Bank of America's Investor Day, McDonald's Earnings Report, ISM Services Data

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. It is Bank of America's Investor Day, and this is the first investor day the bank has held in about 15 years. And it comes as the stock of Bank of America has trailed its big bank peers, not just this year, but as Catherine Doherty of Bloomberg News points out last year and for the past five years as well. Catherine joins us now from Boston, right outside the Bank of America Investors Day taking place.

1:45Catherine, Bank of America has come out with some new targets that it's talking up, talking about at least 12 percent earnings per share growth annually over the next several years. What is the unifying narrative that the bank is offering up right now to explain these new targets? So we have a new narrative today, and it expands from the old narrative of responsible growth. That is a phrase that CEO Brian Moynihan has used talking about building the bank coming out of the financial crisis. He's talked about using responsible choices and being explicit about the risk that the bank is taking on in order to grow revenue.

2:24Well, today we heard a new phrase. He's been repeating this phrase where he says that the growth is one that they want to stick to the ribs. I know it sounds like a funny phrase, or at least it's one that has stood out to me. And it also makes me think of, I don't know, barbecue or some sort of food. But he's repeated it time and time again this morning and on media now. He's saying we want to have growth that sticks to the ribs. So put it on the T-shirt. This is the new phrase of Bank of America. So, Catherine, is there a sense here that Bank of America is comfortable with the assets they own?

3:01Do they feel like they need to acquire something or maybe divest something? What are they saying about kind of the way they're constructed right now? So there hasn't been a lot of talk about acquisitions or add-ons. It has been a large emphasis on existing either infrastructure, technology, and the deposit growth that they say they expect in the future. But also they're giving a lot of detailed information about where they've come from really since 2019. Some of the stats even go back to 2010. And so it's not just the emphasis on where they hope to go in the next three to five years, but an emphasis on where they've come from.

3:43In terms of what it's doing well, we know that the markets unit has posted 14 straight quarters of year over year growth. And of course, most of the big banks had incredible performances for their markets businesses in the last quarter. What do we hear about how they're going to double down on the things that are working? So another business line just sat through the presentation this morning is consumer. B of A is the second largest bank given its deposit franchise. And Holly O 'Neill, the head of consumer and retail, talked about how they are seeing really 90 % plus of their customers have a core checking or savings account.

4:27And they are pointing to that as a particular strength because once you have the core checking or saving, you can then add on and introduce customers to other parts of the business. Maybe they can even grow to be a banking partner if they are a CEO or owner of a company. So that is one particular emphasis that the bank executives have made today. The other, Wealth Management. They're really emphasizing just the brand recognition that comes with if you are an advisor out and looking to take on new clients and bring in more assets to the bank. Having B of A's larger franchise is something that they're speaking to as a core strength.

5:12So these are just some of the beyond the numbers, the details that they're going through this morning in Boston. Stay with us. More from Bloomberg Intelligence coming up after this. This is Tom Keen inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christophorus. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names in economics, finance, investment, and international relations.

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6:34Listen on demand wherever you get your podcasts or watch us live on YouTube. The earnings parade continues, Paul. And of course, we're talking about blue chip companies, McDonald's being the latest one. Yep, absolutely. McDonald's, which, by the way, it's number two with a Coke. That's been my order since I'm at 14. Nothing's changed. They had, I think, pretty good numbers coming out. The stock's up a couple of percent here today. So Red Brown joins us, earnings reporter for Bloomberg News. This is a busy time for the folks in our stock desk because earnings are coming out fast and furious and they stay on top of it.

7:05Red, what do you make of the McDonald's results? I think in the context of the other results that we've gotten in the last week or so from a couple other restaurants, I think it's really interesting. During the call, the McDonald's CEO, CFO really talked about this bifurcation that they've been observing for the last few years between higher income diners and lower income people. And it seems like that trend is continuing, persisting, potentially accelerating. It seems like, and specifically what I'm talking about is the higher income consumers seem to be coming down into McDonald's and shopping a bit more, drawn in by the value that McDonald's has been pushing over the last couple of quarters.

7:42And we're seeing that across all of the fast food chains. That's Yum as well, and also Burger King, things like that. And then on the other side of that, companies like Chipotle and Cava, these kind of like middle tier that, you know,$20 bowls of food are struggling a little bit more as like people lose interest in that value proposition that they're offering. So I think McDonald's, obviously the biggest name in the space, really kind of hammers that point home for this earning season. And I think that's kind of the thing, like the main takeaway for me at the moment. And of course, McDonald's is leaning into this idea that it offers value at a difficult time for a lot of consumers.

8:17It's got a lot of deals and promotions to maintain that reputation. Does that cost it in any way? Or do the same sort of sales kind of back that up that this works? I think it's a little early before they've seen that benefit from it quite yet. They all have seen a little bit of pressure on the profitability. Because the company is so committed to this, restoring the value reputation is kind of the language that they use with their customers. They're actually supporting the franchisees. They're giving them marketing. They're helping them make up some of that losses that they will make, they will have from offering these discounts on the menu.

