Red Flags: What's Driving Investor Caution With AMC, GRPN, and LCID This Week?

Posted on by The INO.com Team

The stock market appears to be regaining ground from the October slump, with noted gains in the S&P 500 and Nasdaq since the onset of November. However, while some stocks have displayed a rally, their stability remains questionable amid the Federal Reserve’s mixed signals.

Signs of a soft landing are emerging in the U.S. economy. A slowing job growth rate and reduced inflationary pressure inspired investor confidence that the Fed may refrain from further interest rate hikes and potentially consider cutting rates sooner.

Nevertheless, the market continues to grapple with volatility due to high interest rates and the daunting $33 trillion national debt posing a potential threat to the U.S. economy. Consequently, specific stocks could face increasingly volatile conditions moving forward.

This year's broad rally has not been all-inclusive, as certain equities have struggled. Despite performing well amid individual company challenges and lofty valuations, several stocks may lose their steady performance status should macro conditions deteriorate instead of improving.

In particular, Lucid Group, Inc. (LCID), AMC Entertainment Holdings, Inc. (AMC), and Groupon, Inc. (GRPN) are raising concerns among investors. Let’s delve into an in-depth analysis of this caution and what has tagged these stocks as potential red flags.

Lucid Group, Inc. (LCID)

Luxury EV maker LCID has gained considerable attention following Riyadh Air's announcement of a signed MOU with the former. This pivotal partnership is designed to encompass a range of operational, commercial, and marketing collaborations projected to heighten LCID's industry prominence significantly.

Further emphasizing its market strategy, LCID announced its adoption of Tesla’s North American Charging Standard (NACS), bolstering its customer service efforts by offering increased access to reliable and convenient vehicle charging solutions.

Despite LCID's promising potential in the burgeoning EV industry, its disappointing third-quarter financial results have exercised investor caution due to substantial shortfalls in revenue and production forecasts.

With $137.81 million in revenue in the third quarter, denoting a 29.5% year-over-year decrease, it marks four consecutive quarters when the company failed to meet market estimates. Its losses have also steadily accrued over the year. It burned through $630.89 million in the third quarter alone, amassing an annual total exceeding $2.17 billion.

The additional concern stems from significant production figures falling behind. It produced 1,550 vehicles during the quarter, representing a 32.1% year-on-year drop, signifying their lowest output figures since the company's inception. Furthermore, its Q3 deliveries of 1,457 Lucid Airs reflect a meager 4.2% increase from the prior year. This figure parallels its Q1 and Q2 metrics, generating concern amid typical expectations for escalating EV sales, particularly for startups commencing from a lower base.

Gradual delivery growth and loss escalation have raised significant questions surrounding LCID's profitability. The company has grappled with production increment challenges and slower-than-projected delivery growth, resulting in a revision of the previous sales outlook.

Initially, LCID projected a production forecast of 10,000 to 14,000 cars this year. Recent developments have led executive expectations to a more modest 8,000 to 8,500 units.

LCID shares experienced an approximate 10% decline after releasing less-than-ideal third-quarter results and decreased annual production guidance. Over the past year, it has lost 65.9%.

The company is projected to confront a slew of challenges in its trajectory. As a capital-intensive venture, it works assiduously to escalate its production efforts. As of September 30, 2023, its liquidity, including cash and short-term investments, was valued at $4.42 billion, marking a decline from the $5.25 billion as of June 30, 2023. Saudi Arabia contributed a significant proportion of this capital.

Despite the substantial backlog of orders from Saudi Arabia, a positive factor for LCID, the hefty price tags attached to its cars restrict widespread affordability. As per the company's website, the least expensive vehicle retails at $75,000, escalating to $250,000 for the most expensive model.

Adding to its woes, the preference for trucks over sedans among many Americans further impairs LCID’s efforts to expand operations and capture greater market share over time. Subsequently, excluding orders from Saudi Arabia, LCID also grapples with potential demand issues. Given the fiercely competitive nature of the American market, carving out a substantial niche would pose formidable challenges.

AMC Entertainment Holdings, Inc. (AMC)

AMC, engaged in the theatrical exhibition business, is grappling with ongoing financial pressure amid an upsurge in its debt load and ponderous liquidity management. In September, the company closed an at-the-market equity offering, amassing approximately $325.5 million following the sale of 40 million shares at an average price of $8.14 per share.

Less than a month preceding this, AMC underwent a 1-for-10 reverse stock split to bolster its capital. Following two consecutive quarters of profitability, as of September 30, 2023, the company's cash holdings totaled $729.70 million.

AMC has embarked on another stock sale as a lifeline to sourcing necessary funds. It plans to funnel $350 million of its Class A shares in an “at the market offering.” The achieved funds would be used to enhance liquidity and manage existing debt, along with funding general corporate operations.

