Capital One headquarters in McLean, Virginia on February 20, 2024.Â
Brendan Smialowski | AFP | Getty Images
Capital One‘s blockbuster takeover proposal for Discover Financial includes a $1.38 billion breakup fee if Discover decides to go with another buyer, but no such fee if U.S. regulators kill the deal, people with knowledge of the matter told CNBC.
While Discover can’t actively solicit alternative offers, it can entertain proposals from other deep-pocketed bidders before shareholders vote on the transaction.
In the unlikely event that Discover decides to go with another offer, it would owe Capital One $1.38 billion, which aligns with the typical breakup fee in bank deals of between 3% and 4% of the transaction’s value, said the people.
Breakup fees are an industry practice designed to motivate both sides of an acquisition to close the transaction. They can result in massive payouts when deals sour, like the estimated $6 billion AT&T paid to T-Mobile after giving up its 2011 takeover effort because of opposition from the U.S. Department of Justice.
Watchers of the Capital One agreement are taking particular interest in whether U.S. banking regulators will allow it to happen. Regulators have blocked deals across industries in recent years on antitrust grounds, and getting a transaction done during an election year in an environment considered hostile to bank mergers has been called uncertain.
Neither side will owe the other a breakup fee if regulators block the acquisition, which is said to be typical for bank deals. Still, last year Canadian lender TD Bank agreed to pay $225 million to First Horizon after its takeover collapsed amid regulatory scrutiny of the larger firm.
When asked about the “intense regulatory backdrop” for this deal during a conference call Tuesday, Capital One CEO Richard Fairbank said he believed he was “well-positioned for approval” and that the companies have kept their regulators informed.
Capital One needs to get approvals from the Federal Reserve and the Office of the Comptroller of the Currency for the deal to go through. The Justice Department also has the right to comment on the acquisition, and can litigate to block the transaction.
The deal happened after Capital One approached Discover, and didn’t include a wide search for all possible bidders, according to one of the people.
Robert Reffkin, Compass co-founder and CEO, joins ‘Squawk on the Street’ to discuss if real estate activity is what Reffkin wants to see heading into spring, Reffkin’s thoughts on the 30-year fixed mortgage rate, and if concessions to buyers will dissuade homeowners to sell.
Capital One’s recently announced $35.3 billion acquisition of Discover Financial isn’t just about getting bigger â gaining “scale” in Wall Street-speak â it’s a bid to protect itself against a rising tide of fintech and regulatory threats.
It’s a chess move by one of the savviest long-term thinkers in American finance, Capital One CEO Richard Fairbank. As a co-founder of a top 10 U.S. bank by assets, his tenure is a rarity in a banking world dominated by institutions like JPMorgan Chase that trace their origins to shortly after the signing of the Declaration of Independence.
Fairbank, who became a billionaire by building Capital One into a credit card giant since its 1994 IPO, is betting that buying rival card company Discover will better position the company for global payments’ murky future. The industry is a dynamic web where players of all stripes â from traditional banks to fintech players and tech giants â are all seeking to stake out a corner in a market worth trillions of dollars by eating into incumbents’ share amid the rapid growth of e-commerce and digital payments.
“This deal gives the company a stronger hand to battle other banks, fintechs and big tech companies,” said Sanjay Sakhrani, the veteran KBW retail finance analyst. “The more that they can separate themselves from the pack, the more they can future-proof themselves.”
The deal, if approved, enables Capital One to leapfrog JPMorgan as the biggest credit card company by loans, and solidifies its position as the third largest by purchase volume. It also adds heft to Capital One’s banking operations with $109 billion in total deposits from Discover’s digital bank and helps the combined entity shave $1.5 billion in expenses by 2027.
But it’s Discover’s payments network â the “rails” that shuffle digital dollars between consumers and merchants, collecting tolls along the way â that Fairbank repeatedly praised Tuesday when analysts queried him on the strategic merits of the deal. There are only four major card networks: giants Visa and Mastercard, then American Express and finally the smallest of the group, Discover.
Capital One and Discover credit cards arranged in Germantown, New York, US, on Tuesday, Feb. 20, 2024.Â
Angus Mordant | Bloomberg | Getty Images
“That network is a very, very rare asset,” Fairbank said. “We have always had a belief that the Holy Grail is to be able to be an issuer with one’s own network so that one can deal directly with merchants.”
From the time of Capital One’s founding in the late 1980s, Fairbank said, he envisioned creating a global digital payments tech company by owning the payment rails and dealing directly with merchants. In the decades since, Capital One has been ahead of stodgier banks, gaining a reputation in tech circles for being forward-thinking and for its early adoption of cloud computing and agile software development.
But its growth has relied on Visa and Mastercard, which accounted for the vast majority of payment volumes last year, processing nearly $10 trillion in the U.S. between them.
Capital One intends to boost the Discover network, which carried $550 billion in transactions last year, by quickly switching all of its debit volume there, as well as a growing share of its credit card flows over time.
By 2027, the bank expects to add at least $175 billion in payments and 25 million of its cardholders onto the Discover network.
The true potential of the Discover deal, though, is what it allows Capital One to do in the future if it owns the toll road, according to analysts.
By creating an end-to-end ecosystem that is more of a closed loop between shoppers and merchants, it could fend off competition from rapidly mutating fintech players like Block and PayPal, as well as buy now, pay later firms like Affirm and Klarna, who have made inroads with both businesses and consumers.
Capital One aims to deepen relationships with merchants by showing them how to boost sales, helping them prevent fraud and providing data insights, Fairbank said Tuesday, all of which makes them harder to dislodge. It can use some of the network fees to create new loyalty plans, like debit rewards programs, or underwrite merchant incentives or experiences, according to analysts.
“Owning a network allows us to deal more directly with merchants rather than a network intermediary,” Fairbank told analysts. “We create more value for merchants, small businesses and consumers and capture the additional economics from vertical integration.”
It’s a capability that technology or fintech companies probably covet. The Discover network alone would be worth up to $6 billion if sold to Alphabet,Apple or Fiserv, Sakhrani wrote Tuesday in a research note.
The Capital One-Discover combination could fortify the company against another potential threat â from Washington.
Proposed legislation from Sen. Dick Durbin, D-Ill., aims to cap the fees charged by Visa and Mastercard, potentially blowing up the economics of credit card rewards programs. If that proposal becomes law, the competitive position of Discover’s network, which is exempt from the limitations, suddenly improves, according to Brian Graham, co-founder of advisory firm Klaros Group. That mirrors what an earlier law known as the Durbin amendment did for debit cards.
Chairman Dick Durbin (D-IL) speaks during a US Senate Judiciary Committee hearing regarding Supreme Court ethics reform, on Capitol Hill in Washington, DC, on May 2, 2023.
Mandel Ngan | AFP | Getty Images
“There are a bunch of things aimed, in one way or another, at the card networks and that ecosystem,” Graham said. “Those pressures might be one of the things that creates an opportunity for Capital One in the future if they have control over this network.”
