Boeing & Microsoft - Big Shift In Rate Hike Expectations

Fed has moved with the whims of the stock market for the first time since Powell became chairperson. The Fed became dovish in late December. That helped spark the rally since then. Fed’s statement reflected this new guidance. If the Fed would have made a smaller shift, it would have been slightly more hawkish than where it was recently. But still more dovish than December. 

Numerically, the Fed seems to have guided for 0 or maybe 1 hike in 2019. It didn’t consider the amazing rally this year at all when writing this statement.

There is now a 74.4% chance the Fed keeps rates the same this year. That’s similar to where it has been recently. The shift is that there is now no chance of a hike and there’s a 25.6% chance of a cut. We’ve recently seen odds that show there is a greater chance of a hike than cut. 

When the stock market rallied from Christmas Eve, the odds of hikes increase, albeit at a slower pace. The Fed pushed the odds of hikes back down. This has allowed stocks to rally despite the expected weak 2019 earnings growth. 

It’s tough to say for sure when the Fed’s full dovish tilt will be priced in. We have earnings season happening at the same time as this meeting. That’s why this is the most important week of the year.

Boeing & Microsoft - Boeing Beats Estimates Handily

It’s very important to note that the stock market’s gain on Wednesday wasn’t exclusively the Fed’s doing. 

This earnings season hasn’t been great for 2019 estimates, but a few key firms have boosted the market a few times so far. Wednesday was one example as Apple and Boeing rallied sharply.

Boeing had a great earnings report as EPS was $5.48 per share which beat estimates by 91 cents. Furthermore, revenues were $28.3 billion which beat estimates by over $1 billion. This sent the stock up 6.25%. The firm reported $101.1 billion in revenues in 2018. It crossed the $100 billion threshold for the first time. 

The firm also reported great guidance which has been rare this earnings season. It expects 2019 EPS to be between $19.90 to $20.10 which beat estimates for $18.31. It’s amazing for a firm to release full-year guidance and to have such a narrow range. Boeing will be a clear winner as it has been recently.

Earnings from operations were up 40%. The firm expects to deliver between 895 and 905 airplanes in 2019 which is double-digit growth from the 806 it delivered last year. 

Airplane profits were up 15.6% in Q4. Services revenues were up 29%. Defense division was up $6.1 billion as it gained over 20 contacts with the Pentagon that had a cumulative value of $13.7 billion. 

The Democratic presidential candidates have all been focusing on domestic policy, so it remains to be seen if they would lower the defense budget if elected.

Boeing & Microsoft - Microsoft Misses Revenue Estimates

It was correct to be bearish on Microsoft and Amazon ahead of their earnings reports. Personally, I was skeptical of these firms because Intel and Western Digital reported weakness in the cloud. 

However, both Microsoft and Amazon beat estimates for their cloud divisions as the secular growth trend continued.

Microsoft beat EPS estimates by 1 cent, reporting $1.10. Revenues of $32.47 billion missed estimates by about $40 million. Revenues were up 12% year over year. Azure grew 76% which is the same as last quarter. 

The analyst from KeyBanc Capital Markets, which has a buy on the stock, expected 74% growth. 

Furthermore, the Commercial Cloud division had $9 billion in revenues which was up 48%. That’s 1% higher than last quarter and 3.2% higher than the KeyBanc analyst’s estimate. Commercial Cloud had 52% gross margins.  

(Click on image to enlarge)

Microsoft results CHART

Microsoft ended the Windows phone project, but its Surface tablets and laptops have been a big success as revenues were up 39% to $1.86 billion. I think that Surface has an advantage over Apple products. They all use the same OS which allows for a touch screen. 

The iPad Pro has slowly developed into a powerhouse, but it still uses iOS which is a hindrance. The MacBooks still don’t have a touch screen. Even with the strength of Surface, the More Personal Computing segment had $12.99 billion in revenue which missed estimates for $13.08 billion. 

Boeing & Microsoft - Revenue from Windows devices makers had 5% decline - worst result in over 2 years.

Productivity and Business Process Segment had $10.1 billion in revenues which beat estimates by $10 million. The office was hurt by the weakness from PCs which Microsoft blamed on the timing of the supply of processors. The firm had 33.3 million office 365 customers which is up from 32.5 million last year. 

Finally, the Intelligent Cloud segment, which includes Azure, had $9.38 billion in revenues which beat estimates by $100 million.

The firm’s revenue guidance missed estimates as it came in at between $29.4 billion and $30.1 billion when estimates were for $29.87 billion. This sent the stock down 1.83%. That’s not a huge decline, but it’s still a buying opportunity for this name.

Boeing & Microsoft - Conclusion

Both Boeing and Microsoft had opposing reports. One beat estimates easily and one missed on revenue. However, they are both long term winners that should outperform the S&P 500. 

Microsoft’s cloud business still did well even though there were reports of a slowdown in the cloud. 

The final outstanding FAAMG name is Alphabet. These big internet names mostly got through earnings season without a disaster. That’s great for the indexes, but overall guidance has still been weak on average. 

With 210 S&P 500 firms reporting results, sales growth is only 6.16%. It will get worse in 2019.