However, AMC’s stock plunged over 88% over the past year. A significant drop of roughly 20% was observed upon publicizing its third-quarter earnings. The earnings report was not necessarily bad, as revenues increased 45.2% year-over-year to $1.41 billion, reaping net earnings of $12.3 million – a feat driven by robust theatrical attendance for Barbie and Oppenheimer. The $350 million stock sale announcement shook investors and incited a sell-off, driving share prices below the $9 mark.

Although the company seeks to fortify its balance sheet through additional funding, forecasts do not anticipate a return to a surplus working capital soon. As of September 30, 2023, AMC's working capital deficit was $549 million, compared to the deficit of nearly $847 million as of June 30, 2023.

The third-quarter raise of over $325 million resulted in a modest improvement in the working capital balance of $298 million for the quarter. Consequently, AMC's fresh plans for equity sales may be inadequate in bridging the company’s capital gap, suggesting a need for further funds in the near term.

Moreover, AMC's working capital will likely remain negative as the cash influx will be directed towards debt repayment, potentially sparking further equity sales.

Despite making a recovery from the pandemic lows, AMC's current performance still falls short of ensuring long-term viability. Future equity sales could be on the horizon, and each presumably more dilutive than the last, particularly as the stock teeters near its all-time low levels.

Groupon, Inc. (GRPN)

GRPN has yet to achieve profitability. For the fiscal third quarter that ended September 30, 2023, its revenue declined 12.4% year-over-year to $126.47 million, while net loss attributable to GRPN came at $41.36 million or $1.31 per share.

Despite experiencing a surge over the past year, GRPN’s shares took a hit in October due to an unfavorable response to an announcement regarding an asset sale. Consequently, it is anticipated that the share price might continue to plummet.

As of September 30, 2023, the company’s working capital deficit stood at $158.06 million, slightly improving from $171.82 million as of June 30, 2023. Given its negative working capital, the company needs to secure funding to ensure survival and additional capital to facilitate a turnaround. This could potentially imply future dilution of shareholder value.

GRPN shares tumbled over 35% after announcing a new rights offering and the firm’s recognition of "challenged" business conditions. The board has approved an $80 million fully underwritten rights issue extended to all holders of its common stock. This will be done via non-transferable subscription rights to purchase common stock at $11.30 a share.

Currently, as GRPN’s share has dwindled to trade at $9.61 per share, it seems improbable that investors would be willing to purchase shares at the company’s set price of $11.30 – leaving the CEO and board members to foot the bill for this $80 million investment.

Looking ahead, for the fourth quarter of 2023, the company anticipates revenues to fall within the range of $127.5 million to $137.5 million, signifying a decline of 14% to 7% year-over-year. Furthermore, adjusted EBITDA is expected to be between $18 million and $25 million. The company’s pessimistic sentiment about revenue has spooked investors, leading to stock sell-offs.

4 Must-Have Holiday Stocks for Your Portfolio

Posted on by The INO.com Team

As the Christmas season approaches, traditionally marked by increased discretionary spending, retailers anticipate a much-needed boost. The consumer discretionary sector has faced considerable challenges in recent years, with many retailers depending on the festive season for over half of their annual sales.

Although post-Thanksgiving sales have evolved beyond their traditional one-day events, the closing weeks of the fourth quarter remain crucial for retailers seeking to improve their financial health. The National Retail Federation anticipates holiday spending this November and December to achieve record levels, projecting growth between 3% and 4% over 2022 to reach between $957.3 billion and $966.6 billion.

Deloitte's annual Holiday Retail Survey projects that 2023 consumer spending will exceed pre-pandemic levels for the first time, with the average consumer predicted to spend $1,652 on gifts, up 14% year-over-year.

Interestingly, there is a commonly observed "Santa Claus Rally" phenomenon in the financial market during this period – a seasonal surge in volume and trading that tends to last until Christmas. LPL Financial found that since 1950, a Santa Claus rally has occurred around 79% of the time.
Year-end holiday shopping, driving sales for retailers and related businesses, can increase stock prices. Investors are generally keen on a year-end rally that boosts their portfolios, while professional traders often consider it an influential factor in determining their year-end bonuses. The occurrence of a Santa Claus rally this year could be welcomed, given the sluggish behavior of stocks since August.

Investment focus is shifting toward stocks presenting the most significant opportunities now, with some manifesting more profitability potential than others if acquired before price surges. Many investors are identifying holiday stocks to capitalize on with the holiday shopping season looming.
Given this backdrop, let us delve into an in-depth analysis of consumer discretionary stocks Amazon.com, Inc. (AMZN), Walmart Inc. (WMT), Target Corporation (TGT), and Etsy, Inc. (ETSY) now.

Amazon.com, Inc. (AMZN)

As the winter holiday season draws near, e-commerce behemoth AMZN, with a market cap of over $1 trillion, is ramping into full festive gear. The Seattle-based firm hosted its recent Prime Day event on October 10 and 11, further revealing plans to enfold 250,000 additional personnel across its global operations in anticipation of the busy year-end shopping frenzy.