The biggest question for Capital One, its customers and investors is whether the merger will ultimately be approved by regulators. While Fairbank said he expects the deal to be closed in late 2024 or early 2025, industry experts said it was impossible to know whether it will be blocked by regulators, like a string of high-profile takeovers among banks, airlines and tech companies.
On Tuesday, Democratic Sen. Elizabeth Warren of Massachusetts urged regulators to swiftly block the deal, calling it “dangerous.” Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, said he would be watching the deal to “ensure that this merger doesn’t enrich shareholders and executives at the expense of consumers and small businesses.”
The Discover deal’s survival may hinge on whether it’s seen as boosting an also-ran payments network, or allowing an already-dominant card lender to level up in size â another reason Fairbank may have played up the importance of the network.
“Which thing you are more concerned about will define whether you think this is a good deal or a bad deal from a public policy point of view,” Graham said.
CNBC’s Leslie Picker and Bank of America CEO Brian Moynihan join ‘Squawk on the Street’ to discuss the state of the economy, strength of the consumer, the Fed’s rate path outlook, the impact of Capital One-Discover deal, regional bank turmoil, and more.
Customers use automated teller machines (ATM) at an HSBC Holdings Plc bank branch at night in Hong Kong, China, on Saturday, Feb 16, 2019.
Anthony Kwan | Bloomberg | Getty Images
HSBC‘s full-year 2023 pretax profit missed analysts’ estimates on Wednesday, hit by impairment costs linked to the lender’s stake in a Chinese bank, sinking its London-listed shares as much as 7%.
Europe’s largest bank by assets saw its pre-tax profit climb about 78% to a record $30.3 billion in 2023 from a year ago, according to its statement released Wednesday during the mid-day trading break in Hong Kong. That missed median estimates of $34.06 billion from analysts tracked by LSEG.
Chief Executive Noel Quinn also announced an additional share buyback of up to $2 billion to be completed ahead of the bank’s next quarterly earnings report. HSBC also said it would consider offering a special dividend of 21 cents per share in the first half of 2024 after it completes the sale of its Canada business.
With the highest full-year dividend per share since 2008 and three share buy-backs in 2023 totaling $7 billion, Quinn said the bank returned $19 billion to shareholders last year.
Quinn’s remuneration doubled to $10.6 million in 2023 from $5.6 million the year before, boosted in part by variable long-term incentives since his appointment in 2020.
HSBC suffered a “valuation adjustment” of $3 billion on its 19% stake in China’s Bank of Communications, Quinn said. In an interview with CNBC following the earnings release, he said this is “a technical accounting adjustment” and “not a reflection” on BoComm.
This write-down was among the items that plunged the bank’s fourth-quarter pretax profit by 80% to $1 billion from a year earlier.
HSBC’s Hong Kong shares reversed gains of about 1% after trading resumed, falling as much as 5%. The benchmark Hang Seng Index was up about 2%. Shares in London were down around 7% in early deals, set for their biggest one-day drop since 2020, according to Reuters.
HSBC shares
Here are the other highlights of the bank’s full year 2023 financial report card:
Revenue for 2023 increased by 30% to $66.1 billion, compared with the median LSEG forecast for about $66 billion.
Net interest margin, a measure of lending profitability, was 1.66% â compared with 1.48% in 2022.
Common equity tier 1 ratio â which measures the bank’s capital in relation to its assets â was 14.8%, compared with 14.2% in 2022.
Basic earnings per share was $1.15, compared with the median LSEG forecast for $1.28 in 2023 and 75 cents for 2022.
Dividend per ordinary share was 61 cents â the highest since 2008 â compared with 32 cents in 2022.
HSBC, which has a second home in Hong Kong, said it was focusing on the fastest growing parts of Asia, a continent where the bank makes most of its profits.
In an earnings briefing to investors and analysts, the bank said it has completed the sale of its businesses in France, Oman, Greece and New Zealand, and was in the process of exiting Russia, Canada, Mauritius and Armenia.
The bank flagged two key macroeconomic trends: declining interest rates as inflation ebbs â a development that could eat into its interest income; and a continued reconfiguration of global supply chains and trade.
“International expansion remains a core strategy for corporates and institutions seeking to develop and expand, especially the mid-market corporates that HSBC is very well-positioned to serve. Rather than de-globalizing, we are seeing the world re-globalize, as supply chains change and intraregional trade flows increase,” Quinn said in the earnings statement.
The bank is targeting a mid-teens return on tangible equity for 2024, which was about 14.5% last year.
HSBC said it will be focusing on an expansion of non-interest income revenue sources via its wealth and transaction banking business. It is expecting banking non interest income of at least $41 billion in financial year 2024.
HSBC said it’s cautious about the loan growth outlook for the first half of 2024 amid economic uncertainty, expecting a mid-single digit annual percentage growth over the medium to long term.
Every weekday the CNBC Investing Club with Jim Cramer holds a “Morning Meeting” livestream at 10:20 a.m. ET. Here’s a recap of Tuesday’s key moments. 1. U.S. stocks kicked off the shortened trading week lower on Tuesday. Investors took profits in Big Tech, weighing down the Nasdaq . Laggards after the opening include Club holding Nvidia . The chipmaker shed over 5.5% ahead of its quarterly earnings on Wednesday evening. Amazon , Apple and Meta Platforms were all down as well. It’s no surprise that tech’s selling off following the sector’s big run since the start of 2024. Elsewhere, it’s a good day for consumer staples like our Procter & Gamble . 2. Palo Alto Networks will report quarterly earnings after market close Tuesday. The portfolio name sold off last quarter on a billing miss. But CEO Nikesh Arora said it was a function of the high cost of money, which pushes customers to seek shorter-term deals versus longer-term contracts. Although the stock’s roughly double-digit gain since then sets a high bar into earnings, we’re upbeat on the company’s solid fundamentals and cybersecurity as a key secular theme. Demand for Palo Alto’s services, for example, will continue to rise as hacking threats intensify from overseas. 3. We trimmed our Wells Fargo position on Tuesday. Shares surged last week after positive updates around the bank’s recovery plan. The Office of the Comptroller of the Currency terminated a 2016 consent order for past misdeeds â signalling a move in the right direction for regulators to eventually lift Wells Fargo’s asset cap. This is great news for our investment thesis. Still, we made a small sale to right size the position and minimize risk. Wells Fargo’s rally swelled our position size near 5%, the largest in the portfolio. We don’t want any one position to get too big as we aim to keep the portfolio diversified. (Jim Cramer’s Charitable Trust is long WFC, PANW, NVDA, META, AAPL, AMZN, GEHC, PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Shortly after the opening bell, we will be selling 420 shares of Wells Fargo , at roughly $51.75 each. Following the trade, Jim Cramer’s Charitable Trust will own 2,670 shares of Wells Fargo, decreasing its weighing to 4.25% from 4.93%. Wells Fargo shares jumped roughly 8% last week to a new 52-week high after the bank said the Office of the Comptroller of the Currency terminated a 2016 consent order linked to its sales practice misconduct. There are eight consent orders still outstanding, CNBC reported last week, but this was an important one for Wells Fargo to get done because the issues tied to the consent order were a reason why the Federal Reserve put an asset cap on the bank in 2018. The end of the 2016 consent order is a clear-cut win for Wells Fargo. The sooner the bank can get the asset cap lifted, the greater confidence investors will have in management’s ability to drive a sustained 15% return on tangible common equity. The stronger a return Wells can generate, the higher the multiple investors will be paying for the stock. WFC 1Y mountain Wells Fargo 1 year We are pleased to see Wells Fargo take a big step toward getting past the legacy regulatory issues, which CEO Charlie Scharf has worked to fix since taking over in 2019. However, portfolio management reasons are why we are trimming into this recent strength, locking in gains of about 54% on stock purchased in January 2021. Due to its recent outperformance, our Wells Fargo position size has swelled to the largest in the portfolio at nearly 5%. For a bank whose stock tends to rally in fits and starts and continues to deal with an overhang from its commercial real estate exposure, we think it’s prudent to right-size the position and open up some room to buy in case the stock falls back to the mid $40-per-share range. Accordingly, we are downgrading our rating to a 2 . (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
David George, Baird senior research analyst, joins ‘Squawk Box’ to discuss news of Capital One Financial acquiring Discover Financial Services in a $35.3 billion all-stock deal, what the deal means for consumers and the banking sector at large, and more.
