VIDEO: What We Learned From the Latest Earnings Reports

In today’s Portfolio video, Chris Versace walks through learnings from quarterly earnings reports on Tuesday from Coca-Cola (KO) , railcar leasing company GATX (GATX), Pulte Home (PHM)  and Quest Diagnostics (DGX) . 

Chris explains how those insights reaffirm our view that margins will be a key focal point as the pace of quarterly earnings heats up, and why companies will need to deliver beat-and-raise results. 

He also discusses how the strategic review at Warner Bros Discovery (WBD)  could bring about some opportunities for us in the coming months. 

Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here. It is Tuesday, October 21. And as I indicated in our opening comments today, the pace of earnings is starting to accelerate. And that means that we are going to-- barring portfolio companies reporting, we're going to do our best to connect the dots, as other companies report, really kind of updating our view on particular sectors, industries, and of course, where we can, the overall economy.

It's important, especially now. why? Because, well, as you know, the government is shut down. And we're not getting a lot of the usual economic data that we tend to get. So we've got to rely even more on third-party data like we used this morning to talk about for Dutch Bros that was very favorable, but other comments as well, and of course, lean into what companies are saying more so than usual, really triangulating the data points that we are getting.

So with that, let's talk about some of the things that we read or heard this morning during the companies that did report or their earnings calls. Let's start first with Coca-Cola. Interesting here, the company said that its organic revenue rose 6%. That was ahead of the market consensus for 4.8%, so better top-line growth.

But when we break it down, what did we find? Unit case volume grew 1%. So volume, very small, but the revenue price performance, 6% in terms of price and mix. That means price price price is key here.

But also too were Coca-Cola's margins. The operating margin hit around 31.9%. That's up from 30.7% in the year ago quarter and better than the 31.5% that the market was looking for.

So the two factors to walk away from the Coca-Cola report are pricing is dropping to the bottom line. Margins are expanding. And remember, we said coming into the current earnings season that margins were going to be a key focal point.

Now, perhaps this is a little bit of just pricing falling more to the bottom line with tight controls on costs. But it could also be due to some improvement in certain key commodity prices. We'll do a little more digging on that. Remember, though, that the combination of pricing, falling commodity prices, that was something that had us get a little interested in the shares of Hershey, which we'll report next week.

We'll do a little more digging. Maybe we'll have some more to say on this. We will see.

The next company I want to talk about, probably one that's a little more off-the-beaten-path, is Railcar Leasing Company GATX, ticker symbol GATX. Chris, why do we pay attention to trucks and rails? Well, because the movement in trucks and rails are a nice indicator of economic activity.

So the greater the activity, the more robust the economy, the slower the activity, the less things are moving around, a argument for a slower economy. So what did GATX have to say? Direct quote here, "while tariffs and macro uncertainties have affected customers who use the most economically sensitive car types--" I'll toss in some examples that are likely tanker cars, grain cars, tanker cars carrying oil. And we've seen oil and gas prices come down nicely.

But back to what GATX had to say-- "the demand for the large majority of car types in our fleet is holding up well." so demand quarter over quarter has remained relatively healthy. That's a sign positive for the economy or at least one that tells us that the economy, from a manufacturing perspective, is not rolling over. Given the absence of economic data, we'll take that as the positive indication that it brings.

I want to talk a little more about Pulte home builder. We briefly touched on some of their opening comments earlier today. But I just want to walk through this. And the reason being is that it really underscores why, in my opinion, we want to continue to stand clear of the housing market and home builders.

So for Pulte, their are Q3 closings, 7,523 homes, unit backlog, 9,88 homes. That's down both quarter over quarter and year over year. Remember the comment I made a minute ago about margins. Pulte's home sales gross margins, 26.2%, down quarter over quarter, down year over year.

Why? Well, a little bit of it's on the pricing front because prices have ticked lower. But it also has more to do with the use of incentives. As Pulte explained on its earnings call, incentives in the third quarter were 8.9% of the gross sales price. That compares to 7% in the year ago quarter, so a nice step up. And it's incrementally higher from 8.7% in the June quarter.

Why is Pulte and other homebuilders using incentives? To move product. If you remember an alert that we talked about regarding housing starts and the number of homes that had been constructed, we were starting to see both tick down.

And as it relates to new home sales, when we juxtapose the figures and the math, it tells us that the home builders are seeing waning demand. They need to see more-- they need to use more incentives to move the product that they have. And it's hitting their margins.