AMZN's biannual Prime Days are effective levers for amplifying revenue. The July event yielded over $12 billion worth of sales – a record-breaking feat that crowned it the most successful Prime Day ever. Striving to expand the holiday shopping duration, the company has been progressively ushering its secondary Prime Day event into the fourth quarter.

The impact extends beyond just the Prime Days. The company also greatly benefits from the surge in sales during the Black Friday and Cyber Monday promotions tied to the Thanksgiving holiday, offering substantial financial reinforcements. The company forecasted revenue between $160 billion and $167 billion for the current holiday quarter. However, analysts polled by LSEG were expecting revenue of $166.62 billion, at the higher end of AMZN's guidance.
AMZN has restructured its delivery network in its retail operations to strategically position goods closer to customers, allowing for faster, more cost-effective order fulfillment. The enhancement of its same-day delivery services has positively influenced its profit margins by encouraging shoppers to place orders more frequently and in larger quantities.

For the fiscal fourth quarter ending December 2023, its revenue is expected to increase 11.2% year-over-year to $165.86 billion, while EPS could reach $0.76, up significantly year-over-year.

On the stock market front, shares of AMZN have appreciated over 69% year-to-date and are trading above the 50-, 100-, and 200-day moving averages – an apparent sign of a bullish trend.

Echoing these encouraging prospects, Wall Street analysts expect the stock to reach $176.13 in the next 12 months, indicating a potential upside of 24%. The price target ranges from a low of $145 to a high of $230.

Walmart Inc. (WMT)

Initially established as a conventional brick-and-mortar retailer, WMT has become an influential omnichannel contender. The company’s strategic acquisitions of Bonobos, Moosejaw, and Parcel and its partnerships with industry giants Shopify and Goldman Sachs underscore this evolution. Further efforts, such as introducing delivery programs Walmart + and Express Delivery and investing in Flipkart – an acclaimed online e-commerce platform – exemplify these changes.

These mechanisms have strengthened the retail behemoth's position, allowing it to remain resilient within the dynamic landscape of the retail industry. The company's adaptive initiatives ensure continuous relevancy and competitiveness in this changing ecosystem.

The prominent discount retailer goes the extra mile for the holiday season, employing additional personnel and offering round-the-clock service from Thanksgiving to Christmas to accommodate last-minute shoppers. The company notably profits from Black Friday, Cyber Monday, and Boxing Day promotions, with attractive offers ranging from electronics and toys to clothing.

WMT's in-store and virtual purchases witnessed a substantial escalation during the holiday season, complemented by an upswing in the market.
WMT’s second-quarter financial performance exceeded Wall Street predictions, and the company elevated its full-year guidance. Propelled by robust grocery sales and enhanced online expenditure, the retailer registered a remarkable second-quarter earnings per share of $1.84, while revenue touched $161.63 billion.

The retail giant revealed a 24% year-over-year growth in its e-commerce sales during the second quarter of 2023, with same-store sales observing a 6.4% uptick. WMT anticipates a 4% to 4.5% overall surge in annual sales.

For the fiscal fourth quarter ending January 2024, its revenue is expected to increase 3.6% year-over-year to $158.42 billion, while EPS is anticipated to reach $1.66.

Shares of WMT have gained over 15% year-to-date and trade above the 50-, 100-, and 200-day moving averages, indicating an uptrend. Moreover, Wall Street analysts expect the stock to reach $180.46 in the next 12 months, indicating a potential upside of 9.8%. The price target ranges from a low of $165 to a high of $210.

Target Corporation (TGT)

Boasting a market cap exceeding $51 billion, TGT has demonstrated robust financial health in 2023, successfully safeguarding its profit margins amid a challenging retail environment. The firm maintained solid earnings and cash flow despite subdued consumer spending in fundamental areas like home décor.

As holiday shoppers navigate TGT’s illustrious aisles, they are presented with the retailer's holiday price match guarantee – a strategy aimed at streamlining shopping experiences while offering optimal pricing. Frequently running comprehensive sales on daily essentials and holiday requisites – from electronics to clothing and household goods, TGT facilitates economical purchases, countering rising inflationary pressures.

TGT adopts a strategic stance this festive season by emphasizing affordability in its holiday marketing schemes. Guided by the motto "However You Holiday, Do It For Less," TGT links everyday items within its seasonal collection, providing an affordable range for consumers facing economic challenges.
Recognizing that 75% of TGT customers initiate their digital shopping journeys on mobile platforms, the corporation has augmented its investment in digital channels by 20% in 2023, specifically focusing on media mix optimization throughout the holiday period. This concerted effort towards optimizing digital footprint hones in on social media.