Traders work on the floor of the New York Stock Exchange during morning trading on January 31, 2024 in New York City.
Michael M. Santiago | Getty Images
The so-called “Magnificent 7” now wields greater financial might than almost every other major country in the world, according to new Deutsche Bank research.
The meteoric rise in the profits and market capitalizations of the Magnificent 7 U.S. tech behemoths â Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla â outstrip those of all listed companies in almost every G20 country, the bank said in a research note Tuesday. Of the non-U.S. G20 countries, only China and Japan (and the latter, only just) have greater profits when their listed companies are combined.
Deutsche Bank analysts highlighted that the Magnificent 7’s combined market cap alone would make it the second-largest country stock exchange in the world, double that of Japan in fourth. Microsoft and Apple, individually, have similar market caps to all combined listed companies in each of France, Saudi Arabia and the U.K, they added.
However, this level of concentration has led some analysts to voice concerns over related risks in the U.S. and global stock market.
Jim Reid, Deutsche Bank’s head of global economics and thematic research, cautioned in a follow-up note last week that the U.S. stock market is “rivalling 2000 and 1929 in terms of being its most concentrated in history.”
Deutsche analyzed the trajectories of all 36 companies that have been in the top five most valuable in the S&P 500 since the mid-1960s.
Reid noted that while big companies eventually tended to drop out of the top five as investment trends and profit outlooks evolved, 20 of the 36 that have populated that upper bracket are still in the top 50 today.
“Of the Mag 7 in the current top 5, Microsoft has been there for all but 4 months since 1997. Apple ever present since December 2009, Alphabet for all but two months since August 2012 and Amazon since January 2017. The newest entrant has been Nvidia which has been there since H1 last year,” he said.
Tesla had a run of 13 months in the top five most valuable companies in 2021/22 but is now down to 10th, with the share price having fallen by around 20% since the start of 2024. By contrast, Nvidia’s stock has continued to surge, adding almost 47% since the turn of the year.
“So, at the edges the Mag 7 have some volatility around the position of its members, and you can question their overall valuations, but the core of the group have been the largest and most successful companies in the US and with it the world for many years now,” Reid added.
Could the gains broaden out?
Despite a muted global economic outlook at the start of 2023, stock market returns on Wall Street were impressive, but heavily concentrated among the Magnificent Seven, which benefitted strongly from the AI hype and rate cut expectations.
In a research note last week, wealth manager Evelyn Partners highlighted that the Magnificent 7 returned an incredible 107% over 2023, far outpacing the broader MSCI USA index, which delivered a still healthy but relatively paltry 27% to investors.
Daniel Casali, chief investment strategist at Evelyn Partners, suggested that signs are emerging that opportunities in U.S. stocks could broaden out beyond the 7 megacaps this year for two reasons, the first of which is the resilience of the U.S. economy.
“Despite rising interest rates, company sales and earnings have been resilient. This can be attributed to businesses being more disciplined on managing their costs and households having higher levels of savings built up during the pandemic. In addition, the U.S. labour market is healthy with nearly three million jobs added during 2023,” Casali said.
The second factor is improving margins, which Casali said indicates that companies have adeptly raised prices and passed the impact of higher inflation onto customers.
“Although wages have risen, they haven’t kept pace with those price rises, leading to a decline in employment costs as a proportion of the price of goods and services,” Casali said.
“Factors, including China joining the World Trade Organisation and technological advances, have enabled an increased supply of labour and accessibility to overseas job markets. This has contributed to improving profit margins, supporting earnings growth. We see this trend continuing.”
When the market is so heavily weighted toward a small number of stocks and one particular theme â notably AI â there is a risk of missed investment opportunities, Casali said.
Many of the 493 other S&P 500 stocks have struggled over the past year, but he suggested that some could start to participate in the rally if the two aforementioned factors continue to fuel the economy.
“Given AI-led stocks’ stellar performance in 2023 and the beginning of this year, investors may feel inclined to continue to back them,” he said.
“But, if the rally starts to widen, investors could miss out on other opportunities beyond the Magnificent Seven stocks.”
It will be an all-stock deal and Capital One, which already uses Visa and Mastercard networks, plans to keep the Discover brand, the Wall Street Journal said.
The news comes on the back of a Bloomberg News report on Monday that Capital One was considering an acquisition.
CNBC has reached out for comment from both Capital One and Discover.
The merger of the two companies, who are among the largest credit card issuers in the U.S., would expand Capital One’s credit-card offerings. The company bought digital concierge service Velocity Black, a premium credit card and luxury market platform, in June of last year.
Shares of Discover are down 1.7% lower for the year, putting the company at a $27.63 billion market cap. Capital One has a market cap of $52.2 billion and shares of the company are up 4.6% in 2024.
The Capital One-Discover merger would be one of the largest deals announced so far this year. Synopsys announced a deal to buy Ansys for $35 billion in January and Diamondback Energy‘s $26 billion deal to buy privately held oil and gas producer Endeavor Energy was announced on Feb. 12.
As consumers watch their wallets, companies have felt pressure from investors to do the same. Executives have sought to show shareholders that they’re adjusting to consumer demand as it returns to typical patterns or even softens, as well as aggressively countering higher expenses.
Airlines, automakers, media companies and package giant UPS are all digesting new labor contracts that gave raises to tens of thousands of workers and drove costs higher.
Companies in years past could get away with passing on higher costs to customers who were willing to splurge on everything from new appliances to beach vacations. But businesses’ pricing power has waned, so executives are looking for other ways to manage the budget â or squeeze out more profits, said Gregory Daco, chief economist for EY.
