Market commentary: US home sales, Facebook and AT&T earnings

In the middle of the earnings season, the main economic data released yesterday was the US Home Sales, which came in at an 18-month high, signalling that the economy is beginning to shake off the winter slow down and that the housing market continues to recover quarter after quarter.

Existing home sales increased 6.1% reaching an annual rate of 5.19 million units in March, posting the highest level since 2011. Homes supply also increased by 2%, however the market remains undersupplied, with over-demand driving prices 7.8% higher to an average of $212,100 per unit.

While the latest report is an additional encouraging sing for the housing market, I think that with the supply side still struggling to catch up with current demand, and the increase in prices largely outpacing the growth of available houses, in coming quarter’s home affordability could become a drag on the entire sector.

On the earnings side, the two major companies reporting on Wednesday were Facebook and AT&T, which released their quarterly results after the closing of US markets.

The social media giant Facebook, one of the most watched company in the technology and media sector, reported mixed results, beating analysts’ expectations on profit, but missing by $20 million on revenue. Revenue still witnessed a remarkable 46% increase Year-on-Year, taking the total amount for the quarter to $3.45 billion, around $1 billion more respect the same period last year.

Despite a stronger dollar taking a toll on Facebook’s earnings because the company generates more than half of its revenues outside US, the firm managed to deliver better than expected profitability thanks to recent increases in the price per advertise and the consistent addition of new users. Mobile advertising and related revenues accounted for 73% of the overall company sales, continuing to replace desktop’s revenues and confirming to be the driving force behind Facebook’s success.

The reported EPS was $0.42 per share, beating analysts’ expectations by $0.02, and growing 20% from a year earlier. The company also revisited its forecasts for its spending increase for 2015, which is now seen to consolidate between 55% and 65%, down from the previously announced 75%. Despite an increase in spending, investments and acquisitions related charges, Facebook’s cash flow rose 30% to a stunning $1.2 billion, with the social media giant ending the first quarter of the year with a total of $12.4 billion in cash and short term investments, and no debt.

Facebook shares gained 1.21% ahead of the results, but dropped as much as 4.3% in after-hours trading, with traders taking profits after the social media missed revenues estimates for the first time since 2012.

In my opinion, Facebook remains a solid and innovative company, with a “bullet proof” balance sheet, new products in the pipeline and ample room for future monetisation of both Instagram and WhatsApp.

Facebook dominance in the advertising industry and its consistent ability to generate excess cash should largely overshadow a narrow revenue miss, which was mostly derived by foreign exchange charges.

AT&T, the largest US telecommunication company, also reported earnings on Wednesday, posting mixed results that beat on profitability but missed on revenues, which were negatively impacted by foreign exchange issues and a stronger dollar.

The telecom giant reported revenue of $32.57 billion, missing analysts’ expectations by $270 million while growing 0.3% from a year earlier. The reported EPS was $0.63, ahead of analysts’ forecasts and a positive sign for a firm that has been struggling with declining margins and a full-out industry’s price war. AT&T also reported net users’ additions totalling 1.2 million new customers and a best-ever Churn rate of 1.02%.

The company also confirmed it expects to complete the acquisition of Direct TV within the second quarter of the year, and CEO Stephens reiterated that he expects the merger to support the company’s free cash flow which is seen able to generate cash in excess of dividends and to provide means for AT&T to reduce its indebtedness toward its 1.8x target.

Shares in AT&T gained 0.61% ahead of the results and jumped as much as 2% during after-hours trading.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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