Yesterday, I wrote that investors looking for clues as to economic conditions in America, and prospects for the market overall, would be well served by watching Fastenal's (FAST) earnings, a manufacturing and construction trade supplier, rather than the higher profile releases coming from the likes of Infosys (INFY) or Delta Air Lines (DAL). That doesn’t mean, however, that the DAL and INFY releases aren’t informative in other ways. All three major earnings reports investors heard this morning had contradictory elements, and thus can be expected to create trading opportunities, both short and long term.
FAST
Fastenal, while in my mind the most significant of this morning’s releases (as explained in yesterday's article linked above), is in some ways the most deceptive. The stock is trading significantly higher in the premarket after a bottom line beat on as expected revenue, but if you look beyond the numbers, things aren’t actually that clear. Higher than anticipated earnings on a revenue number that is exactly in line can only mean one thing: higher than forecast margins. That tells us nothing about overall market conditions, because it can come about from an easing of inflationary pressure on the supply side, or from price increases that didn’t deter sales, or from minor cost cutting, or any one of a number of things.
In fact, if you look at the details of this report, the overall message it sends is not as great as it might appear at first glance. Fastenal did well in the circumstances, but experienced relatively soft demand on the manufacturing side and a drop off in sales to the construction industry. Neither of those things are particularly surprising, but when they are considered and added to the fact that the beat was about margin improvement rather than volume, the pop in FAST this morning isn’t necessarily an indication that the manufacturing and construction industries, which together constitute the heartbeat of the U.S. economy, are flourishing.
From a short-term, stock specific perspective, it would seem that for the same reasons, the roughly 5% jump in FAST this morning is overdone and a pullback either later today or over the next few days, depending on how CPI and other economic news unfolds, can be expected.
INFY
Infosys stock is moving in the opposite direction, trading more than 3% below yesterday’s close in the premarket as I write. Their actual results weren’t too bad, being roughly in line with forecasts, but a downward revision to guidance is hurting the stock. Of more interest to investors who don’t own the stock but are looking for clues regarding economic conditions are the geographical and industry segment breakdowns the company offered. Sale growth was driven primarily by performance in Europe, up 5.4%, rather than the U.S., where revenue grew only around 1%. Meanwhile, the financial and communications sectors saw drops in year on year sales, but that was more than offset by strong growth in life sciences, manufacturing, and retail. All of that suggests that while the global economy is holding up quite well, the U.S. is beginning to feel the effects of rate hikes and is growing at a slower pace, if not actually contracting.
As with Fastenal, the stock specific outlook that I get from this report is somewhat bearish. INFY are not known as an habitual under-estimator of their prospects, so reduced guidance here has more significance than it may have compared to others. Then there is a more personal reason for caution: I distrust buzzwords, and the commentary was full of them. They seemed to be trying just a bit too hard to create an impression of a strong link to the AI boom. That is not surprising in a software company, but mentioning the leaders in that boom, Microsoft and Nvidia, in a report ostensibly about the company’s own performance just seems a little too desperate.
I know that is not empirical analysis, being about a “feel” rather than any data, but my feelings have served me well over the years, so I won’t be buying INFY in anticipation of a bounce and would even consider shorting the stock if there is a significant retracement over the next few days.
DAL
Conventional wisdom says that Delta’s good earnings are indicative of overall economic strength in the U.S., but it may not be that simple. Yes, more flight bookings, particularly by businesses, can be seen as indicating such strength, but it could also be one or a combination of two other things: the return to the office and a competitive win by Delta. The move away from remote work and back to in person meetings and interactions will give a boost to airline volume overall, and it could just be that Delta is getting more than their fair share of that mini boom. That would certainly fit with what we have seen recently. Over the last six months, DAL has outperformed other airline stocks and is up around 7%, as compared to the global airline ETF, JETS, which has lost around 8%.
So, once again, I would be cautious of reading too much into DAL’s results. As with INFY’s report, there are company and industry specific factors that outweigh any influence of broad economic conditions. However, in the case of Delta, those factors are a positive influence and, all else being equal, further gains in the stock can be expected.
Final Word
In yesterday’s piece, my point was that while DAL and INFY would garner all the attention this morning, FAST would be more informative for the neutral observer who owned none of the three. The results seem to bear that out, but both Delta and Infosys have released results that suggest trades given the initial market reaction. In a market where the medium to long term outlook is at best unclear, short term trades like that will be where my focus lies so, while I was looking for clues about economic conditions this morning, the actual “news I can use” are the stock specific factors that suggest that kind of trade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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