“Oh, to be back in the land of Coca-Cola (KO),” Bob Dylan once sang, and the lyric popped in our head this morning, because the news crossing the Tape on Tuesday – big, blue-chip earnings reports and key consumer data – provides a pretty good look at how things are in the land of Coca-Cola.
Tuesday is a big day for Dow components. Six of the index’s 30 members report earnings (five before the bell, one after market close), providing an unusually good “tell” on the state of the consumer both here in the U.S. and globally.
Coca-Cola, McDonald's (MCD), DuPont, United Technologies (UTX) and Verizon (VZ) all reported earnings before the bell. Microsoft reports after the market closes. The Street was not impressed. Of the five that reported, only Verizon is higher in midday trading; the others are all in the red, with Coke down 3%. That’s on a day when the Dow itself is up about 70 points.
Revenue growth tells you why. Verizon’s revenue rose 7.5% to $21.5 billion from the year prior period. United Technology saw revenue up 7.4% to $17.2 billion. McDonald’s rose 1% to $7.2 billion. For Coke, it was down 1% to $12.6 billion. DuPont’s also slipped to $9.7 billion from $9.8 billion. None of those are particularly strong numbers.
Of that group, Coke, McDonald’s and Verizon probably give the cleanest read of the consumer. The first two saw familiar struggles, and the latter’s nifty increase came with an asterisk.
Verizon found itself getting a big boost from tablet sales, which helped it draw in about 50% more customers than it did a year ago. “Tablets are extremely good for the industry, not just for Verizon,” CFO Fran Shammo said. The rub? That growth came amid heavy promotions, some of which included giving customers a free tablet with existing accounts.
McDonald’s same-store sales were down 1.5%, which the company attributed to “negative comparable guest traffic amid ongoing broad-based challenges.” In other words, the company is saying that the problem isn’t the quality of the Big Mac but the quantity of spare cash in their customers’ wallets.
For the S&P 500 companies as a whole, this is looking like another lackluster earnings season. With about a quarter of the companies having reported, Thomson Reuters is pegging second-quarter earnings growth at 5.1% overall, and that once again is a disappointment; on July 1, growth was pegged at 6.2%, the firm said. On Jan. 1, the estimate was for 9.7%. Revenue growth is now expected to be a modest 3.4%.
The question is: Do these corporate reports speak to broader issues? Coke, for example, saw flat soda volume in North America. Is that about consumer purchasing power, or changing tastes?
This morning’s reports on consumer prices and wages help provide an answer. Consumer prices, including food and energy and not seasonally adjusted, were up about 2.1% from a year ago. Adjusting for that inflation, average hourly wages were actually down 0.1% in June from a year ago.
In other words, even that relatively mild amount of inflation is more than consumer wages can compensate for, which explains the weak revenue growth, and consequently implies that McDonald’s problems are more about their customers’ wallets than the Big Macs.
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