Iconic U.S. Companies Delivered Earnings Beats -- but Not All Got Stock Bumps

In this this Market Foolery segment, host Chris Hill and Motley Fool Funds' Bill Barker discuss a raft of major quarterly reports: Ford, AT&T (T 0.19%), U.S. Steel (X -2.90%), Hershey, and Coca-Cola, all of which came through with excellent second quarters. And the key to those wins was less about the top-line revenues and more about bottom-line earnings, which have been driven by unusually strong margin growth and cost cutting. As a bonus, they consider how Caterpillar is doing so well in the absence of any new infrastructure initiatives out of President Trump's Washington.

A full transcript follows the video.

This video was recorded on July 26, 2017.

Chris Hill: Let's get to some of the other companies reporting. As you indicated, names that are straight out of the 1950s here in America. Ford Motor, AT&T, U.S. Steel, Coca-Cola, Hershey all reporting. All, as you said, doing as good if not better than expected. Although in terms of the stock performance, AT&T and U.S. Steel are really the big movers today. I didn't realize, because we rarely ever talk about U.S. Steel. The only time I talk about U.S. Steel is if I'm watching The Godfather Part 2, where Hyman Roth has the classic line, "Michael, we're bigger than U.S. Steel."

Bill Barker: Another good line about U.S. Steel is, there was a book about the Yankees covering the '50s and early '60s. The subtitle was When Rooting for the Yankees Was Like Rooting For U.S. Steel. I know that's painful for you as a Red Sox fan, which is why I bring it up.

Hill: [laughs] That's OK, I wasn't around in the 1950s or early 1960s.

Barker: Wow, would you have suffered if you had been.

Hill: I really would have. Although, as I was going to say, U.S. Steel, really cool ticker symbol. It's just X. I like that. But again, U.S. Steel, AT&T, those are the big movers. When you look at this basket of Americana-type stocks, does anything leap out at you?

Barker: Yeah, it's a victory lap for America. [laughs] Not to get too 1980s U.S. Olympic cheering. When I look at it, I see, again, the bottom line being a bigger outperformer than the top line for a lot of these things. U.S. Steel more than tripled what the profits were expected to be -- $1.07 per share against $0.34 expected. That wasn't a function of tripling what the expected sales were going to be. This is better margins. That's a story for some of the other companies in there as well. I just think there's a breadth to the success of businesses at the moment, which is, what is supporting the stock market as a whole right now? You have the stock market at all-time highs; how much should you be worried about that? Well, this quarter is going to set the record for earnings, both operating earnings, which ignores all the bad stuff, all the one-time charges that go into GAAP-reported earnings. But, GAAP earnings are also going to be setting a record this quarter. And the projections for next quarter are not coming down. So earnings, which ultimately is what you get from owning stock, is looking very good. 

The concern, in part, is that this is being driven by superior margins. And how sustainable are margins at or above 10%? Well, they've been pretty sustainable over the last 10 years, in the 9%-9.5% range, except for the Great Recession. So there's reason to think that the longer term of 6%-7% average for operating earnings is something to remember, and to wonder why companies are capturing as much of the income from their sales as they are, one thing is, they're not distributing it to employees at the same rate, and how sustainable is that? We see the effects of that in our politics. But at the moment, it's a good quarter for classic American companies.

Hill: I'm a little surprised by the combination of U.S. Steel's results and Caterpillar's results, which were earlier in the week, in part because you think back to January, when President Trump took office and the new Congress took office, there was a lot of expectation that one of the first big things right out of the gate was going to be some sort of infrastructure bill. And that has not materialized. So the results that they're putting up, the quarters that we're seeing out of Caterpillar and U.S. Steel, would make more sense to me if, in fact, there had been some massive infrastructure spending bill that had been passed back in January or February or something like that.

Barker: I think that's fair, to ask what's going on there. U.S. Steel would love it if there was a significant infrastructure commitment, or something that went beyond words from the administration, some real dollars that were committed. But they're in all parts of the economy. Commercial construction, you don't necessarily need government-supported projects to achieve the results they've just had. Cars. Of course, it would be great for them if every bridge that needed to be replaced started doing that. And part of the hope for the company from the bulls is that various of the proposals that it will be United States-produced steel that's going into any infrastructure bill. We'll see what happens with that. But that's part of the bull case as well.