Market Snapshot
briefing.com
| Dow | 35551.67 | +113.69 | (0.32%) | | Nasdaq | 14147.82 | +2.88 | (0.02%) | | SP 500 | 4573.81 | +5.08 | (0.11%) | | 10-yr Note | +24/32 | 3.86 |
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| | NYSE | Adv 1811 | Dec 1033 | Vol 871 mln | | Nasdaq | Adv 2960 | Dec 1719 | Vol 4.2 bln |
Industry Watch
| Strong: Communication Services, Industrials, Financials, Real Estate, Utilities |
| | Weak: Information Technology, Materials, Consumer Discretionary, Energy |
Moving the Market
-- Digesting a heavy batch of earnings news, headlined by Microsoft (MSFT) and Alphabet (GOOG)
-- Reacting to an expected 25 basis points rate hike by the FOMC and Fed Chair Powell's press conference
-- Losses in many mega cap names has weighed on index performance while a big gain in Alphabet (GOOG) has acted as some offsetting support
-- Regional bank stocks outperform after news of PacWest (PACW) and Banc of California (BANC) merger fuels speculation about additional merger activity in the space
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Closing Summary
26-Jul-23 16:30 ET
Dow +82.05 at 35520.03, Nasdaq -17.27 at 14127.67, S&P -0.71 at 4568.02
[BRIEFING.COM] Today's trade was mixed as market participants reacted to a heavy batch of earnings, the latest policy move by the FOMC, and Fed Chair Powell's subsequent commentary.
The FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 5.25-5.50%, as expected. The policy directive also upgraded the description of economic activity to expanding at a moderate pace from continuing to expand at a modest pace in the June directive.
The market reaction was relatively muted as investors looked ahead to Fed Chair Powell's press conference, which induced some whipsaw price action for the major indices.
Mr. Powell acknowledged that inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to two percent has a long way to go. The Fed currently doesn't see inflation getting down to two percent until 2025 or so. The Fed will continue to make its decisions meeting by meeting. The idea, though, that the Fed would keep hiking until inflation gets to two percent would be a prescription of going way past the target and that's clearly not the appropriate way to think about it.
By and large, the Fed Chair was non-committal about the next move. Ultimately, the major indices closed near where they were trading before the policy directive was released at 2:00 p.m. ET.
Expectations for a second rate hike at any of the meetings before the end of the year were largely unchanged. According to the CME FedWatch Tool, probability of a second rate hike at any of the remaining FOMC meetings this year remains under 40%.
On the earnings front, Microsoft (MSFT 337.77, -13.21, -3.8%) and Alphabet (GOOG 129.66, +6.87, +5.6%) were among the more influential movers, garnering mixed reactions from investors, along with Visa (V 237.10, -1.59, -0.7%), Boeing (BA 232.80, +18.68, +8.7%), Coca-Cola (KO 63.05, +0.80, +1.3%), and AT&T (T 14.89, +0.09, +0.6%).
Microsoft reported better-than-expected earnings and revenue, but logged a decent decline due to some profit-taking activity after guiding fiscal Q1 revenues slightly below the consensus estimate. Alphabet and Boeing, meanwhile, offered some offsetting support.
The broader market held up fairly well today as evidenced by the 0.2% gain in the Invesco S&P 500 Equal Weight ETF (RSP) while the market-cap weighted S&P 500 closed flat.
Regional bank stocks were a pocket of strength after the news that PacWest Bancorp (PACW 9.76, +2.07, +26.9%) and Banc of California (BANC 14.71, +0.09, +0.6%) are merging in an all-stock transaction. The SPDR S&P Regional Banking ETF (KRE) rose 4.7%.
Strength from its regional bank components helped the Russell 2000 to outperform its peers, gaining 0.7%.
The S&P 500 communication services sector (+2.7%) was the top performer by a wide margin, thanks to Alphabet, while the information technology sector (-1.3%) finished in last place, weighed down by Microsoft.
- Nasdaq Composite: +35.0% YTD
- S&P 500: +18.9% YTD
- Russell 2000: +12.4% YTD
- S&P Midcap 400: +12.2% YTD
- Dow Jones Industrial Average: +7.2% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index fell 1.8% with purchase applications dropping 3.0% and refinance applications remaining flat from last week.
