Global equities scorecard: Solid numbers all around

Seven of our international stock picks have reported so far and the numbers are looking good.

It has been a remarkable start to the earnings season so far, as all of our Eureka International stocks that have reported (up to July 23) have delivered solid numbers and the shares have rallied strongly after the earnings release.


CSX, the first of the major North American rail carriers to release results, said net income rose 4.5 per cent to $US553 million even as revenue fell 5.5 per cent. The railroad slashed materials and supplies costs by $US62m from a year earlier and saved $US153m on fuel. From March to June, it reduced average worker count by 570. Earnings per share of 56 cents outpaced analysts’ estimates by 3 cents. A good result overall.

CSX also reported it struck an all-time high operating ratio of 66.8 per cent in Q2 and that’s positive for profitability going forward.

Volume was down 1 per cent during the period but the company was able to lower expenses by 9 per cent to help offset the 6 per cent drop in revenue.

In terms of guidance: CSX expects domestic coal revenue to fall 10 per cent this year. Margins are seen rising as a full-year mid-60s operating ratio is targeted.

CSX also said third-quarter earnings per share will be “relatively flat” as CSX faces headwinds from declining coal cargo, while the company seeks to compensate with efficiency and pricing gains.

CSX reiterated its 2015 outlook for “mid-to-high single digit” per-share earnings growth after cutting the forecast in April from at least a 10 percent gain.

CSX was up 3.37 per cent in after-hours trading in response to the earnings report.

Netflix (NASDAQ: NFLX)

NFLX reported a much better than expected 2Q result.

US net new subscriber results were well ahead of forecasts at 900k ( 60 per cent Y/Y) vs street consensus of 615k driven by original programming and declining churn. That is, in my experience, a huge beat! 2Q international subs were also nicely ahead at 2.37m ( 112 per cent Y/Y) vs. a consensus of 1.9m.

While revenue was in-line at $US1.654 billion ( 23 per cent Y/Y), US and international contribution margins were better than expected at $US340m and -$US92m. Although 2Q EBITDA was a bit light at $US119m reflecting higher than forecast technology and S G and A spend in front of the launch of 4 new markets in 2H 2015.

Guidance was well received. 3Q US subscriptions are forecast to be at about 1.15m vs. a 900k consensus, and 3Q international sub guidance was also ahead at 2.4m versus a 2.25m consensus.

The international rollout is on track with markets in Japan, Spain, Italy, and Portugal to be opened by the end of the year. NFLX expects that international losses will peak in 2016 and remains confident that US margin expansion and “wave 1” international markets profitability will continue to improve, helping the company deliver ”material” global profits in 2017.

Originals continue to perform. Netflix attributed 2Q’s strong subscriber additions in part to its strong 2Q slate of content (including Marvel’s “Daredevil”, “Sense8”, “Dragons: Race to the Edge”, “Grace and Frankie”, and season 3 of “Orange is the New Black”). Netflix also noted that nearly 90 per cent of its members have engaged with Netflix original content.

Netflix stock rose 12 per cent after the report in after-market trading and racked up an 18 per cent gain the following day.

Schlumberger (NYSE: SLB)

Schlumberger rose 1.4 per cent in after-hours trading, as the company beat second-quarter profit expectations and provided a somewhat optimistic industry outlook.

Net earnings fell to $US1.12bn, or US88 cents a share, from $US1.6 billion, or $US1.21 a share, in the same period a year ago. Excluding non-recurring items, earnings per share came in at US88 cents, well above consensus estimates of US79 cents. Revenue fell 25 per cent to $US9.01 billion, with North American revenue declining 39 per cent to $US2.36bn, just shy of consensus of $US9.02bn and $US2.38bn, respectively.

Q2 operating margin was 19 per cent, down from 19.4 per cent in the first quarter and 21.7 per cent in Q2 2014. Still the Q2 operating margin is impressive, given the sector headwinds and the significant drop in North American rig count. An operating margin of 19 per cent is higher than the operating margin during previous downturns and surprisingly is higher than 2012 levels when crude traded above $US100 per barrel.

