Caterpillar, European, and Big Tech Earnings

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1:34On today's Bloomberg Intelligence show, we dig inside the big business stories impacting Wall Street and the global markets. Each and every week, we provide in-depth research and data on some of the 2 ,000 companies and 130 industries that our analysts cover worldwide. Today, it's another major earnings week, but we'll break down some big tech earnings from this week. Spoiler alert, the AI-fueled spending surge keeps racing ahead. Plus, that AI frenzy is now spilling over to heavy machinery and oil fracking. We look into how Caterpillar fared when they reported this past week. But first, Verizon, the U.S.

2:02largest mobile service provider, reported a loss in wireless phone subscribers in the third quarter as a new chief executive officer laid out an aggressive growth strategy to reclaim market share. Dan Schulman, a former CEO of PayPal, was appointed just a few weeks ago to replace Hans Vestberg over at Verizon after two straight quarters of subscriber declines and a stock performance that has lagged the two main rivals. For more, we were joined by John Butler, Bloomberg Intelligence Senior Telecom Analyst. I first asked John to break down Verizon's earnings. So this, first of all, I'll tell you, the dividend is safe, Paul.

2:33I mean, that's the good news for Verizon. And it's safe because new CEO Dan Schulman, who recently replaced Hans Vesberg at the helm of Verizon, sort of laid out his new plan for growth. I think the real watchword of the day here for Verizon is to pivot from a very technology or network oriented company to now Shulman is going to turn them into a very consumer focused company. I think he's really going to take a page out of T-Mobile's book. But in terms of promoting, I think unlike T-Mobile, he's going to do it in a more disciplined manner. So I guess as I think about the wireless business, I mean, we all have a phone in our pocket.

3:23And it just seems like the only way to grow revenue is either add subscribers, which can be expensive, or raise prices, which how long can you do that? How do you grow the business? I mean, that's one thing he talked about was how to grow the business here. And what you're seeing with the telecoms is they're all pushing more heavily into broadband. They're doing a very good job there. With Verizon, like AT &T, they've got two avenues of growth there. One is fiber broadband. Verizon is buying Frontier, so they're going to onboard about a million new fiber subscribers in the new year. And the other is fixed wireless access, which is sort of that wireless link into the home.

4:10It's been very popular with people. So once you get those broadband subscribers, probably more than half of them don't have wireless. And so Verizon's aim is to continue to build that broadband base and then cross-sell wireless into that base. You've also got switching activity that goes on in any given quarter, no matter how hard the carriers try. You're always going to lose some subscribers and they're up for grabs. And I think Verizon now is looking to get their fair share of those. And there's also modest, very modest organic growth in the business through population growth and some immigration, although immigration is down this year.

4:56Yep. I don't even know where we are, John, in terms of the 5G, 6G, 4G. Are there technological changes coming to the wireless business or are we at kind of where we are in terms of capacity and usage and so on? So capacity is on the rise. Spectrum is the lifeblood of wireless. The more spectrum you have, the more network capacity you have. To put it in layman's terms, for the average smartphone user, that means higher download speeds. And Verizon is currently activating what's called C-band spectrum. It's very high capacity. And so you're going to see their average network speeds across the nation edge up over time as they activate that spectrum.

5:43In terms of the generational upgrades that you alluded to, the 3G, 4G, 5G, we're mid-cycle now. We launched 5G about five years ago, and I think you'll see an upgrade to 6G as we get towards 2030. But right now, it's sort of status quo on that front. I guess the issue for Verizon is now going more customer-centric. And as you mentioned, when I read that, it seemed just like what T-Mobile's been doing for years and years and years. Going back to John Ledger, is this a strategy you think can be successful? for Verizon? We'll see. I mean, that's their big challenge, right? I mean, T-Mobile was always the branding king.

6:29They did a great job there, just as you said, starting with John Ledger, who made himself the face of the brand. They really did a terrific job there. They went out as a sort of a hip counterculture, consumer-friendly brand. Verizon was at the opposite end of that spectrum, leaning into their great network coverage. They still have that. They have probably the best coverage in the industry, but in terms of network speed and performance, the other two, AT &T and T-Mobile, have really caught up. So the challenge for Verizon now is to nurture a more consumer-friendly brand image, dare I say a most fun brand image.