8:53So McDonald's is committed to this. It sounds like they're committed to this in the long term because they do want to get people back in the stores. It kind of remains to be seen whether or not the foot traffic is actually benefiting such that it is driving the bottom line as well. But they see it as so important to kind of refreshing or kind of reintroducing the brand proposition to people that they're willing to commit to this. take a little bit of that short-term pain for the long-term benefits. What are they saying about their cost structure here? I see beef prices much higher over the last year or two.

9:24What are they saying about some of the cost of goods sold here? Well, so the one thing to call on the cost of goods sold before we get into the beef issue is the marketing. So they are kind of bumping up the marketing. They saw around a 20 % jump in their SG &A expense because of that. But on the beef thing, McDonald's is the largest buyer of beef. So that scale kind of allows them to take it. They can take advantage of the scale and negotiate strong contracts when it comes to beef. Obviously, beef inflation has been hitting all of these companies, but not in a way that the companies are outsized negatively impact thus far.

10:01But definitely something to watch as the beef prices continue to go higher. And the improvement here, especially for its U.S. comparable sales, really comes at a timely point. Because for a while, the company had been laggard when it came to comparable sales, at least domestically. Yeah, definitely. And it does speak to the kind of strategic changes that they've made. Like, they did act maybe a little bit late in the game. Burger King has been rolling out their value offerings for a little over a year. But McDonald's has acted and acted swiftly. Like, you know, it's a big deal, I think, to get the buy-in from the franchisees of McDonald's.

10:35Like, they had almost a consensus. It's very rare that you see almost like a high 90 % of franchisees willing to take the price hits because they're the ones that are dealing with this at the end of the day. But I think, you know, McDonald's acting fast, acting boldly to kind of get back into the green. I've noticed really, really in the last several years, so much more technology in the stores. Like, you can, a lot of them don't even have people practically taking your order. It's all done electronically. What are they saying about their investments in technology, maybe even AI? How is that impacting that business?

11:10Yeah, for McDonald's, there was quite a bit of talk about their digital offerings for this quarter. All of these companies, so between McDonald's, Yum!, which has KFC, Taco Bell, and a couple other brands under that umbrella, are all really pushing the digital for that exact reason, to get the cost down. McDonald's just rolled out their Monopoly program. When I was a kid, Monopoly was the peel-off on the cups. It was very exciting. Now it's completely digital. So that's another way of trying to drive people into the app to get people to shop through there. That's where a lot of promotions are.

11:42That'll help also drive foot traffic. So it's helping in two ways. It's helping people get in, shop more, and also helping them the cost for them. Stay with us. More from Bloomberg Intelligence coming up after this. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing, and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate companies, crypto, you really need to hear these conversations.

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12:57You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. ISM Services Index came in at 70. The consensus was 68. Seems pretty good to me. Let's check in with Steve Miller. He's the chairman of ISM. joining us via Zoom from Aledo, Texas. Think oil patch. And that's where Aledo is. Think landman, which, by the way, second season starts in like a week. So that's huge. I know you're all over that. Steve, talk to us about this ISM data here.

13:32What stands out to you? Well, one of the things that was great news is we saw new orders come back and we saw business activity increase. So a little bit of a surprise to me, given the government shutdown, we saw public administration go into contraction from expansion month over month, but the rest of the economy seemed to hold up. Real estate, rental and leasing, and retail trade returned from contraction to expansion. So those were some of the leaders. At the same time, though, it seems like inflationary pressures remain because you look at prices paid. And prior month in September, it was at 69.4, and economists had anticipated it to decline to 68, but instead we got an increase to 70.

14:18Talk a little bit about that. Sure. The index, the first time it's been at 70 since October of 2022. So we're definitely seeing in the commentary as well, tariff impacts starting to flow through for some commodities. We see chemicals, electronic components, some other things are showing in increases to prices paid. I think the positive side on the inflationary aspect is employment is still a little bit weak. And we're seeing that the supplier and supply chain performance is still strong. So in that environment where it looks like there's available capacity in all of the industries, except for utilities, I believe that's a very positive sign for competition in the market and keeping inflationary pressures from hitting the consumer.

15:13Steve, thanks so much for joining us. Really appreciate getting a couple of minutes of your time. Steve Miller, he's the chair of ISM Services PMI. We'll get some data here. It looked pretty good to me. And one of the things that jumped out to me, Scar, this is the new orders, 56.2. The consensus was 51. Last period was 50.4. So nice jump in new orders there. And of course, the services part of the economy is much bigger than the manufacturing side of the economy. And earlier this week, we heard from ISM that manufacturing remains in this slump, I believe, an eighth month of shrinkage in manufacturing.

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16:07Hello, I'm Michelle Hussain. And for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day. To spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage, Russia needs to be taught a lesson, to tech journalist Cara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.

16:51So please join me, listen and subscribe to The Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts. You certainly ask interesting questions. Thank you.