- New home sales decreased 2.5% month-over-month in June to a seasonally adjusted annual rate of 697,000 units (Briefing.com consensus 722,000) from a downwardly revised 715,000 (from 763,000) in May. On a year-over-year basis, new home sales were up 23.8%.
- The key takeaway from the report is that new home sales activity, which is measured on signed contracts, was crimped in June by rising mortgage rates that created added affordability pressures.
- The weekly EIA crude oil inventories showed a draw of 600,000 barrels after last week's draw of 708,000 barrels.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Advance Q2 GDP (Briefing.com consensus 1.6%; prior 2.0%), advance Q2 GDP Deflator (Briefing.com consensus 3.0%; prior 4.1%), Weekly Initial Claims (Briefing.com consensus 233,000; prior 228,000), Continuing Claims (prior 1.754 mln), June Durable Orders (Briefing.com consensus 1.0%; prior 1.7%), Durable Orders ex-transportation (Briefing.com consensus 0.2%; prior 0.6%), June advance goods trade deficit (-$91.1 bln), June advance Retail Inventories (prior 0.8%), and June advance Wholesale Inventories (prior -0.1%)
- 10:00 ET: June Pending Home Sales (Briefing.com consensus 0.3%; prior -2.7%)
- 10:30 ET: Weekly natural gas inventories (prior +41 bcf)
Market pulls back after brief rally
26-Jul-23 15:35 ET
Dow +33.32 at 35471.30, Nasdaq -27.87 at 14117.07, S&P -6.42 at 4562.31
[BRIEFING.COM] The stock rally was short-lived and the major indices are roughly unchanged now from levels seen before Fed Chair Powell began his press conference.
After the close, Meta Platforms (META) will headline the earnings reports. Molina Healthcare (MOH), Flex (FLEX), L3Harris (LHX), United Rentals (URI), Lam Research (LRCX), Chipotle Mexican Grill (CMG), eBay (EBAY), ServiceNow (NOW), Seagate Tech (STX), Mattel (MAT), Align Tech (ALGN), Teradyne (TER), and others also report after the close.
Valero Energy (VLO), Comcast (CMCSA), HCA (HCA), AbbVie (ABBV), Bristol-Meyers (BMY), Northrop Grumman (NOC), Honeywell (HON), Southwest Air (LUV), McDonald's (MCD), Mastercard (MA), Tractor Supply (TSCO), Grainger (GWW), Keurig Dr Pepper (KDP), Baxter (BAX), Royal Caribbean (RCL), Norfolk Southern (NSC), and Crocs (CROX) are some of the companies reporting earnings ahead of tomorrow's open.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Advance Q2 GDP (Briefing.com consensus 1.6%; prior 2.0%), advance Q2 GDP Deflator (Briefing.com consensus 3.0%; prior 4.1%), Weekly Initial Claims (Briefing.com consensus 233,000; prior 228,000), Continuing Claims (prior 1.754 mln), June Durable Orders (Briefing.com consensus 1.0%; prior 1.7%), Durable Orders ex-transportation (Briefing.com consensus 0.2%; prior 0.6%), June advance goods trade deficit (-$91.1 bln), June advance Retail Inventories (prior 0.8%), and June advance Wholesale Inventories (prior -0.1%)
- 10:00 ET: June Pending Home Sales (Briefing.com consensus 0.3%; prior -2.7%)
- 10:30 ET: Weekly natural gas inventories (prior +41 bcf)
Market climbs as Powell speaks
26-Jul-23 15:05 ET
Dow +113.69 at 35551.67, Nasdaq +2.88 at 14147.82, S&P +5.08 at 4573.81
[BRIEFING.COM] As Fed Chair Powell's press conference continues, the major indices have turned sharply higher, trading at their best levels of the day now.
Mr. Powell said "we haven't made a decision to go every other meeting. We're going to be going meeting by meeting." Overall, his commentary hasn't contained anything too surprising.
Many stocks have participated in the upside moves. The Invesco S&P 500 Equal Weight ETF (RSP) is up 0.3% and the market-cap weighted S&P 500 trades up 0.2%.
Fed raises rates 25 bps, as widely expected
26-Jul-23 14:25 ET
Dow +23.02 at 35461.00, Nasdaq -54.95 at 14089.99, S&P -10.55 at 4558.18
[BRIEFING.COM] The market moved slightly higher, only to quickly retreat back to unchanged after the Federal Open Market Committee (FOMC) increased rates by 25 basis points to a range of 5.25-5.50%, as widely expected. The Committee will continue to assess additional information and its implications for monetary policy. Currently, the S&P 500 (-0.23%) is in second place on Wednesday afternoon.
