s streaming platform is launched is bad, a beat after Disney+ launches would be amazing. Disney+ launches on November 12th

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