Management is continuing to control costs. Overall, headcount will decline by 20,000 and capex is being reduced by some $US1.5 billion.

Schlumberger's Q2 free cash flow was also impressive generating free cash flow of $US1.5 billion, or 132 per cent of earnings. Given Schlumberger's unleveraged balance sheet (debt to equity ratio of 34 per cent), management could use that free cash flow to buy shares or do acquisitions, buying companies at bargain prices. The company bought back 5.8m shares in the second quarter versus 8.7m shares bought back in Q1.

For 2015, the company now expects exploration and production investment in North America to fall by more than 35 per cent, compared with a previous outlook for a decline of more than 30 per cent. Meanwhile, chief executive Paal Kibsgaard said in the conference call he believes the North American rig count "may now be touching bottom, and that a slow increase in both land drilling and completion activity could occur in the second half of the year". I agree with SLB that the current period of E&P underinvestment will eventually lead to the next growth cycle. It always does.

Schlumberger continues to deliver in a tough environment. That’s why we continue to hold the stock. In such tough industry conditions , SLB’s customers will want cost-effective technology based solutions as they continue to deal with  lower energy prices. Schlumberger remains one of the best placed service names in the space and is well placed for the recovery when it comes.


Google reported a very positive 2Q15, with strong revenues (albeit impacted by foreign exchange effects,) favourable margin trends and less aggressive capital expenditures vs expectations.

Google reported that revenues rose 18 per cent Y/Y, and foreign exchange changes hurt the company less than expected. Revenue growth (CC) as reported, was 11.3 per cent vs a consensus of 9.9 per cent. More importantly, expenses were constrained far more than most analysts expected.

Much of the upside was driven by Google Sites growth of 13.4 per cent Y/Y to $US12.4bn. Led by mobile search and YouTube, Google is benefiting from strong secular trends as video continues to shift to mobile and TV dollars increasingly move online. Google indicated that top advertiser spend on YouTube is up 60 per cent Y/Y.  US gross revenue growth also accelerated 3.7 per cent from 1Q 2015 to 16 per cent Y/Y.

The Non-GAAP operating margin increased 90bps Y/Y and Q/Q to 41.5 per cent, well above consensus estimates of 38.5 per cent. Overall expenses grew only 11 per cent Y/Y compared to 29 per cent in 2014 and 15 per cent in 1Q15.

Capital expenditures came in at a modest $US2.5bn, well below consensus expectations. Analysts now forecast $US11bn in capital expenditures for the entire year, not much higher than 2014 levels. A huge positive going forward.

After the earnings release Google closed at an all-time record high of $US699.62 the next day skyrocketing 16.3 per cent and delivering an extra $US66.9 billion to investors in one day. That’s the biggest one-day percentage gain since April 2008.

According to The Wall Street Journal, that one-day market cap gain is also the largest on record, eclipsing Apple’s one-day market-cap gain of $US46bn on April 25, 2012, and Cisco Systems Inc.’s $US66.1bn valuation gain on April 17, 2000.

Infosys (NYSE: INFY)

Infosys 1Q 2015 results surprised positively on broad-based revenue growth, while being largely in line on EBIT margins and profitability.

Cross selling efforts with top-10 clients saw growth of 5.7 per cent q-q and efforts to improve sales efficiencies were reflected in better deal signings of $US688m (vs $US200-400m in the past two quarters). Growth trends in BFS, retail, manufacturing and US were also better than expected.

Infosys USD revenue growth of 4.5 per cent q-q was ahead of competitor Tata Consultancy Services’ ( 3.5 per cent q-q) as well as consensus ( 3 per cent q-q), while being in line on EBIT margins (down 170bps q-q to 24 per cent). Even sluggish segments like consulting & SI (4.8 per cent q-q), telecom (5.8 per cent q-q), application maintenance (5.6 per cent q-q) and ROW (9.9 per cent q-q) contributed. The only negative was continued pricing declines (6.5 per cent in offshore and 3.5 per cent in onsite over the past three quarters).