Furthermore, TGT's innovative advertising campaigns encapsulate broad holiday themes like “Lights,” “Magic,” and “Style,” demonstrating their application across various product categories. These aspirational campaigns aim to inspire consumers as they prep for holiday social events, alongside fulfilling their routine shopping needs.

Enhancing its product offering, TGT has introduced thousands of new items this year, expanding from toys priced at $25 to affordable $1 stocking stuffers. The corporation spotlights partnerships with renowned brands, including Fenty Beauty, Kendra Scott, and Mattel and private label introductions like the recent Figmint kitchen range.

For the fiscal fourth quarter ending January 2024, its revenue and EPS are expected to increase 1.2% and 19.4% year-over-year to $31.77 billion and $2.26, respectively.

Wall Street analysts expect the stock to reach $145.03 in the next 12 months, indicating a potential upside of 32%. The price target ranges from a low of $105 to a high of $180.

Etsy, Inc. (ETSY)

Renowned as a premier online hub for handcrafted and vintage goods, ETSY is an ideal platform for consumers looking for inventive gift options, particularly during the bustling winter holiday season. The broad spectrum of products available on ETSY – from jewelry and clothing to toys and home décor – caters to the preferences of its 97.3 million active users offered by 8.8 million energetic sellers.

However, this year has posed significant challenges for ETSY. ETSY grapples with unfavorable financial outcomes, unlike its competitors, who have rebounded from pandemic-induced downturns. The company experienced another decline following the release of its third-quarter earnings report.

ETSY's unique business model – a marketplace that emphasizes handcrafted and vintage items and operates via network effects and switching costs – may be attractive, but ultimately, consistent growth is vital to sustain investor interest. While ETSY insists on its distinct positioning within a large potential market, its struggle to bolster gross merchandise sales (GMS) post-pandemic suggests that the demand for its products may be more limited than anticipated.

Growth in GMS was barely perceptible in the third quarter at just 1.2% year-over-year to $3 billion. GMS per active buyer was down 6% to $127, possibly reflecting the economic challenges.

Moreover, the company estimated GMS for the fourth quarter of 2023 to decline in the low-single-digit range year-over-year. This could deteriorate into a mid-single-digit drop if financial circumstances worsen and stabilize or marginally increase if conditions improve.

CEO Josh Silverman said, "There's no doubt that this is an incredibly challenging environment for spending on consumer discretionary items. It's therefore important to acknowledge that this volatile macro climate will make it challenging for us to grow this quarter."

Yet, amid this financial gloom, bright spots are visible for ETSY. For the fiscal third quarter that ended September 30, 2023, active buyers on the ETSY marketplace witnessed a 4% year-over-year increase, totaling 91.6 million, with growth in U.S. active buyer trends for the first time in seven quarters. The company has reactivated 6 million buyers, marking a 19% year-over-year uptick, and retention rates exceed pre-pandemic levels.

Simultaneously, ETSY's seller base surged 19% to 8.8 million overall. An additional 400,000 sellers have joined the Etsy marketplace in the quarter, bringing its total to 6.7 million. These sellers may use the platform to supplement their income amid inflationary and other economic strains.

However, it is crucial to point out that even though other discretionary retailers are grappling with the prevailing economic climate, ETSY continues to underperform compared to its e-commerce competitors. This inevitably prompts queries regarding when or whether we might witness a resurgence in ETSY’s growth on par with its peers.

For the fiscal fourth quarter ending December, its revenue and EPS are expected to increase 1.7% and 16.2% year-over-year to $820.69 million and $1.33, respectively. Wall Street analysts expect the stock to reach $74.39 in the next 12 months, indicating a potential upside of 16.3%. The price target ranges from a low of $50 to a high of $125.

Is NIO (NIO) Stock a Ticking Time Bomb?

Posted on by The INO.com Team

Nio Inc. (NIO), a leading China-based electric vehicle (EV) manufacturer, has performed poorly over the past few months. Shares of NIO have plunged more than 5.4% over the past month and 17% year-to-date.

But, as per the latest headlines, it may appear that the situation will improve from here for the EV maker. On November 1, NIO announced its October 2023 delivery results. The company delivered 16,074 vehicles in October, growing by 59.8% year-over-year. The deliveries comprised 11,086 premium smart electric SUVs and 4,988 premium smart electric sedans.

Although deliveries surged by a high double-digit figure last month, growth was not as impressive sequentially. In September 2023, NIO delivered 15,641 vehicles. So, October’s deliveries represented a sequential increase of just 2.8%.

The company’s figures are lackluster compared to China-based peers such as Li Auto Inc. (LI) and Xpeng Inc. (XPEV) and past expectations.
LI’s October deliveries totaled 40,422 vehicles, increasing by 302.1% year-over-year and a sequential growth of 12.1% (based on 36,060 vehicle deliveries in September). Further, XPEV’s deliveries came in at 20,000 in October, an increase of 292% year-over-year and up 31% on a sequential basis.