In further comments the FOMC said that recent indicators suggested that economic activity has been expanding at a moderate pace (recall last month the FOMC said activity was expanding at a "modest" pace). Job gains have been robust in recent months, and the unemployment rate has remained low while also observing that inflation remains elevated.
Comments also held that tighter credit conditions for households and businesses were likely to weigh on economic activity, hiring, and inflation. The extent of these effects, though, remains uncertain.
In addition, the Committee said it would continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
Gold modestly higher ahead of rate decision
26-Jul-23 13:55 ET
Dow -5.13 at 35432.85, Nasdaq -58.79 at 14086.15, S&P -11.28 at 4557.45
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (-0.25%) is still in second place.
Gold futures settled $6.40 higher (+0.3%) to $1,970.10/oz ahead of the FOMC's rate decision, which is due at the top of the hour.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $101.26.
Earnings and the Fed in market's sightline
We're not so sure if the earnings reports from Alphabet (GOOG) and Microsoft (MSFT) were the equivalent of getting over a hurdle so much as they were the equivalent of getting over a hump. To be sure, there wasn't a lot of angst wrapped up in the price action for those stocks, which is to say there wasn't any real fear that they would drop some bombs on investors.
They didn't. Both companies exceeded consensus estimates for earnings and revenue. Alphabet duly impressed and is up 6.0% in pre-market trading, whereas Microsoft simply impressed and provided a fiscal Q1 revenue outlook that was slightly lower than expected, creating an excuse for some to take some money off the table. Shares of MSFT, up 46% year-to-date, are down 3.6% in pre-market trading.
The mixed response to the reports from these heavyweight companies, not to mention the lingering sense that the market is due for a pullback and that an FOMC decision is due out later today, has led to some squishy trading in the equity futures market.
Currently, the S&P 500 futures are down 12 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 56 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 104 points and are trading 0.3% below fair value.
This is not an ominous look for the broader market by any means. Better-than-expected results from Boeing (BA), Coca-Cola (KO), and AT&T (T) have been soothing influences along with a nice jump in Union Pacific (UNP) following news of a CEO change.
The look of the equity futures market, then, is the look of resignation that it is getting more challenging for this rally to keep running unabated in the near term with market multiples becoming more demanding of validation.
In other words, a lot of good news -- or hope of good news -- has found its way into stock prices already in the parabolic run off the March lows.
Enter the Fed, which is going to raise the target range for the fed funds rate by 25 basis points today to 5.25-5.50%. That news will be handed down at 2:00 p.m. ET, but it is the policy sermon on the mount from Fed Chair Powell at 2:30 p.m. ET that will capture the market's undivided attention, as participants will be eager to hear if what he signals about future policy action is blessed be the bulls or blessed be the bears.
What he will say -- or, at least, what we think he will say -- is that inflation is improving, but that core inflation is still too high. Still, the committee will continue to take into account the lag effect of prior rate hikes as it determines if additional rate hikes are necessary. That decision, he will say, is going to be data dependent and that the Fed is not on a pre-set course.
What he will emphasize is that the Fed is not even thinking about cutting rates and that policy rates are apt to stay higher for longer to ensure inflation is under control and back in-line with the Fed's 2.0% objective.
Frankly, that view shouldn't come as a surprise to the market, which is inclined to believe that today's rate hike will be the last from the Fed in this tightening cycle. The risk of upset, then, is a Fed chair who goes out of his way, with his words and tone, to shoot down that thinking.
-- Patrick J. O'Hare, Briefing.com
Texas Instruments sinks; does not expect meaningful changes in end-market demand next quarter (TXN)
Texas Instruments' (TXN -5%) Q2 report felt essentially unchanged compared to the previous quarter. Declining yr/yr revs, mild quarterly guidance, and no trough in sight eclipsed the semiconductor firm's solid earnings beat. Management may have remained steadfast in its optimism toward long-term dynamics. However, continuously rising CapEx coinciding with relative sales underperformance discourages investors from humming to the same tune surrounding TXN's long-term fundamentals.
