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Supply chain woes lower 3M profit outlook, UPS delivers an earnings beat, GE raises guidance

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Watch as Brian Sozzi, Julie Hyman, and Brian Cheung discuss how the market is reacting to the latest earnings from 3M, General Electric, and UPS.

Video Transcript

JULIE HYMAN: Let's turn to the industrial companies that are coming out with their numbers this morning as well. And we start with 3M. That company coming out with earnings per share ahead of estimates, sales beating estimates as well. And 3M is now coming out with a full year forecast. It is a little bit more narrow. Brought down the top of that forecast a little bit. I know that you are digging into these numbers, Brian Sozzi, because you're going to be speaking to a company executive later on.

BRIAN SOZZI: Yeah, looking forward to catching up with 3M CEO, Mike Roman, right off his earnings call really close to 11:00 o'clock. But look, I think it remains an inflationary story here with 3M. Certainly, many parts of their business are recovering, tapes, abrasives, stationery products likely helped by the back to school shopping season.

But margins, operating profits down in really three of their four segments. Only really rose in their health care business here. So, here's another company, another industrial, really getting hit hard because of inflation.

Now, they have warned about this all year. They were looking for, I believe, a $0.65 to $0.80 share hit because of inflation this year. They have told investors that might come in at the high end. So, you know, I'll be curious to see what they say on the earnings call about that outlook, if they have to raise it up even more because the inflationary pressures that continue to impact the industrial space.

BRIAN CHEUNG: Yeah, and that call is happening right now. But what is interesting was just the breakdown of the expenses that they had in the quarter. You can take a look directly at the cost of goods sold. That's a line item in the income statement I've been really paying attention to for a lot of these consumer facing brands.

Up 13% year over year. That doesn't include the cost of marketing, that doesn't include the expenses that you might have for CapEx. This is just the cost of sales themselves. So, obviously, 13% year over year increase is just a massive change for this company, and that's going to hurt any sort of margin for any type of company in any sort of industry.

So, the way that they're going to be able to navigate these supply chain disruptions, knowing that this is not going to be anything that's going to fade in the next immediate quarter, I think it's going to remain a story for the likes of 3M and a lot of these other companies as well. So, I think when we talk about a lot of these goods producers, really looking at that part of the income statement is going to be so critical.

JULIE HYMAN: Let's move on to General Electric, talking about these large industrials. Larry Culp, ongoing quest to really concentrate this company in what was such a conglomerate at one time, and now has been sort of boiled down. Revenue, as you can see there, missing estimates. Adjusted earnings per share beating estimates.

And there were some various areas of strength here. Free cash flow is always pretty key for General Electric, and there the company beat industrial free cash flow, in particular, $1.7 billion. And as you can see there, the company coming out with guidance as well, and pretty much raising the guidance.

This, as when I talk about the sort of concentrating or winding down at the company, remember, it is getting rid of the last vestiges of GE capital in selling its air leasing unit. That sale is supposed to close before the end of the year. Selling that to AerCap for $30 billion. The shares, interestingly, not much change here this morning, Sozz, despite what looks like, on balance, pretty positive news for GE.

BRIAN SOZZI: Oh, GE earnings day, Julie. I always have my dusty CFA textbooks nearby to go through this thing. Look, I think what you're seeing here is an aviation market recovery by GE. They're calling that out in their investor deck. They said, an aviation market recovery has begun.

But overall, and this is a trend I'm starting to pick up now on these industrial earnings reports, a little more cautious in the revenue outlook. We've been hearing that this morning from a Sherwin-Williams. Now, we hear from a GE and a couple of others here in large part because of supply chain bottlenecks. But overall, this was a much better quarter for GE than we've seen really last quarter, the quarter before, and the year before that, and the year before that. So, from that context, it was pretty good.

BRIAN CHEUNG: Yeah, I mean, and a big story for free cash flow is also reducing the debt, right. And AerCap buying GE's aircraft leasing business is going to be huge in further reducing the debt. So, the trajectory under Larry Culp has been in the right direction. Now, of course, I think a good general rule of thumb is that any time you're talking about a company's health within the context of free cash flow is never a good situation. So, as long as that remains a narrative, this is still part of the comeback story.

They're not necessarily fully back yet. They still have a long ways to go. But it is good when you see that, despite the fact that they're guiding on flat revenue, they actually upgraded their adjusted industrial profit margin expectations to an expansion of 350 or so basis points or more. It was about 250 in the previous quarters before that. So, when you're looking at the margins ability to also help into the cash flow situation as opposed to just divesting certain businesses, that shows a more underlying health in the business that could spell a more healthy future for this company in the next quarters.

JULIE HYMAN: Yes, we will see. We'll continue to watch that trajectory. By the way, I was looking at the numbers. GE is up some 140% or so since its low that it reached in March of last year. Although, the longer term chart still is not a pretty one.

Finally, we round it out with United Parcel Service, UPS. That company coming out with earnings and sales that beat estimates. That revenue number was up by about 9%. And Carol told me, the CEO, has been enacting her better not bigger strategy, which means effectively shipping fewer packages, but at a higher price. And that, Brian Sozzi, seems to be working out pretty well.

BRIAN SOZZI: Yeah, still crunching the numbers here on this one, Julie. But operating margins, in large part because I think of those price increases that you mentioned, in the domestic US package business, that was up significantly, margins in the supply chain business. And the overall operating margin for UPS in the quarter, if I have it right, is 12.8%. That is really coming up against the top end of their outlook for 2023.

Now, it was June, it was a June investor day for UPS that they came out of that operating margin outlook and it disappointed a lot of people on the street, and the stock really got hit here. But at least the margins in this quarter suggest perhaps that longer term outlook is a little conservative here. You know, I think the big question is, can UPS sustain some of the progress they are making with operating margins and efficiency as they invest in capacity to ultimately get us packages faster.

BRIAN CHEUNG: Yeah, and I think too, I mean, this is just the story of this supply chain, right? Just people who are trying to deliver goods, whether that's a person trying to mail a Christmas package to someone else or a company trying to deliver something, they are more elastic with the amount that they are willing to pay for shipping, because it's just so impossible to find the inventory.

That when you finally do have the inventory, pay whatever it takes to get that good finally to the person that's demanding it. And I think that ultimately whether or not that cost is shared by the company of whoever's manufacturing a given couch, or a t-shirt, or what have you, or the consumer that's ultimately buying it, I think doesn't matter.

People are willing to pay whatever it is. Now, whether or not that story remains the case, is that a transitory story, which in this case for UPS and other shippers is a good thing, I think remains an open question. But I do want to highlight the fact that UPS is interestingly managing actually higher capital expenditures as a result of the higher margins that they have. I think they actually increased their guidance in their outlook from what they're going to spend on CapEx from $4 billion to $4.2 billion.

They want to make sure that they're using the margin health that they have right now to increase the capacity that they have to deal with not just this holiday shipping season, but what could be a post-COVID world where people are just buying things online and relying on shipping as opposed to picking things up themselves anymore. So, I feel like that change is probably likely to be permanent. It's a big reason why they're trying to make that CapEx spend.

BRIAN SOZZI: Brian, you use UPS for all your sneaker deliveries?

BRIAN CHEUNG: Hey, I use whatever service is available for me to get my sneakers. It doesn't matter. It doesn't matter if it's Brown, doesn't matter if it's FedEx, it doesn't matter.

BRIAN SOZZI: Viewers want to know. That's why I asked.

JULIE HYMAN: It's mostly not up to us, right? I mean, like, you buy what you buy. They use what they use. It's up to the vendor.