Today’s news:
• Baker Hughes (BKR) reports first-quarter results.
• Netflix (NFLX) reports first-quarter results.
This morning, oilfield service company Baker Hughes (BKR – yield 5.6%, 12.75, Hold) reported first-quarter results that were largely in line with Wall Street’s expectations. These included adjusted EPS of $0.11 and $5.425 billion revenue vs. the consensus estimates of $0.11 EPS and $5.6 billion revenue.
As previously reported, the quarter included a large non-cash goodwill impairment charge. Here’s what the company had to say about it: “In the first quarter of 2020, in response to the impact on our business from the significant decline in oil and gas prices and the COVID-19 pandemic, we recorded restructuring, impairment, and other charges, including inventory impairments and separation related charges, totaling $1,526 million primarily related to product line rationalization and reducing headcount in certain geographical locations. In addition, we recorded a non-cash goodwill impairment charge in our Oilfield Services and Oilfield Equipment segments totaling $14,773 million.”
CEO Lorenzo Simonelli added, “Despite a volatile macro environment driven by a significant decline in oil prices and the COVID-19 pandemic, we produced solid results in our Turbomachinery & Process Solutions (TPS) and Oilfield Services (OFS) businesses and generated over $150 million of free cash flow despite typical seasonal headwinds in the first quarter. The strength of our Company and diversity of our portfolio are most apparent in times like these. … To navigate this challenging environment, we have taken decisive actions in an effort to cut costs, accelerate structural changes, and deploy technology and optimize processes that can lower costs for our customers. This includes reducing capital expenditures by more than 20% versus 2019, executing a restructuring plan to right size our operations for anticipated activity levels and market conditions, as well as continuing to deliver on our portfolio evolution strategy. … Our strong backlog of longer-cycle projects and aftermarket services provides greater stability as our shorter-cycle businesses encounter pressure from the dramatic declines in activity.”
Yesterday afternoon, Netflix (NFLX – 428, Hold) reported first-quarter results after the market closed. Revenue was $5.768 billion, a fraction below analysts’ estimates, and adjusted EPS of $1.57 missed the $1.65 estimate. The earnings miss was attributed to COVID-related paused productions and hardship fund commitments. Revenue was impacted by strength in the U.S. dollar. The big, celebrated number was the quarter’s subscriber growth of 15.8 million, far surpassing the expected 8 million new subscribers; and the surprising, hidden-in-the-financials number was the much-larger-than-expected second-quarter earnings projection. (Read more about the hardship funds and second-quarter projections, below.)
The balance sheet numbers were preceded by a lengthy letter addressed to shareholders. The letter addresses:
• the fortunate but unsustainable surge in new subscribers;
• the customer support issues arising from work-at-home challenges, which the company has resolved;
• 2,000 new hires in customer service;
• the almost complete cessation of film production;
• a $150 million donation to provide income to out-of-work television production cast, crew and support personnel, which includes setting up hardship funds for unemployed industry personnel in seven countries in Europe, Central & South America;
• the company doubling its own match to their employees’ charitable giving.
Netflix management delivered forecasts for the second quarter, including $6.048 billion in revenue vs. the consensus projection of $6.0 billion; and $1.81 diluted EPS vs. the consensus projection of $1.55. This earnings projection nails down the answer to the question, “How is the outlook for Netflix, going forward?” Between the outstanding subscriber growth and the rising operating margin that’s enhancing earnings per share, investors should be confident in owning Netflix.
You’re going to read negative headlines announcing that coming quarters will not be as strong as Netflix’ first quarter, as COVID-19 fades from the scene. Well, it didn’t take a rocket scientist to figure that out, but the news stories will present that as a bad situation, as in, “Oh no, will Netflix become a mediocre company after the virus is gone?!” Sigh. Ignore the headlines, which are meant to scare people into tuning in to that particular news medium. Instead, focus on the second-quarter projections, which are outstanding, and read the press release, which is informative.
By the way, I’ve noticed that investors love to complain about some of the really popular stocks, in a sneering manner, with the implication that these companies are on the downtrend in terms of product popularity and balance sheet performance. All you’ve had to do in the last couple of years is go on Twitter and write, “What do you think of Apple (AAPL) stock?”, and the naysayers come out of the woodwork. You can tell that they’re mostly people who are desperate for attention and want to project some superiority over Apple, or Netflix, or whichever company is their target du jour. I’ve even had several investors seriously question me about Netflix’ viability as a growing company in recent days.
I’ll control my reaction here … they’re out of their minds. If an investor wants to feel superior to a company, then perhaps they should start by insulting a company that’s losing money. But picking a fight on social media over Apple or Netflix earns them a scarlet L sewn onto their shirtfront … L for “loser.”
So if you’re at a cocktail party and you mention Netflix stock, and Mr. Suave-and-Debonair insults the company as if he has some sort of serious inside information about its impending demise, just smile, knowing that he’s not a terribly happy or confident person. Happy people don’t insult smart people who own shares of NFLX.
NFLX is down 1.4% to 428 in pre-market trading, as I write. I continue to recommend that investors hold off on stock purchases until oil prices stabilize. The extreme turmoil in energy markets could easily pull stocks down in the coming days, and you’ll likely be able to add to your NFLX position at a lower share price.