“You are in an environment where cost fatigue is very much part of the equation for consumers and business leaders,” Daco said. “The cost of most everything is much higher than it was before the pandemic, whether it’s goods, inputs, equipment, labor, even interest rates.”
There are some exceptions to the recent cost-cutting wave: Walmart, for example, said last month that it would build or convert more than 150 stores over the next five years, along with a more than $9 billion investment to modernize many of its current stores.
And some companies, such as banks, already made deep cuts. Five of the largest banks, including Wells Fargo and Goldman Sachs, together eliminated more than 20,000 jobs in 2023. Now, they’re awaiting interest rate cuts by the Federal Reserve that would free up cash for pent-up mergers and acquisitions.
But cost reductions unveiled in even just the first few weeks of the year amount to tens of thousands of jobs and billions of dollars. In January, U.S. companies announced 82,307 job cuts, more than double the number in December, while still down 20% from a year ago, according to Challenger, Gray and Christmas.
And the tightening of months prior is already showing up in financial reports.
So far this earnings season, results have indicated that companies have focused on driving profits higher without the tailwind of big price increases and sales growth.
As of mid-February, more than three-quarters of the S&P 500 had reported fourth-quarter results, with far more earnings beats than revenue beats. The quarter’s earnings, measured by a composite of S&P 500 companies, are on pace to rise nearly 10%. Revenues, however, are up a more modest 3.4%.
And the layoffs haven’t been contained to tech. UPS said it was axing 12,000 jobs, saving the company $1 billion, CEO Carol Tome said late last month, citing softer demand. Many of the largest retail, media and entertainment companies have also announced workforce reductions, in addition to other cuts.
Warner Bros. Discovery has slashed content spending and headcount as part of $4 billion in total cost savings from the merger of Discovery and WarnerMedia. Disney initially promised $5.5 billion in cost reductions in 2023, fueled by 7,000 layoffs. The company has since increased its savings promise to $7.5 billion, and executives suggested in its Feb. 7 quarterly earnings report that it may exceed that target.
JetBlue Airways, which hasn’t posted an annual profit since before the pandemic, is deferring about $2.5 billion in capital expenditures on new Airbus planes to the end of the decade, culling unprofitable routes and redeploying aircraft in addition to the worker buyouts.
Some cuts are even making their way to the front of the cabin. United Airlines, which also posted a profit in 2023, at the start of this year said it would serve first-class meals only on flights more than 900 miles, up from 800 miles previously. “On flights that are 301 to 900 miles, United First customers can expect an offering from the premium snack basket,” according to an internal post.
Several of the country’s largest automakers, such as General Motors and Ford Motor, have lowered spending by billions of dollars through reduced or delayed investments on all-electric vehicles. The U.S.-based companies as well as others, such as Netherlands-based Stellantis, have recently reduced headcount and payroll through voluntary buyouts or layoffs.
Even Chipotle, which reported more foot traffic and sales at its restaurants in the most recently reported quarter, is chasing higher productivity by testing an avocado-scooping robot called the Autocado that shortens the time it takes to make guacamole. It’s also testing another robot that can put together burrito bowls and salads. The robots, if expanded to other stores, could help cut costs by minimizing food waste or reducing the number of workers needed for those tasks.
Industry experts have chalked up some recent cuts to companies catching their breath â and taking a hard look at how they operate â after an unusual four-year stretch caused by the pandemic and its fallout.
EY’s Daco said the past few years have been marked by a mismatch in supply and demand when it comes to goods, services and even workers.
Customers went on shopping sprees, fueled by government stimulus and less experience-related spending. Airlines saw demand disappear and then skyrocket. Companies furloughed workers in the early pandemic and then struggled to fill jobs.
He said he expects companies this year to “search for an equilibrium.”
“You’re seeing a rebalancing happening in the labor markets, in the capital markets,” he said. “And that rebalancing is still going to play out and gradually lead to a more sustainable environment of lower inflation and lower interest rates, and perhaps a little bit slower growth.”
The auto industry, for example, faced a supply issue during much of the Covid pandemic but is now facing a potential demand problem. Inventories of new vehicles are rising â surpassing 2.5 million units and 71 days’ supply toward the end of 2023, up 57% year over year, according to Cox Automotive â forcing automakers to extend more discounts in an effort to move cars and trucks off dealer lots.
Automakers have also been contending with slower-than-expected adoption of EVs.
David Silverman, a retail analyst at Fitch Ratings, said companies are “feeling a bit heavy as sales growth moderates and maybe even declines.”
Cost cuts at UPS, Hasbro and Levi all followed sales declines in the most recent fiscal quarter. Macy’s, which reports earnings later this month, has said it expects same-store sales to drop, and there’s early evidence that may come to bear: Consumers pulled back on spending in January, with retail sales falling 0.8%, more than economists expected, according to the latest federal data.
Most major retailers, including Walmart, Target and Home Depot, will report earnings in the coming weeks.
Credit ratings agency Fitch said it doesn’t expect the U.S. economy to tip into recession, but it does anticipate a continued pullback in discretionary spending.
“Part of companies’ decision to lower their expense structure is in line with their views that 2024 may not be a fantastic year from a top-line-growth standpoint,” Silverman said.
Plus, he added, companies have had to find cash to fund investments in newer technology such as infrastructure that supports e-commerce, a resilient supply chain or investments in artificial intelligence.
Companies may have another reason to cut costs now, too. As they see other companies shrinking the size of their workforces or budgets, there’s safety in numbers.
Or as Silverman noted, “layoffs beget layoffs.”
“As companies have started to announce them it becomes normalized,” he said. “There’s less of a stigma.”
Even with rolling layoffs, the labor market remains strong, which may help explain why Wall Street has by and large rewarded those companies that have found areas to save and returned profits to shareholders.
Shares of Meta, for example, almost tripled in price in 2023 in that “year of efficiency,” making the stock the second-best gainer in the S&P 500, behind only Nvidia. After laying off more than 20,000 workers in 2023, Meta on Feb. 2 announced its first-ever dividend and said it expanded its share buyback authorization by $50 billion.
UPS, fresh from job cuts, said it would raise its quarterly dividend by a penny.
Overall, dividends paid by companies in the S&P 500 rose 5.05% last year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, and he estimated they will likely increase nearly 5.3% this year.
â CNBC’s Michael Wayland, Alex Sherman, Robert Hum, Amelia Lucas and Jonathan Vanian contributed to this story.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.
A young man holds a credit card and uses a laptop for online shopping.
Diy13 | Istock | Getty Images
Americans shopping online after midnight often make riskier transactions and are more likely to default on their loans, according to Affirm Chief Financial Officer Michael Linford.
The fintech firm uses the hour a consumer attempts a transaction as a key data point to help determine whether to approve loans, Linford told CNBC in a recent interview. Other factors include a user’s repayment history with Affirm and transaction data from credit bureau Experian.
“Local time of day is a signal that we use in underwriting, and most times of day have the same credit risk,” Linford said. Between midnight and 4 a.m., however, something changes, he said.
“Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day â credit delinquencies spike right around 2 a.m.”
While the data is clear that late-night financial decisions are riskier, the reasons for it are less so. Shoppers could be inebriated or under financial or emotional duress and desperately seeking credit, Linford said.
Affirm, run by PayPal co-founder Max Levchin, is among a new breed of fintech lenders competing with credit cards issued by banks. The buy now, pay later industry offers installment loans that typically range from no-interest short-term transactions to rates as high as 36% for longer-term credit.
Firms including Affirm, Klarna and Sezzle have embedded their services in the online checkout pages of retailers.
A key to their business model is the ability to approve or reject customers in real time and at the transaction level, using data to help judge the odds of being repaid.
“We don’t need to know if you’re going to be employed in two years,” Linford said. “We need to know whether you’re going to be able to pay back the $700 purchase you’re making right now. That is very different from credit cards, where they give you a line and say, ‘Godspeed.’”
The use of buy now, pay later loans has grown along with the overall rise in consumer debt. While the industry touts up-front rates and fewer fees compared to credit cards, critics have said they enable users to overspend.
But Affirm manages repayment risk by either denying transactions or offering shorter-term loans that require down payments, Linford said. Last week, Affirm reported that 30-day delinquencies on monthly loans held steady at 2.4% during the last three months of 2023from a year earlier, even as total purchase volumes surged 32% during that time.
Affirm has little incentive to allow users to pile up debts, according to the CFO.
“If you can’t pay us back, we’ve lost, unlike with credit cards,” Linford said. “We don’t charge late fees. We don’t revolve, we don’t compound.”
The rates at Affirm are in contrast to credit card delinquencies at the four biggest U.S. banks, which have been climbing since 2021 as loan balances have grown. Americans owed $1.13 trillion on credit cards as of the fourth quarter of last year, a $50 billion increase from the previous quarter amid higher interest rates and persistent inflation, according to a Federal Reserve Bank of New York report.
“The job environment is good, so it begs the question, why are credit card delinquencies creeping up?” Linford said. “The answer is, they took their eye off of underwriting and from my perspective, they got aggressive in a time when consumers were beginning to show stress.”
Every weekday the CNBC Investing Club with Jim Cramer holds a “Morning Meeting” livestream at 10:20 a.m. ET. Here’s a recap of Friday’s key moments. 1. U.S. stocks declined Friday as investors interpreted hot inflation data. Investors weighed the odds that the Federal Reserve may take even longer to deliver interest rate cuts in 2024, pushing bond yields higher. The p roducer price index (PCI) print came in hotter-than-expected, but that doesn’t mean the downward trend in inflation is over. More important economic data is on the horizon. We’re waiting for the central bank’s closely-watched personal consumption expenditures (PCE) report next week. 2. Wall Street made a huge call on Eli Lilly stock. Morgan Stanley bumped the healthcare name’s price target to a Street high of $950 apiece from $805 apiece. Analysts speculated that Eli Lilly could be the first $1 trillion biopharma stock, citing huge upside for sales in medicines like Mounjaro and Zepbound. We’re upbeat on research that highlights the company’s massive growth prospects. Shares climbed 3.62% after the opening, notching a new 52-week high. 3. We received some positive updates on Wells Fargo on Thursday. The Office of the Comptroller of the Currency terminated a 2016 consent order linked to the bank’s fake accounts scandal. This is the sixth consent order that regulators have terminated since 2019, which indicates the firm’s turnaround plan is working. Still, it’s too early to talk about Wells Fargo’s asset cap being lifted though â likely a 2025 story âbut it’s definitely a step in the right direction. Wells Fargo stock surged 7% on the announcement, hitting a new 52-week high on Thursday. Now that the financial name accounts for roughly 5% of the portfolio, we’re leaning towards right sizing and making a small sale of shares. (Jim Cramer’s Charitable Trust is long WFC, LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Layoffs could be coming to Morgan Stanley’s crucial wealth management business â a prudent step to improving the bank’s overall cost structure amid uncertainty over Federal Reserve interest rate moves. Morgan Stanley has plans to cut several hundred employees in the division as new CEO Ted Pick tries to keep costs in check, the Wall Street Journal reported on Wednesday. While impacting less than 1% of the division’s workforce, the cuts represent Pick’s first big move at the helm of the firm and Morgan Stanley’s need to drill down on expenses. Morgan Stanley declined CNBC’s request for comment. Pick, a veteran of the bank, officially took the reins from longtime CEO James Gorman on Jan. 1. During his tenure at the helm, Gorman pivoted Morgan Stanley to rely less on investment banking by building up wealth management, which has a more predictable revenue stream. MS YTD mountain Morgan Stanley (MS) year-to-date performance Possible layoffs in wealth management are important because it’s Morgan Stanley’s largest operating segment â making up roughly half of companywide revenue. Any reductions there can have an outsized benefit toward reducing costs to stay on track to meet, and hopefully exceed, Pick’s conservative reset guidance . Despite delivering in mid-January a better-than-expected fourth quarter, shares dropped more than 4% on earnings day as investors worried about the picture the new CEO was painting for the future. It didn’t help that Q4 results for all of the major banks were rather messy as they were forced to pay the FDIC back for rescuing regional lenders after last year’s failure of Silicon Valley Bank. On the post-earnings call, Pick said the bank was far from reaching management’s previously issued goal of 30% operating margins for wealth management. To make matters worse, he said that headwinds such as geopolitical conflicts and the state of the U.S. economy could weigh on profits. Elevated interest rates have continued to pressure margins. (And, Tuesday’s hotter-than-expected inflation data certainly hurt the case for a near-term start of Fed rate cuts.) At the time, we weren’t thrilled with the quarterly results. But Jim Cramer did say, “When you get this kind of cautious commentary from a new CEO, my gut says he’s simply trying to lower expectations to play the [under promise, over deliver] game.” He added the Club’s not throwing in the towel yet on the bank stock. “Morgan Stanley’s paying you to wait with that 4% yield, and they’re right in there buying with you thanks to their aggressive buyback.” Investors seem upbeat on word of cost-cutting efforts. Shares rose more than 2% on Thursday. Our other bank stock, Wells Fargo , rose more than 7% to a 52-week high Thursday on news the Office of the Comptroller of the Currency terminated a 2016 consent order linked to its sales practices. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Ted Pick, CEO Morgan Stanley, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 18th, 2024.
Adam Galici | CNBC
Layoffs could be coming to Morgan Stanley’s crucial wealth management business â a prudent step to improving the bank’s overall cost structure amid uncertainty over Federal Reserve interest rate moves.
Wells Fargo President and CEO Charlie Scharf attends The Future of Everything presented by The Wall Street Journal at Spring Studios in New York City, on May 17, 2022.
Steven Ferdman | Getty Images Entertainment | Getty Images
Wells Fargo said Thursday one of its primary regulators has lifted a key penalty tied to its 2016 fake accounts scandal.
The bank said in a release that the Office of the Comptroller of the Currency terminated a consent order that forced it to revamp how it sells its retail products and services.