For us, it's another reminder that the housing market is a tough one right now. And as a result, we want to continue to stand clear of companies, particularly home builders. Now, during yesterday's office hours, I did talk a little bit about the housing market being more of a buyer's market. I'm personally experiencing that right now.

And I do think it means that you will see folks that want to put their homes on the market, particularly as we approach the spring selling season for 2026, start to do some repair, remodel projects, paint cabinets, doors, hardware, whatever it might be, in order to spiff their homes up so that they can maximize the offer and the number of offers that they get. We are going to be taking a look at some homes and some stocks for that, likely candidates, Sherwin-Williams, Masco and the like.

So stay tuned on that. But remember, we are heading into one of the seasonally slowest times of the year for homebuilding as well as repair and remodels. I'm talking about the year-end holiday season. Good time to do some homework on some of these names, but not likely the time to pull the trigger or make any moves. But we'll continue to talk about that.

Also, just building one step further on the housing market, Pulte did say that the number of closings it expects in the current quarter will be down 7,200 to 7,600. That compares to 8,100 in the year-ago quarter. The average selling price is starting to tick lower $560,000 to $570,000. That's down from about $580,000.

But here's the kicker. And it confirms that more incentives are going to be used. The gross margin is expected to be between 25.5% and 26%, down from 27.5% in the year-ago quarter. Obviously, more incentives. Again, not the time to be talking about buying a home builder.

Quickly, let's talk about Quest Diagnostics, DGX. Why? Because it's a nice comp to Labcorp. Quest Diagnostics reported September quarter EPS of 260, $0.10 better than the consensus forecast. They raised their guidance for 2025 to EPS of-- now, pay attention here, 976 to 984 from 963 to 983.

So they had a 10 cent beat. But they only bumped up the low end of their EPS guidance. They did not increase the upper end. September quarter revenue growth a little over 13% with about 7% organic growth, as well as contributions from acquisitions, pretty much similar to what we're likely to hear from Labcorp.

So I would say that the report, a nice set up. But why are DGX shares kind of getting beaten up today? Well, remember my comment in our opening alert this morning that, just given where the market is, S&P 500 and its PE valuation, we're going to have to see companies deliver beat and raise quarters.

DGX did not do that. They tightened up the lower end of the range. But they did not raise the higher end of their EPS range. I think that has something to do with why the stock is getting hit. Labcorp, I believe that they tend to be smarter than that. But we will see if they want to take the conservative route or not. If they do not, and the stock pulls back, we have a little room to do incremental nibbling on Labcorp.

To me, it's kind of a nice sleeper name, Steady Eddie grower, doesn't attract a lot of headlines. But they continue to consolidate their industry. And they continue to expand their array of tests. Very nice with our demographic shift that is the aging of the population.

And finally, folks, you've probably seen that Warner Bros. Discovery is exploring strategic alternatives. Paramount, Comcast, Netflix, their names are all being bandied about. Personally, I see it as another confirmation point about the changing landscape of content creation and really content consumption.

We continue to see that landscape shifting more and more to streaming. Call it consume what I want, where I want, when I want it. And it's going to bring digital advertising with it. We continue to see Google's YouTube business extremely well-positioned.

And candidly, depending on what happens with Warner Bros., does it get cut into pieces? Who acquires it? Is there any indigestion in digesting the whole business, parts of the business, what have you? But we also have the upcoming split at Comcast. We could see some do new dynamics, call it, or maybe even some new opportunities emerge in the months, maybe quarters ahead.

So we'll be continuing to focus in on that. But I will also say that we do have Netflix reporting after the close today. Now, this is a name that we're going to watch because we do like subscription business models. We do like the way they are building their advertising business. But the stock's had pretty good of a run.

But I also want to see, what do they have to say about their appetite for acquisitions? What would it take? Are they interested in picking up a studio or content library, what have you? Again, my thinking is that content is king. People vote for their feet with content.

We've seen that in the past. I think we will continue to see that. That's also why I'll be very interested to hear, in addition to Stranger Things 5-- I will be watching that. But in addition to Stranger Things, the final season, Stranger Things 5, I want to know, what else are they bringing to the content slate for the final quarter of 2025? And what insight they might shed about their content lineup for 2026?

We'll have much more on that and a lot more other companies that are reporting after today's close tomorrow. And we'll be talking with all of that stuff with you tomorrow and throughout the week. Thanks for watching. And remember, please be sure to check your emails, your alerts. If we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.