There were warning signs ahead of TXN's Q2 report, particularly chip giant Taiwan Semi (TSM) slashing its FY23 financial predictions. Still, with shares climbing over +15% from May lows leading into TXN's Q2 earnings, the market shrugged off potential concerns, anticipating TXN delivering improving numbers from the previous quarter. However, this did not materialize, igniting considerable selling pressure today.
- What happened? Weakness from Q1 carried through to Q2, hindering performance across many of TXN's end markets. The previously resilient industrial market, TXN's most prominent at 40% of FY22 sales, succumbed to macroeconomic pressures, delivering flat growth sequentially. Meanwhile, communication equipment and enterprise systems saw sales declines qtr/qtr.
- There were still a few silver linings. Automotive (25% of TXN's business) climbed by low-single digits from Q1. Likewise, after several quarters of sequential declines, personal electronics finally grew sequentially, up low-single digits. These two end markets helped TXN achieve sequential growth of 3.4% to $4.58 bln, surpassing the high end of its prior guidance of $4.17-4.53 bln.
- Meanwhile, EPS of $1.87 was at the high end of TXN's $1.68-1.88 forecast and exceeded analyst expectations by double-digits, its widest beat since 2Q22.
- Unfortunately for TXN, there was not much to cheer about beyond these highlights. Gross margins contracted 540 bps yr/yr due to another quarter of declining revs, which slipped 13.1% yr/yr, increased CapEx, which was up 49% on a TTM basis compared to the year-ago period, and the transition of LFAB-related charges to cost of revenue.
- Regarding the constant CapEx investments not resulting in corresponding sales growth, TXN commented that they are longer-term, which should eventually allow the company to produce products at a lower cost.
- Although this strategy has been in play for the past several years without much to show for it, TXN did not waver from its long-term thinking, stating that the semiconductor cycle takes place over decades, not a few quarters. The company also remained "extremely confident" in gaining market share due to its ongoing investments.
- Looking ahead, TXN targeted adjusted EPS of $1.68-1.92, the midpoint of which missed estimates, and revs of $4.36-4.74 bln. Discouragingly, the company does not expect significant changes in its end markets compared to Q2.
Bottom line, TXN registered quarterly results broadly consistent with Q1, with a few notable exceptions, such as the return to growth in personal electronics. Although Q2 was not without some highlights, investors are expressing a lack of patience regarding TXN's long-term vision.
Finally, TXN's Q2 report does not set a positive tone ahead of rival Analog Devices' (ADI) Q3 (Jul) report next month.
Alphabet's search business and cloud's improving profitability drive upside results (GOOG)
Alphabet (GOOG) may not have knocked it out of the park with its 2Q23 results, but the Google parent company has now beat EPS and revenue expectations in back-to-back quarters, illustrating that the rebound in its advertising business is strengthening. Following a rough stretch in 2H22 and early 2023 in which companies reined in advertising spending, it's apparent that budgets have loosened up and that GOOG's search product is still a favored choice among marketers, even as AI-powered competition heats up.
- Search, GOOG's bread-and-butter business, grew revenue by nearly 5% yr/yr to $42.6 bln, edging past estimates. While the growth doesn't seem overly impressive, the key takeaway is that the trend is moving in the right direction. After decreasing by 1.6% in Q4, search revenue increased by 2% in Q1, and the momentum continued into Q2.
- With the launch of OpenAI's ChatGPT last November, and the subsequent frenzy that surrounded it, concerns began to surface that GOOG's search business could become vulnerable to market share losses. Microsoft's (MSFT) Bing search engine, for instance, has added new AI-powered chat tools in an effort to increase its competitiveness and lure in more advertisers.
- Although it's still early, so far there's little evidence to suggest that GOOG's dominance in search is waning. Furthermore, the company is busy developing its own AI-based features for its search engine which will be rolled out in the coming quarters.
- Rising competition has taken a toll, though, on YouTube. The emergence of TikTok, combined with a pullback in advertising spending, has weighed on YouTube, as reflected by revenue decreases of 3% and 8% in Q1 and Q4, respectively. However, YouTube also bounced back in Q1 as revenue edged higher by 4.4% to $7.66 bln, beating expectations.
- Additionally, momentum continues to build for YouTube Shorts -- GOOG's answer to TikTok's short format videos -- as monthly users climbed to over 2.0 bln compared to 1.5 bln a year ago.
- Meanwhile, Google Cloud's transition to profitability reached a new level with operating income increasing to $395 mln from $191 mln in Q1. Recall that last quarter was the first profitable quarter for Cloud. Revenue growth remained steady at 27% compared to 28% in Q1, while GOOG's cost-cutting efforts are also likely boosting Cloud's margins.