While NIO’s stock did soar after the release of its delivery results, the rise was modest (nearly 2.1%) compared to LI (almost up 3.5%) and XPEV (up 7%). Moreover, the broad market rally on November 1 may have played a larger role than the vehicle deliveries news in NIO's rally.

Although NIO found support in recent trading days, the stock will likely suffer immensely in the upcoming months. So, we maintain a bearish stance on this EV stock.

Now, let’s review in detail what has happened in the past few months and discuss several factors that could impact NIO’s performance in the near term:

Poor Financial Performance

For the second quarter that ended June 30, 2023, NIO reported revenue of $1.21 billion, missing analysts’ estimate of $1.27 billion. The revenue translates to a decline of 14.8% from the second quarter of 2022. Its vehicle sales came in at $990.90 million, down 24.9% from the second quarter of 2022. The company’s gross profit decreased 93.5% from the year-ago value to $12 million.

NIO’s operating expenses grew 47.2% year-over-year to $849.65 million. Its non-GAAP loss from operations was $753.50 million, an increase of 132% year-over-year. The company’s non-GAAP net loss widened by 140.2% from the prior year’s quarter to $751 million. Furthermore, the automaker’s loss per share came in at $0.51 versus the consensus loss per share estimate of $0.24.

Unfavorable Analyst Expectations

Analysts expect NIO’s revenue for the third quarter (ended September 2023) to increase 47.2% year-over-year to $2.66 billion. However, the company is estimated to report a loss per share of $0.23 for the same period. NIO has also missed the consensus revenue estimate in three of the trailing four quarters and the consensus EPS estimates in all four trailing quarters, which is disappointing.

In addition, the Chinese EV maker’s EPS is expected to remain negative for at least two fiscal years.

High Levels of Indebtedness

On September 25, NIO closed its offering of $500 million in aggregate principal amount of convertible senior notes due 2029 and $500 million in aggregate principal amount of convertible senior notes due 2030. The issuance of a $1 billion convertible senior notes sent ripples of concern among investors and led to a significant drop in NIO’s stock price.

A debt offering generally indicates the company’s need for cash. Although issuing shares can be dilutive, a debt offering results in increased scrutiny by investors as excessive debt is often considered to hinder the company’s ability to generate a cash surplus.
Thus, higher levels of indebtedness due to additional debt offerings can be alarming as they potentially undermine the position of common stockholders. This apprehension potentially influences behavior toward NIO, reflecting concerns about the EV maker’s debt strategy and its implications for future financial stability and long-term viability.

NIO’s total liabilities were $9.52 billion as of June 30, 2023.

Struggling to Boost Sales in Europe

The Chinese EV manufacturer NIO is scrambling to drive sales in Europe, its first area of international expansion. The company is considering building a dealer network across Europe to speed up sales growth despite China-based EVs facing potential tariffs in the region.

NIO, an aspiring competitor to a world-class EV brand, Tesla, Inc. (TSLA), launched in Norway in 2021 and entered Germany, Sweden, Denmark, and the Netherlands in October 2022, enabling customers to purchase directly from its stores or online.

However, Nio began assessing dealers in key European markets after the company’s President said sales in Europe were missing expectations.
A source said that dealers were being considered both for Nio-branded cars sold in Europe and for project “Firefly,” a new affordable EV brand that the company plans to export to Europe from 2025.

Another reason to use dealers would be to ease cash pressure on NIO, which is prioritizing spending on research and battery swapping stations in China, that source added.

Job Cuts in the Face of Heightened Competition

Shanghai-based EV company Nio will reduce job positions in November and cut or defer some investment, strategic moves aimed at boosting the company’s viability as it grapples with widening losses and intense competition.

Demand for EVs has dampened in China as consumers prefer more economical plug-in hybrids, sales of which grew nearly 84.5% in the first nine months of 2023, helping automakers LI and BYD Co. Ltd (BYDDY) to gain market share.

Also, a price war started by world EV leader TSLA a year ago is dragging down the profitability of other EV makers, which have also stepped up efforts to cut costs and build partnerships to survive the escalating competition.

According to an internal letter signed by CEO William Li seen by Bloomberg News, NIO will slash its staff by 10% this month.

“Duplicate” and “inefficient” roles will be eliminated, and project investment that won’t contribute to the company’s financial performance within three years will be cut or differed, Li said.

Nio has been in a fight for survival amid fierce competition in the nation’s automotive industry over the past two years. Li wrote that to “qualify for the next round of competition,” the company must reduce costs and ensure resources for critical business areas. Also, he apologized to the colleagues who will be affected by the adjustments, as per the memo.

Price War in the EV Market

A price war instigated by Tesla a year ago increased the pressure in the EV industry, with other companies following by cutting prices in a race to attract customers as their sales showed signs of slowing.

Earlier this year, NIO slashed prices for its cars and announced delaying plans to spend on expansion and research. The Chinese electric car brand cut car prices by the equivalent of $4,200 and ended free battery swaps for new buyers.