7:12I have to chuckle. That really isn't something we would associate with Verizon. But I think Shulman, given his background at other telcos and also in reviving PayPal, has some experience there with branding. And I think it's going to be interesting to see what he does with Verizon to improve that brand image. Our thanks to John Butler, Bloomberg Intelligence Senior Telecom Analyst. This week, Boeing on Wednesday announced a$4.9 billion accounting charge and delayed debut for its 777X jetliner, a reminder of the long recovery ahead for the U.S. planemaker even as rising aircraft deliveries bolster its cash.

7:52The setback underscores the challenges ahead as CEO Kelly Ortberg works to stabilize Boeing even as the company benefits from surging aircraft orders with support from the White House. For more, we were joined by George Ferguson, Bloomberg Intelligence Senior Aerospace Defense and Airlines Analyst. We first asked George for his key takeaways on Boeing's earnings. What I saw from earnings is that the commercial airplane business had about a$430 million loss when you back out that about$5 billion charge for 777. I think that number was a bit better than consensus, a little bit better than what we were looking for.

8:26I think it's another sign that commercial airplane is getting closer to break even. And then in the cash flow statement, Boeing was cash flow positive at an operating level and free cash flow. It was about a billion dollars in the operating level and free cash flow of a couple hundred million. I think that's above where consensus expected it. We saw five billion dollars in inventory get unlocked during the quarter, meaning Boeing has been sitting on something like 90 billion dollars inventory. I think it's like 87, I think was the exact number. And that came down to 82 billion because they've been buying from suppliers, putting things on shelves as they try to keep the supply base healthy while they've been going through some of their challenges here.

9:15And now they're starting to take that, you know, that inventory off the shelves, put it into airplanes. That's going to that's going to hyper drive some of the cash generation of Boeing as they bring that inventory, I think, down to probably a 60 or 50 billion dollar level. So I think those are both big positives. And the charge was largely non-cash for an airplane that I think is still very competitive, just gets delayed a bit. All right. How about the deliveries of the 737? What's the guidance there, George? Because we know that's the big cash driver. Yeah. So they're, you know, Boeing's kind of out of the game of giving guidance right now.

9:51But they've they said, you know, the FAA has allowed them to go to 42 a month build rate, which would be above what they've done in in the last quarter. I think we've got a model that about 44 or 45 per month for the next three months. That's because there's still some inventory airplanes they'll deliver as well as what they're building. Just heard Kelly Ortberg say on the call that he would anticipate sort of cranking up those build rates from 42 in increments of five every six months, no sooner. Obviously won't break unless they feel like they've got things stabilized. So I think we've got a path here to higher build rates over, you know, to the end of the decade.

10:36So, you know, I would expect that as they get a year down the road here, we'll be probably break even in this business. You know, maybe a little bit longer, but I think we'll be break even in that business. And again, that's I think all part of the turnaround is getting 737 to perform. That's going to be the financial driver. So Kelly Orberg has now been CEO for just over a year. He started in August of 2024. I can't believe it's been that long already. I know. And a lot has happened, clearly. And what I didn't realize is that Boeing is still facing some labor issues. St. Louis area machinists still strike.

11:14They've been striking for more than three months. What does this say about Kelly Orberg's leadership and what kind of grade would you give him, George, for his leadership so far? Yeah, I mean, I'd give him a very high grade, right? Again, I think that, you know, the biggest thing he needed to do was, like, improve morale, improve quality. And it appears to, you know, to be the case. I think, you know, the proof is, again, build rates, the FAA returning some, you know, giving Boeing the ability to go to 42 and returning some of their ability to certify some of the airplanes. So I think I'd give it all high.

11:52In St. Louis right now, St. Louis is where the defense business is centered out of. Right now, the defense business not performing great, but getting better. I think there's definitely more to come in the defense business as they start building the F-47, which is the sixth generation fighter that they won. But that's still some preliminary work. My guess is that the sides are still a little bit apart on where they want to be for an agreement. And it's not as critical to get those folks back to the production lines as it was to get commercial 737 machinists back to production lines. So he's probably doing the right thing for the business here and making sure he can get an agreement he can live with, especially in defense where it's harder to bear increased costs.