Now that GOOG's core advertising business has steadied and improved, and Cloud has turned the corner and is generating profits, the company is in a stronger position to make a significant leadership change. On that note, the company also announced last night that CFO Ruth Porat will assume the newly created role of President and Chief Investment Officer. She will continue to serve as CFO until a permanent replacement has been named.
Overall, this was an encouraging quarterly report for GOOG that demonstrated the resiliency of its business and created more enthusiasm for the upcoming AI launches that will enhance its search engine.
Microsoft wraps up FY23 on a mixed note; stock lower mostly on weak SepQ guidance (MSFT)
Microsoft (MSFT -4.5%) is heading lower today after wrapping up FY23 on a mixed note. The software giant reported a solid EPS beat for Q4 (Jun) last night. However, the upside was not as large as we saw in MarQ and the Q1 (Sep) revenue guidance was a bit below analyst expectations. In our preview, we noted our caution heading into this report given the big run in the stock.
- Let's start with Azure, which grew +27% CC (constant currency), at the high end of the +26-27% CC prior guidance. Azure growth continues to moderate from +31% in MarQ, +38% CC in DecQ, +42% CC in SepQ and +46% CC in JunQ. That is not entirely surprising given that Azure is getting quite large. Also, we see the SepQ Azure guidance of +25-26% CC as pretty solid and not much of a drop off from JunQ.
- MSFT said on its call that Azure continues to take share as customers migrate their existing workloads and invest in new ones. Also, of note, Microsoft Cloud surpassed $110 bln in annual revenue in FY23 with Azure accounting for more than 50% of the total for the first time. Another positive was that we did not hear MSFT repeat its cautious comments from its MarQ call when it said Azure customers continued to exercise some caution. Overall, Azure looked quite strong.
- MSFT saw continued healthy renewal strength in its commercial business, which includes its upsell and attach motions, particularly with Microsoft 365 E5. MSFT saw a record number of $10+ mln contracts for both Azure and Microsoft 365. Also, the average annualized value for its large long-term Azure contracts was the highest it's ever been. Commercial RPO increased +18% CC to $224 bln and roughly 45% will be recognized in revenue in the next 12 months.
- In its consumer business, the PC market overall was in-line with expectations, although the early timing of back-to-school inventory builds benefited Windows OEM. Advertising spend was slightly lower than anticipated, which impacted search and news advertising and LinkedIn Marketing. As previously announced, Microsoft is in the process of acquiring Activision Blizzard (ATVI). MSFT said it continues to work through the regulatory approval process and remains confident about getting the deal done.
Overall, this was a solid but not spectacular end to FY23. MSFT does not usually guide lower for the next quarter, so that was a bit troublesome. It gave a reason for investors to lock in some of the 40% gain they had seen since early March. We had cautioned in our preview that, given the recent run, we would use caution. However, even with today's pullback, the stock performance has been very impressive, so we would not worry too much about today.
Coca-Cola's initial pop on Q2 results fizzles as lingering macroeconomic challenges weigh (KO)
Coca-Cola's (KO) initial pop on Q2 earnings, which saw volumes exceed rival PepsiCo (PEP), is beginning to fizzle out. Although overall volumes were still flat yr/yr in Q2, this underscored little consumer resistance to significantly higher prices, largely fueling Coca-Cola's earnings and sales beats in the quarter. Also, a robust first half of the year factored into Coca-Cola's raised FY23 outlook, projecting EPS growth of +5-6% yr/yr and organic revenue growth of +8-9%, both up 1 pt from prior targets.
Why are investors starting to lose their initial enthusiasm?
- Most of KO's top-line growth stemmed from ongoing price hikes, climbing 14% in EMEA yr/yr, 17% in Latin America, 9% in North America, and 5% in Asia Pacific. The continuously increasing prices are somewhat worrisome since management reiterated that consumers continue seeking private-label alternatives, particularly in Europe, where KO saw its most pronounced volume decline at 5%.
- Asia Pacific is also an area of concern. Volumes grew just 2% in the quarter, below PEP's 5% jump. China's economic recovery slowed in Q2, and consumer confidence is below pre-pandemic levels. Unit case volumes in China, Mexico, Brazil, and India, accounted for 32% of the KO's global volumes, making China one of the company's primary markets. If recovery efforts stall in the country, KO could be staring at a meaningful hit to upcoming financial performance.