Shares of the bank jumped more than 6% on the news.
Wells Fargo, one of the country’s largest retail banks, has retired six consent orders since 2019, the year CEO Charlie Scharf took over. Eight more remain, most notably one from the Federal Reserve that caps the bank’s asset size, according to a person with knowledge of the matter.
In a memo sent to employees, Scharf called the development a “milestone” for the lender. The 2016 fake accounts scandal â in which the bank admitted to putting customers into more than 3 million unauthorized accounts â unleashed a wave of scrutiny that revealed problems related to the servicing of mortgages, auto loans and other consumer accounts.
The attention tarnished the bank’s reputation and forced the retirement of both ex-CEO John Stumpf in 2016 and successor Tim Sloan in 2019.
“The OCC’s action is confirmation that we have effectively put in place new systems, processes, and controls to serve our customers differently today than we did a decade ago,” Scharf said. “It is our responsibility to ensure we continue to operate with these disciplines.”
The termination of the OCC order “paves the way” for the Fed asset cap to ultimately be removed, RBC analyst Gerard Cassidy said Thursday in a research note.
â CNBC’s Leslie Picker contributed to this report.
The LeFrak Organization CEO Richard LeFrak joins ‘Squawk Box’ to discuss the state of the commercial real estate market, the stressors facing the sector, and more.
With the S & P 500 on Friday closing above 5,000 for the first time ever, recognizing the winners this year has not been difficult. But what about the ones that are still cheap â or less expensive â on a valuation basis? Those are not as easy to spot. We screened the 32 stocks in our portfolio late Monday and identified 10 that are undervalued based on traditional market metrics following their latest quarterly earnings reports. (The market was under heavy pressure Tuesday after a hotter-than-expected consumer price index.) To determine valuation, we reviewed two metrics â price-to-earnings (P/E) ratios and P/E-to-growth (PEG) ratios â and compared each to their historical five-year averages. P/Es and PEG ratios A stock’s P/E shows how much shareholders are paying in share price for earnings. We use forward P/Es in our analysis. A stock with a lower P/E is considered to be cheaper on a valuation basis. Sometimes, however, a low P/E could be a red flag â signaling earnings estimates are too high and need to come down, which usually leads to a drop in share price, or something is fundamentally wrong with the company, such as slowing growth. The PEG ratio, another valuation tool, starts with the price-to-earnings ratio and divides the P/E by estimated earnings growth. This metric helps investors determine whether they’re paying too much today for a company’s estimated growth in the future. A good PEG ratio is 1 or lower. There is a major consideration when analyzing five-year valuation average comparisons: interest rates. As inflation has cooled, there has been a debate recently over when central bankers should cut rates. If rates come down this year, as expected, then higher multiples could be supported. The 10 undervalued companies from our screen all have strong businesses. Some of these stocks, like the overall market, are trading at or near record-high prices. But price is what you pay and value is what you get. Stocks can have high prices based on historical trading patterns and still be considered cheap based on valuation. As a yardstick, the S & P 500 has a price-to-earnings multiple of 20.5 times the next 12 months’ earnings estimates. That’s above its five-year average of 18.9. The stocks we’re highlighting here are all trading below their five-year average. In other words, the overall market is more expensive compared to historical norms and these stocks are less expensive. All data is from FactSet as of Monday. 1. Alphabet Price-to-earnings ratio (P/E): 21.1 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 1.3 Alphabet ‘s forward P/E of 21.5 times is 10% cheaper than peers and below its five-year average of 23.4. The PEG of 1.3 is below the historical average of 1.5 â meaning you’re paying less for estimated growth, too. Alphabet shares have the cheapest valuation of all our Significant Six mega-cap tech stocks, which include Amazon, Apple , Microsoft , Meta Platforms and Nvidia. Alphabet’s attractive valuation comes despite multiple avenues for growth within Google Cloud and generative artificial intelligence through Gemini, the successor to Bard. Ongoing cost discipline should also benefit margin expansion. While advertising revenue came in softer than anticipated in Alphabet’s most recent quarter , we believe the tech firm’s use of gen AI in Google search can help improve results. GOOGL 5Y mountain Alphabet 5 years The stock would need to gain about 4% to reach last month’s all-time high. We have our wait-for-a-pullback 2 rating on shares because it’s not our style to chase moves higher even if the valuation is attractive. 2. Amazon Price-to-earnings ratio (P/E): 40.9 P/E vs. peers: flat P/E-to-growth ratio (PEG): 1.3 Amazon ‘s forward P/E of 40.9 times is relatively flat compared to peers and well below its five-year average of 62.7. The PEG of 1.2 is half its historical average. The bargain here is on growth versus what was paid for Amazon’s growth in the past. That’s significant. Amazon shows promise in delivering consistent revenue and earnings growth in the years to come. Profitability in retail is incrementally growing as management focuses on speeding up delivery times supported by the regionalization of its fulfillment network. Cost efficiencies also show the strength of its operating margin growth opportunity across segments. Amazon continues to exhibit strong advertising revenue growth, and the company’s Amazon Web Services cloud unit is back and presents a major multiyear growth opportunity. AMZN 5Y mountain Amazon 5 years Shares of Amazon hit a 52-week high Monday but would still have to increase 9% to hit their July 2021 all-time closing high. For the same reasons as Alphabet, we have a 2 rating on Amazon shares. 3. Constellation Brands Price-to-earnings ratio (P/E): 18.1 P/E vs. peers: flat P/E-to-growth ratio (PEG): 1.8 Constellation Brands ‘ forward P/E of 18.1 times roughly the same as peers and below its five-year average of 20.2. The PEG of 1.8 is well below its historical norm of 2.7. So again, cheaper all around. The maker of Corona, Modelo, and Pacifico delivered a largely positive third quarter last month, with its core Beer business delivering solid results during an off-season period. The company’s struggling Wine & Spirits segment continued to disappoint. Jim Cramer has said over and over that Constellation should concentrate on Beer and offload Wine & Spirits. Management reaffirmed its consolidated comparable earnings guidance while raising its full-year outlook for operating and free cash flow. Shares of Constellation would need to add 10% to match their record closing high of nearly $273 each back in July. We think the stock can get back to those levels. And with an attractive valuation to boost, we have the stock at our buy-equivalent 1 rating. 4. Disney Price-to-earnings ratio (P/E): 22.3 P/E vs. peers: 20% cheaper P/E-to-growth ratio (PEG): 1.2 Disney stock is undervalued even with shares rallying roughly 12% after the company reported an upbeat fiscal 2024 first quarter. The company’s P/E ratio of 21.5 times is about 20% cheaper than peers and below its historical average of 29.6. The PEG of 1.2 compared to its historical 2.6 also flashes bargain, too. Nelson Peltz sees “undervalued” as a problem here. That’s why the activist investor is fighting for Disney board seats. Jim has said he wants Disney’s board to have more “skin in the game,” meaning more share ownership among its members. Peltz would bring that and past success in creating more shareholder value. Disney doesn’t want Peltz on the board, saying outside distractions are not what the company needs. CEO Bob Iger was able to show strength in parks as well as some progress in the entertainment giant’s financials. Management delivered improved profitability, cut streaming losses, and issued guidance of earnings-per-share growing at least 20% for fiscal year 2024 compared to the prior year. However, advertising trends in Disney’s linear networks have been weak as customers migrate to streaming services and a series of the company’s recent films have been duds at the box office. Disney would have to nearly double to get back to its March 2021 all-time closing high of almost $202 per share. We know the turnaround at Disney is going to take a while. But with an inexpensive valuation and an emerging path to growth ahead, we have a 1 rating on the stock. 