Bottom Line

Once considered one of the dominant players in China’s EV market, NIO has poorly fallen short of its sales estimates and continued to post massive losses. The company’s revenue and earnings missed analysts’ expectations in the last reported quarter. Further, analysts and investors appear bearish about its growth prospects.

While its strategic initiatives, including job cuts and lower investment, could boost profitability in the long run, the EV maker continues to face near-term challenges with consumer preferences, fierce competition in the EV market, pricing power, widening losses, and lower margins.
Given its deteriorating financials, declining market share, lower profitability, and short-term uncertain outlook, NIO is best avoided now.

Bank of America (BAC) Just Crossed the 50-Day MA: Bearish Indicator?

Posted on by The INO.com Team

In the wake of regional bank failures earlier this year, the U.S. banking sector has grappled with substantial challenges, which include customer deposit deficits, rising deposit costs, sluggish loan growth, and diminishing profit margins. Yet, it demonstrated resilience later.

This ostensible resurgence became evident as the Federal Reserve propelled benchmark interest rates to the highest in over two decades, a trend expected to reverse in the forthcoming year. Amplified interest rates produce gains for banks due to elevated net interest income.

Despite this, the U.S. banking sector continues to bleed deposits. Throughout the second quarter alone, FDIC-insured banks experienced an almost $100 billion downward deposit shift. The industry's net income was diminished by $9 billion to $70.80 billion in the second quarter, with the average net interest margin contracting by three basis points to 3.28%.

Moreover, Federal Reserve Economic Data reveals a stunning $100 billion diminution in U.S. commercial banking deposits in just three weeks. Deposits plummeted from $17.38 trillion on September 27 to a disconcerting $17.28 trillion by October 18.

Furthermore, according to Moody's assessment, U.S. banks could struggle with at least $650 billion in unrealized losses in their securities portfolios, a 15% increase from the $558 billion losses experienced at the second quarter's end. This comes after expectations of extended higher interest rates led to a bond market collapse in the third quarter.

The share performance of the nation's second-largest financial institution, Bank of America Corporation (BAC), has languished alongside other bank stocks given these circumstances. BAC reported $131.60 billion in unrealized losses in its securities portfolio for the fiscal third quarter that ended September 30, 2023.

BAC continues to weather a period of economic volatility despite a 14% year-to-date decrease in its share values. However, investors are increasingly concerned about the bank's diversified investment portfolio status during long-standing escalated interest rates.

BAC’s early pandemic decision to allot billions into long-term Treasury bonds and mortgage bonds during a time of increased new deposits has now become a significant financial burden.

An influx of deposits accelerated by federal aid significantly outpaced the growth of loans during this period. The acting CFO at the time, Paul Donofrio, divided the surplus funds between long-term fixed-income products, with the remainder placed in short-term and floating-rate debt. This strategy was intended to safeguard the bank's net interest margin if rates stagnated or fell.

Over the years, BAC's CEO, Brian Moynihan, has consistently underscored that the bank stands to make significant gains when interest rates rise, backed by a solid deposit base ready for financial expansion following a strategic pivot by the Fed. However, amid the current high-interest rate climate, BAC has lagged among America's banking heavyweights.

Low-yielding investments and a decrease in the value of holdings upon the Fed's increased rates imply reduced earnings from its investments for BAC. Its investment holdings presently display considerable unrealized losses, missing competitive rates since 2007. As of June 30, 2023, these holdings show paper losses on those debt securities exceeding $109 billion, which increased to $136.22 billion by the third quarter's end.

With approximately $603.37 billion tied up in held-to-maturity securities, the bank's considerable holdings in these low-yield assets restrict its potential to maximize profits from cash investments in money markets or higher-return assets. The bank's comparatively lower overall yields on its securities book are projected to persist for some time. Analysts do not anticipate the bank needing to liquidate these holdings and incur a loss.

BAC’s securities portfolio is the largest and the least-yielding, heavily weighted with debt that matures after a decade. Should the Fed act upon another prospective rate increase, the valuation of these holdings may depreciate further.

Moreover, for the fiscal third quarter of 2023, BAC’s net interest income rose 4.5% year-over-year, surpassing the analyst's estimate, but it remains below its peers. JP Morgan’s NII grew about 30% year-over-year, while Wells Fargo’s NII climbed 8.3% year-over-year.

However, executives remain optimistic that the financial climate could ameliorate each quarter as the portfolio contracts and the remaining bonds decrease in duration. Even if rates stay where they are, interest income is poised to bolster as approximately $10 billion of holdings mature every quarter, the proceeds of which can be reinvested at more favorable rates.

Chief Financial Officer Alastair Borthwick indicates that these funds could go into cash where attractive yields are achievable or possibly for long-term investments, now offering superior coupons. More than a quarter of the bank's reserve remains frozen in debt securities, yielding roughly 2.4% in a market environment offering around 5%. As it stands mid-year, the accounted value of these securities has plummeted by close to $110 billion.