Infosys generated FQ1 EPS of $0.21(pretty well in-line). Revenues of $US2.16bn ( 5.7 per cent Y/Y) beat by some $US40M. Infosys added 79 new clients, up from 61 a year ago. Two of these deals were in the $US200m range. There were also six large deals signed in Q1 with total contract value (TCV) of $US688m.

The company expects FY16 revenue growth to be in the range of 10 per cent –12 per cent in constant currency terms, 7.2 per cent – 9.2 per cent in USD.

Infosys ended FQ1 with $US4.75bn in cash/investments, and no debt.

The market cheered the results with the shares trading up 11 per cent in India and 9 per cent in the US.

Harley Davidson (NYSE: HOG)

Harley posted good results in spite of Y/Y revenue declines and currency pressures. The company generated second quarter profits of $US1.44 per share exceeding analysts’ expectations of $US1.39.

Even better and more importantly, it also affirmed its full year forecast. Harley said it intends to ship between 276,000 and 281,000 motorcycles in 2015, roughly 2-4 per cent more than last year. Harley had reduced shipment estimates in April 2015 due to a strong USD and price competition from the Japanese.     

Still Harley sold 88,931 bikes during the quarter vs 90,218 a year ago. 57,790 bikes were sold in the US.  

Though currency impacted motorcycle sales fell in most key territories, the Asian Pacific region offered a bright spot, up 16.6 per cent from last year's numbers. Canada also performed well with a 9.9 per cent sales jump.

Additional guidance included that “the company continues to expect full-year 2015 operating margin of approximately 18 per cent to 19 per cent for the motorcycles segment. The company also continues to expect 2015 capital expenditures for Harley-Davidson, Inc. of $240m to $260m.” No surprises here.

Harley’s stock jumped 5 per cent to $US57.67 after the report in regular market trading.  

Intuitive Surgical (NASDAQ: ISRG)

Intuitive Surgical had a great result, posting second-quarter increases in revenue, profit and the number of procedures that were all significantly above Wall Street estimates.

Intuitive Surgical generated Q2 2015 EPS of $US4.57 which beat consensus estimates by a whopping $0.59. That represents Y/Y EPS growth of 29 per cent. Revenues of $US586.1m ( 15.7 per cent Y/Y) beat consensus by $US19.24m. 

A breakdown by business vertical saw Instrument sales up 13 per cent to $US296.3m, Systems revenues were 22.5 per cent to $US176m, and services 7 per cent to $US113m.

The company also said world-wide procedures for its da Vinci Surgical Systems rose 14 per cent, driven by growth in the US and Japan – its two main markets. In terms of actual procedures, hernia repair was strong as were colon resections, and prostatectomy. Hysterectomy procedures were “stable”.

System shipments in total (Si and Xi) increased 22 per cent from 96 to 118.64 per cent of the system placements were second generation Xis. The recent approval in Japan for the Xi system was responsible for 13 systems shipped up from 5 the previous quarter.

The new da Vinci Xi system will go on sale later this year in European markets and in the US in 2016 after final approval by US regulators.

Specific company guidance included raising 2015 procedure growth from a range of 8-11 per cent to a range of 11-13 per cent. This was also well received by the market.

As for strategy, CEO Gary Guthart stated in the earnings call: “We're focused on expanding the application of da Vinci in general surgery, particularly colorectal surgery and hernia repair; filling out our product line for da Vinci Xi and launching in key markets globally; developing our organisational capabilities in markets in Europe and Asia; improving our gross margins; and advancing our technologies to improve surgery.”  

Intuitive Surgical’s shares traded up 12.5 per cent to $US568.50 in the after-market post the results.

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