5. Honeywell Price-to-earnings ratio (P/E): 19.4 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 2.3 We like how Honeywell ‘s stock is valued post-earnings . The forward P/E of 19.4 times is 10% cheaper than peers and below its five-year average of 21.5. The PEG of 2.3 versus its average of 2.8. Shares pulled back about 3% after the company reported lower-than-expected organic sales. But what Wall Street didn’t credit was the company had better margins, cash flow and solid backlog. We bought shares on weakness on earnings day Feb. 1 because we still believe in the long-term for the industrial giant’s strong execution. While sales were disappointing. Honeywell’s historically strong Aerospace segment continued to deliver. However, the company is still dealing with softness in its Safety and Productivity Solutions as well as Building Technologies segments. HON 5Y mountain Honeywell 5 years Honeywell shares still need to gain nearly 20% to get back to its record close of just over $234 each back in August 2021. We have a 1 rating on the stock, appreciating its valuation and long-term prospects. 6. Nvidia Price-to-earnings ratio (P/E): 33.5 P/E vs. peers: 10% most expensive P/E-to-growth ratio (PEG): 0.8 After Nvidia ‘s stellar triple in 2023, shares still screen cheap even after its 40% year-to-date gain. In terms of valuation, Nvidia is attractive boasting a forward P/E of 33.5 times. That’s about 10% higher than peers but you could argue that it deserves it due to its utter domination of the market for semiconductors that can artificial intelligence. Not to mention, Nvidia’s P/E is still lower than its historical average of 39.6. Add in the PEG, at a reading of 0.8 versus the 2.2 five-year average, and that’s a dirt cheap cost for expected sky-high growth. NVDA 5Y mountain Nvidia 5 years As every day seems to bring a new high lately, we have a 2 rating on the stock in recognition that we don’t want to chase this runaway train higher. But we still believe Nvidia should be part of any long-term portfolio. We explain in a recent commentary how investors with no Nvidia position (or no positions in the rest of our Significant Six), might think about getting in. 7. Salesforce Price-to-earnings ratio (P/E): 30.3 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 1.4 Salesforce ‘s forward P/E of 30.3 times â 10% cheaper than peers and below its historical average of 46 âand a PEG of 1.4 versus its five-year average of 2.5 show how undervalued the stock is. Back in November , the consumer relationship management software company reported a solid fiscal 2024 third quarter. (The most recent quarter comes at the end of February.) Management at the time boasted solid deal activity even after the tech giant hiked prices on some of its products. The company’s guidance was also upbeat as it expects to grow revenue at a solid pace, accompanied by margin gains. CRM 5Y mountain Salesforce 5 years The stock has been on a tear and would need to add only 7.6% to reach its nearly $310 all-time closing high in November 2021. Shares hit a 52-week high last week. Acknowledging the run, we have a 2 rating on the stock. 8. Starbucks Price-to-earnings ratio (P/E): 22.5 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 1.3 Starbucks ‘ forward P/E ratio of 22.5 times is 10% cheaper than peers and below its 5-year average of 28.3. The PEG at 1.3 is below its historical average of 2. Both indicators reflect an undervalued stock. But similar to Disney, those low readings might also signal caution. We know from its fiscal 2024 first quarter results, out last month , that the company is facing headwinds such as a slowdown in business due to Middle East protests and sluggish economic activity in China. These are factors that could impact growth. SBUX 5Y mountain Starbucks 5 years However, even when we take this into account, the stock has fallen way too much. Starbucks would have to gain more than 30% to eclipse its July 2021 record close of $126 per share. If we consider growth may be a little slower due to the Israel-Hamas war protests and China rebounding slower than expected, we’re still seeing a good value in Starbucks shares. We have a 1 rating, accordingly. 9. Wells Fargo Price-to-earnings ratio (P/E): 9.9 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 0.7 Wells Fargo ‘s forward P/E of 9.9 is 10% cheaper than peers and lower than the 11.2 five-year average. The PEG under 1 â in this case 0.7 â is low, especially when you compare it to a historical average of 1.1. Are these low numbers a sign of trouble? We don’t think so. While Wells Fargo stock came under pressure following conservative guidance, the bank’s fourth-quarter earnings report was solid. It beat on both net interest income and noninterest income. We have come to expect CEO Charlie Scharf to set measured expectations, which can be beaten. We like how management is managing and reducing expenses on a year-over-year basis, which balances the softer outlook. Wells Fargo also expects to buy back more shares in 2024 compared to last year, which adds to shareholder value. While hitting a 52-week high at the end of January, Wells Fargo stock would need to gain roughly 35% to get back to its January 2018 record close of nearly $66. But a cheap valuation coupled with an industry getting further and further away from last year’s regional lender crisis after the collapse of Silicon Valley Bank in March 2023 leads us to our 1 rating 10. Wynn Resorts EV-to-EBITDA (enterprice value/earnings before interest, taxes, and amortization): 9.1 We’re mixing it up a bit with Wynn Resorts â focusing on the company’s adjusted EBITDA because this is the financial metric of choice on Wall Street when it comes to the best-in-class hotel and casino operator. With adjusted EBITDA being the key metric, the multiple we’re focused on is enterprise value to forward EBITDA. Before Covid, Wynn generally traded in a range of about 9 times to 13 times â with two very brief periods in late 2015 and late 2018 where the multiple was closer to 8 times EV/EBITDA. However, with shares now trading at roughly 9.1 times EV/EBITDA on a forward basis, we find them highly attractive given what we just heard from management. WYNN 5Y mountain Wynn Resorts 5 years Investors received a positive update on Wynn ‘s financials when it reported beats on its top and bottom lines in its fourth quarter . Macao is coming back, while Las Vegas is strong and Boston Harbor is resilient. It seems even cheaper when considering that China isn’t fully back online yet, but the company is already operating at structurally higher profit margins compared to historical norms. We added to our Wynn position with a small buy last Thursday after its stronger-than-expected quarter because we think the stock has more room to run. (Jim Cramer’s Charitable Trust is long GOOGL, AMZN, STZ, DIS, HON, NVDA, SBUX, CRM, WFC, WYNN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A trader works on the floor of the New York Stock Exchange
Michael Nagle | Bloomberg | Getty Images
With the S&P 500 on Friday closing above 5,000 for the first time ever, recognizing the winners this year has not been difficult. But what about the ones that are still cheap â or less expensive â on a valuation basis? Those are not as easy to spot.