There were also signs from BAC that some of its customers are encountering problems as borrowing costs rise. Its net charge-offs were $931 million, up 79% from the year-ago quarter.

BAC, indeed, pays less than 2% on its significant deposit base. This allows it to maintain profitability through its loan and investment ventures, unlike smaller banks that face financial strain due to their new deposits costing more than what their older assets yield.

A potential shift in investor perspective may also benefit BAC. As investors shift their focus from bond losses and increasing deposit costs to credit and capital, BAC could surpass expectations and enjoy improved performance.

Bottom Line

Recent decisions by financial institutions have underscored the precarity of the contemporary banking landscape. The alarming revelation that the second-largest lending bank in the U.S. has unrealized losses of $131.6 billion on securities is exceedingly concerning, even with government assurances in place.

Prominent lending organizations have experienced setbacks in their bond holdings; however, BAC is particularly notable due to its size and impact. Possessing over $3 trillion in assets and $1.9 trillion in deposits as of September 30, 2023, the bank has considerable fiscal security to endure this turbulent period. It is anticipated that BAC will successfully navigate these rough waters.

CEO Moynihan has long championed a strategy of "responsible growth," which calls for the pursuit of profit without exposing the bank to unnecessary risk – a methodology instituted in 2014. However, some insiders argue that this cautious approach might neglect potential growth opportunities.
While unrealized losses do not generally affect the average bank customer, they may concern investors. This factor, combined with the massive scale of insured consumer deposits, construes BAC as less vulnerable to the type of deposit flight that sank regional banks.

Should interest rates stabilize and gradually decrease, it could trigger a rise in share prices since the long-term securities the bank holds are likely to gain in value.

Moreover, the unrealized losses may bear less significance for long-term investors focused on gaining from the bank's consistently escalating dividend payments. BAC boasts a solid balance sheet underpinned by sturdy profitability, and it currently offers an appealing dividend yield of 3.38% on the current share price. Investors can benefit from this by retaining the shares and waiting for potential capital appreciation.

While BAC's disproportionate portfolio does not create an immediate existential crisis, it significantly affects both the bank's earnings and investor interest. Even though it currently trades slightly above the 50-day moving average, considering prevailing circumstances, it may be prudent for investors to wait for a better entry point in the stock.

Walt Disney (DIS) Pre-Earnings Analysis – What to Expect

Posted on by The INO.com Team

The Walt Disney Company (DIS), a leading media and entertainment company, posted mixed results for its fiscal 2023 third quarter. The company reported third-quarter adjusted EPS of $1.03, beating analysts’ expectations of $0.98. Its revenue came in at $22.33 billion, lower than the consensus estimate of $22.53 billion.

The company is set to report its fourth quarter and fiscal full year 2023 financial results on November 8, 2023, after the market closes. Analysts expect DIS’ revenue and EPS for the fourth quarter (ended September 2023) to increase 6.2% and 137.6% year-over-year to $21.41 billion and $0.71, respectively.
For the fiscal year 2023, the company’s revenue and EPS are expected to grow 7.7% and 4.2% from the prior year to $89.09 billion and $3.68, respectively.
Shares of DIS have plunged more than 18% over the past six months and 5% year-to-date.

Let’s review in detail what has happened over the past few months and discuss the key factors that could influence DIS’ performance in the near term:

Recent Developments to Further Streaming Objectives

On November 1, DIS announced that it would acquire the remaining 33% stake in Hulu, LLC held by Comcast Corp.’s (CMCSA) NBC Universal (NBCU) for at least $8.60 billion, a deal that would give DIS complete control of the streaming service. Disney had run Hulu since 2019, when Comcast gave up its authority to Disney and effectively became a silent partner.

On September 11, DIS and Charter Communications, Inc. (CHTR) announced a transformative, multi-year distribution agreement that maximizes consumer value and supports the linear TV experience as the industry evolves. As part of the agreement, the majority of DIS’ networks and stations will be restored to Spectrum’s video customers.

Under this deal, Disney+ Basic ad-supported offering will be included in Spectrum TV Select Video packages. Also, ESPN+ will be included in the Spectrum TV Select Plus Video package, and ESPN’s flagship direct-to-consumer Service will be made available to Spectrum TV Select subscribers upon launch.
In a joint statement, Robert A. Iger, DIS’ CEO and Chris Winfrey, President and CEO at CHTR, said, “Our collective goal has always been to build an innovative model for the future. This deal recognizes both the continued value of linear television and the growing popularity of streaming services, while addressing the evolving needs of our consumers.”

Also, on August 9, Disney+ announced that an ad-supported offering will be available in select markets across Europe and Canada starting November 1 after the successful ad-tier launch in the U.S.