These blemishes notwithstanding, Coca-Cola still delivered several notable highlights in Q2.
- KO's bottom-line top line improved by 2.9% yr/yr to $0.78 on top-line growth of 6.2% to $12.0 bln. Organic revs, which exclude currency fluctuations, jumped +11%. Comparable operating margins, which also back out FX headwinds, expanded by 90 bps yr/yr to 31.6% as supply chain pressures continued to ease and energy prices pulled back from record highs.
- In North America, inflation is moderating, and labor markets are strong, driving historically low elasticities and contributing to low consumer blowback to higher prices. As a result, volumes slid by just 1%, significantly better than PEP's 4.5% drop. Meanwhile, in Latin America, where consumers are more accustomed to persistent inflation, volumes were 4% higher yr/yr, 1 pt above PEP.
- In KO's dairy and plant-based beverages, Q2 marked the ninth-straight quarter of double-digit sales growth, contributing to value share gains across both categories. Alcohol ready-to-drink beverages also displayed promising results, while sustained premiumization trends, a characteristic Constellation Brands (STZ) attributed to its upbeat MayQ report, fueled solid numbers in KO's Simply brand.
Bottom line, Coca-Cola's Q2 report was a mixed bag. Investors initially liked that volumes held up relatively well despite the ongoing price hikes. However, macroeconomic conditions remain challenging and could eventually lead to stronger consumer resistance, spurring heightened trade down to private-label alternatives.
General Electric flying to multi-year highs as Aerospace segment fuels beat-and-raise report (GE)
On the strength of its Aerospace segment, which is experiencing robust demand due to an ongoing boom in air travel, and its considerable streamlining efforts, General Electric (GE) has reported solid quarterly results lately. That trend continued this morning with GE issuing an impressive beat-and-raise Q2 earnings report that has shares flying to their highest levels since late 2017.
CEO Larry Culp's vision and strategy to transform GE into a pure play aviation company couldn't be playing out any better. There is still some work to be done -- GE Vernova, which includes the Renewable Energy and Power businesses -- is set to be spun off in late 2023 or early 2024. However, over the past few years, GE has undergone a major transformation, including the spinoff of the healthcare segment in January and the merger of its aircraft leasing unit with AerCap Holdings (AER) in March.
As GE has cut down and simplified its operations, the emphasis has shifted substantially to its Aerospace segment. This transformation has coincided with a recovery and subsequent boom in air travel demand, pushing sales and orders for GE's jet engines sharply higher. Likewise, as mileage piles up for commercial jets across the country, GE's aircraft services business is seeing a major upswing on rising demand for parts and maintenance.
- In Q2, Aerospace organic revenue climbed by 28% with strength in both equipment and services. More specifically, commercial engines and services generated revenue growth of 32%.
- On the defense side, which dealt with significant supply chain issues last year, orders more than doubled while engine output soared by 74% yr/yr.
The robust results for Aerospace don't come as a surprise given the surging momentum in the commercial airline industry, but the recovery in the Renewable Energy segment has been pretty remarkable.
- Rewinding to the year-ago period, organic revenue sank by 20% and segment margin plummeted by 1,210 bps to (13.5)% due to weak orders for wind turbines. Uncertainty surrounding future tax credits for wind generation acted as a drag on the unit, prompting GE to initiate cost-cutting measures that included a 20% reduction in headcount for the segment.
- After the Inflation Reduction Act was passed on August 16, 2022, order activity for wind turbines began to accelerate. Simultaneously, the effects from GE's cost-cutting initiatives gradually took hold, resulting in margin and profitability improvements.
- Bolstered by rising equipment growth across the onshore, offshore, and grid markets, revenue in Renewable Energy climbed by 27% to $3.8 bln in 2Q23. Meanwhile, productivity improvements and price adjustments drove segment margin higher by 680 bps to (9.3)%, leading to a 35% increase in profit to ($400) mln.
Assuming the recovery in Renewable Energy continues -- while Power remains steady (orders up 7% in Q2) -- investor enthusiasm for the GE Verona spinoff should only build. That's a positive for GE as the valuation for GE Verona will presumably rise. Overall, this was a very strong earnings report for GE and its outlook only seems to be brightening as it inches closer to becoming a standalone aviation company.
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