We screened the 32 stocks in our portfolio late Monday and identified 10 that are undervalued based on traditional market metrics following their latest quarterly earnings reports. (The market was under heavy pressure Tuesday after a hotter-than-expected consumer price index.)
Carl Icahn at the 6th annual CNBC Institutional Investor Delivering Alpha Conference on September 13, 2016.
Heidi Gutman | CNBC
Activist investor Carl Icahn on Monday reported a nearly 10% stake in JetBlue Airways, saying the airline stock is undervalued. Shares of JetBlue spiked more than 15% in extended trading.
Icahn amassed the stake in a series of purchases in January and February, according to regulatory filings. He has had and plans to continue discussions with the company “regarding the possibility of board representation,” the records said.
JetBlue said in a statement, “We are always open to constructive dialogue with our investors as we continue to execute our plan to enhance value for all of our shareholders and stakeholders.”
Representatives for Icahn were not immediately available to comment.
This is not Icahn’s first investment involving the airline industry. In one of his more infamous activist campaigns, the corporate raider took TWA private in late 1980s, only to see the airline struggle and file for bankruptcy.
JetBlue has been cutting costs and working to improve operations in an effort to return to profitability after a post-Covid travel surge and a blocked merger with budget carrier Spirit Airlines. A federal judge last month ruled against a combination of the two airlines, citing reduced competition.
JetBlue had argued it needed the tie-up to help it compete against the largest American carriers. JetBlue and Spirit are appealing the judge’s ruling.
JetBlue’s new CEO, Joanna Geraghty, took the helm Monday, and the carrier has appointed a pair of airline veterans to get it back on track.
— CNBC’s John Melloy and Leslie Josephs contributed to this report.
This is breaking news. Please check back for updates.
Pedestrians pass a JPMorgan Chase bank branch in New York.
Michael Nagle | Bloomberg | Getty Images
The three biggest American retail banks collected 25% less overdraft revenue last year as the companies, under pressure from regulators to cap the fees, created new ways for customers to avoid the penalties.
JPMorgan Chase, Wells Fargo and Bank of America reported a combined $2.2 billion in overdraft fees in 2023, roughly $700 million less than in the previous year, according to regulatory filings.
Overdraft fees are triggered when a customer attempts to spend more than the balance in their checking accounts. At around $35 per transaction at many banks, the fees have been a lucrative line item for the industry, generating $280 billion in revenue since 2000, according to the Consumer Financial Protection Bureau.
The industry is girding itself for a battle over overdraft fees after the CFPB in January unveiled a proposal to limit charges to as little as $3 per transaction. Banks say overdraft services are a lifeline that helps users avoid worse options such as payday loans, while critics including President Joe Biden say the fees exploit struggling Americans.
The practice has brought unwelcome attention to big banks. During a 2021 hearing, Sen. Elizabeth Warrenneedled JPMorgan CEO Jamie Dimon on the fees. Dimon at the time refused her call to refund $1.5 billion to customers.
But even before recent efforts by regulators, banks’ haul from overdraft has been on the decline. Pandemic stimulus money helped Americans trigger fewer of the fees starting in 2020, and then firms including Capital One, Citigroup and Ally voluntarily ended the practice.
Those who kept the fees, including JPMorgan, limited the types of transactions that trigger penalties, got rid of fees for bounced checks and introduced one-day grace periods and $50 cushions to reduce their frequency.
Bank of America cut the fees to $10 from $35 in 2022.
“Whether folks eliminated some fees or dramatically reduced the cost of others, there’s been very significant shifts here,” said Jennifer Tescher, CEO of nonprofit group Financial Health Network. “Banks aren’t just getting rid of overdraft, they’re trying to find more customer-friendly ways of meeting their liquidity needs while making sure they aren’t overextended.”
Industrywide overdraft revenue totaled $7.7 billion in 2022, 35% below the 2019 level, according to a May CFPB report that included all U.S. banks with at least $1 billion in assets.
Recent regulatory filings show that the steady decline continued last year, though JPMorgan and Wells Fargo remain by far the largest players in overdraft.
JPMorgan had $1.1 billion in overdraft revenue last year, about 12% lower than in 2022. Wells Fargo saw a 27% decline to $937 million. Bank of America posted a 64% decline to $140 million.
More than 70% of overdraft transactions no longer incur fees, and customers can choose accounts that don’t allow the penalties, a JPMorgan spokesman told CNBC.
“Our customers continue to tell us they want and need access to overdraft protection, which helps them when they are temporarily short on money,” the JPMorgan spokesman said.
Wells Fargo declined to comment. A Bank of America spokesman noted that after the company voluntarily changed its overdraft policies in 2022, revenue from the practice fell more than 90%, and they now collect less than smaller banks.
The 5,000 level for the S & P 500 seems like a foregone conclusion given the strength of mega-cap growth stocks, the renewed fervor for any name related to AI, and emerging strength in other sectors including health care and financials. A strong November and December were followed by an even stronger January, and this earnings season has propelled leading names like Nvdia and Meta to even greater heights. But as much as a market can advance due to the strength of leadership names, market breadth measures tell us more about all the other stocks in our major indexes. This technique is often described using military terminology: the generals are doing great, but what about the infantry? This chart shows the percent of S & P 500 members above their 200-day moving average (second panel) as well as the percent of S & P 500 members above their 50-day moving average (bottom panel). Generally speaking, the percent of stocks above the 50-day moving average represents more of a short-term gauge, because when a stock is still in a primary uptrend but experiences a pullback it will would hit this moving average first. Conversely, the percent of stocks above the 200-day moving average is a better long-term gauge, as it takes a much more significant drawdown for a stock to break down below this long-term trend barometer. The S & P 500 itself (top panel) is well above its own moving averages, speaking to the strength of this market environment off the October 2023 low. Note how both the percent of stocks above the 50-day and 200-day moving averages pushed above the 50% level in mid-November, confirming that many stocks were experiencing a similar rise. By mid-December, however, we saw about 90% of S & P 500 stocks above their 50-day moving average (pink shaded area), suggesting that almost everything was in a confirmed uptrend. Lack of breadth support So as the S & P 500 tests 5000 this week, how confident should we be about further upside for stocks? I’ve placed red vertical lines on the three previous occurrences where we saw 90% of stocks above their 50-day moving average before the indicator moved back below 50%. This would indicate that about 40% of the S & P 500 members had broken below their own 50-day moving average, in other words, a serious lack of breadth support. In each of these three instances, the S & P 500 moved even lower before eventually finding its footing and bouncing back higher. One key difference this time around is that the S & P 500 itself is moving higher. In those other three instances, the benchmark was actually moving lower as the breadth readings were deteriorating. But the message of the chart remains the same. If we see less than 50% of S & P 500 members remaining above their 50-day moving average, further upside above the key 5,000 level seems like an unlikely scenario before a more meaningful pullback for stocks. -David Keller https://www.marketmisbehavior.com DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