Plans to Double Investment in Parks and Cruises Business

DIS said in a securities filing it will nearly double its planned investment in its parks segment to more than $60 billion over 10 years. With all other divisions struggling, Disney’s theme parks, experiences and products segment has been a bright spot in the third quarter. The division saw a 13% rise in revenue to $8.30 billion, mainly driven by strength from its international parks.

But the company’s domestic parks, particularly Walt Disney World in Florida, have witnessed a slowdown in attendance and hotel room occupancy.

Bleak Financial Performance in the Last Quarter

For the third quarter that ended July 1, DIS reported revenues of $22.33 billion, up 3.8% year-over-year, primarily driven by growth in its parks, experiences and products division. However, its top-line numbers came short of analysts’ expectations.

Revenues and operating income from the Disney Media and Entertainment Distribution segment dropped 1% and 18% year-over-year to $14 billion and $1.13 billion, respectively.

The company reported $2.65 billion in restructuring and impairment charges, dragging it to a rare quarterly net loss. Most of these charges were what DIS called “content impairments” related to pulling content off its streaming platforms and ending third-party licensing agreements. Disney’s net loss was $460 million, or $0.25 per share, compared to net income of $1.41 billion, or $0.77 per share, in the prior year’s quarter.

Excluding those impairments, the company recorded an adjusted EPS of $1.03, compared to $1.09 during the year-ago period.

Subscriber losses also continued, with the company reporting 146.1 million Disney+ subscribers during the third quarter, a decline of 7.4% from the prior quarter. Most subscriber losses were from Disney+ Hotstar, where Disney witnessed a 24% drop in users after it lost the rights to Indian Premier League cricket matches.

Disappointing Historical Growth

Over the past three years, DIS’ revenue grew at a CAGR of 8.7%. However, the company’s EBITDA and net income declined at CAGRs of 5.7% and 28.5%, respectively. Its EPS decreased at a CAGR of 31.1% over the same period.

Also, the company’s tangible book value and levered free cash flow declined at respective 4.6% and 6.5% CAGRs over the same time frame.

Streaming Division Faces Several Challenges

Global media and entertainment conglomerate DIS’ streaming division lost $512 million in the fiscal 2023 third quarter, compared to $1.06 billion during the same quarter of 2022. It brings its total streaming losses since 2019, when Disney+ was introduced, to more than $11 billion.

To make the streaming business more profitable, DIS’ CEO Bob Iger has shifted the focus at Disney+ from quick subscriber growth, which requires expensive market campaigns, to making more money from the existing Disney+ subscribers. The price for access to an ad-free version of Disney+ increased to $13.99 per month beginning October 12, previously $10.99 per month.

The company also increased the price of Hulu without ads to $17.99 per month, a 20% price hike. However, the monthly price of Disney+ and Hulu’s ad-based tiers and the annual price of ad-based Hulu remained unchanged.

“We’re obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier,” Mr. Iger told analysts on a conference call.
Along with this pricing news, the company announced it will roll out tactics to mitigate password sharing.

A primary challenge Disney faces is heightened competition in the streaming industry. Among various video streaming giants, including Netflix, Amazon Prime Video, and emerging entrants such as HBO Max and Apple TV+, DIS must differentiate itself in terms of content quality and pricing to stand out in this crowded market.

Further, as consumers continue to feel the pressure of increasing prices and persistent inflation, they will cut back on their media and entertainment spending.

Continued Issues in Media Business

The company still relies on old-line channels such as ESPN, its flagship sports brand, and ABC for approximately a third of its operating profits. Cord-cutting, sports programming costs, and a soft advertising market hurt these outlets. DIS’ traditional channels had $1.90 billion in third-quarter operating income, a decline of 23% from a year earlier.

It was the second straight quarter in which Disney’s traditional TV business reported a sharp drop in operating income. The company cited lower ad sales at ABC, partially due to viewership declines, lower payments from ESPN subscribers, and increased sports programming costs.

Bottom Line

While DIS’ turnaround plan, including a mix of price hikes across its streaming operations, increasing ads, cutting costs, and other strategic initiatives, could drive long-term growth, the company grapples with several challenges. In August, Disney’s shares hit a new nine-year low below $84 as investors were unconvinced with CEO Iger’s turnaround plan.

The media and entertainment giant posted mixed financial results in the last reported quarter, plagued by streaming woes and increased restructuring costs resulting from pulling content from its platforms.

Further, DIS’ short-term prospects seem uncertain as the company continues to struggle with making its streaming business profitable, improving the quality of its films, and the slowdown in the traditional media business, which is challenged by declining subscribers and a soft advertising market.
Disney also faces heightened competition. The streaming industry is exceptionally competitive, and Disney must strike a proper balance between content quality and prices to stand out in this crowded market and be profitable.

Given its deteriorating financials, decelerating profitability, and uncertain near-term prospects, it could be wise to avoid this stock now.