12:42And again, I'd give him high grades. I think the company's at a turnaround right now and doing well. George, about 30 seconds left. We don't talk about the 777 much. How does that kind of figure into their portfolio and into the economics of Boeing? Yep. When it finally gets certified, it'll be the biggest airplane in production. So it kind of replaces 747 and A380 as the queen of the skies. A350-1000 is the closest competitor. It can't be as densified. It can't have as many seats inside it. So I think you'll find a seat cost advantage in the 777. It's got core customers in those Middle East carriers, those Asian carriers that are the big sort of east-west connectors.

13:28And I think it'll be fine. I think the delay won't hurt its ability to be sold. And it's already got 500 in the backlog. Our thanks to George Ferguson, Bloomberg Intelligence Senior Aerospace Defense and Airlines Analyst. Coming up, AI demand is going so fast that the cloud giants are racing to catch up. How did that fare for some big tech earnings this week? That's next. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries. You can access Bloomberg Intelligence via BI Go on the terminal. I'm Scarlett Fu. And I'm Paul Sweeney, and this is Bloomberg.

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15:08This is Bloomberg Intelligence with Scarlett Foo and Paul Sweeney on Bloomberg Radio. Demand for AI keeps growing so fast that the cloud giants are racing to catch up. At least that was the message this week from tech giants Alphabet, Meta, and Microsoft. And the company they're looking to catch, NVIDIA. This week, the tech giant became the first company ever to have a market cap of over$5 trillion. The AI spend is not slowing down. For more, we spoke with Anurag Rana, Bloomberg Intelligence technology analyst. See, I think the common theme is that capital expenditures are going up, which means they're going to spend a lot more money to expand their data center footwork and need more chip capacity to take care of the AI demand that they are saying.

15:52So I think that's the common message for all of them. When you look at Microsoft, I think their CapEx numbers, nobody was expecting would go up this much. We were expecting them to rise, but they basically came out and said, we thought we'll be fine by now, but they're still capacity constrained. The demand is coming through. They talked a lot about their open AI agreement, the revised one. I still think they're probably in one of the better places than they have been in the past several years. All right, let's just compare and contrast Meta and Google. We had talked about big CapEx increases.

16:27Is that just the market saying, hey, we trust you, Google, with this increased spending? Maybe not so much over there at Meta? You know, if you're looking at between both of them, Google is showcasing that they are seeing the benefit of AI in actual revenue generation from their cloud business. Cloud business accelerated. It accelerated last quarter as well. We're really seeing tangible benefits. Then you have Anthropic signing up with Google Cloud to use their TPUs. They have the chip business also. The big question for everybody is, well, Mehta, you're spending all this money. How are you going to monetize it?

17:00Then they talk about, you know, they're going to monetize it internally through better ads and serving ads. Well, they're still serving me ads. I mean, all the time anyway. The question is, where is all this money going and how do you get it back? I think that's where the dichotomy is between these two vendors. And Google has, I think, done a phenomenal job of explaining to the market what their AI strategy is and why is it working so well. So it's a matter of Meta not telling a story to investors, a narrative that resonates with investors or that convinces investors the way that Alphabet is? See, when you think about it, spending$5,$10 billion would be OK.

17:33But when you talk about spending$60,$70,$80 billion of AI-related research going into your products, where is the benefit of that? Yeah, but this is not a news story that they're telling. They told this story last quarter and the quarter before, and investors seem to like it. Fair point. But when you look at now, Google is showcasing that we actually see the benefits and actual numbers that we are reporting. So between the two vendors, it's very clear what I can see on the Google side. It's not so much clear on the Meta side. And I think also another part of it is, having used to follow the stock, is one of the reasons Meta was working so well over the last several years.

18:10It was a cost-cutting story after the Metaverse debacle. You know, people were concerned about all the spending on the Metaverse. Right, right, right. It seemed like Mr. Zuckerberg, yeah, they saw the light and they started cutting costs and the stock worked. Our thanks to Anurag Rana, Bloomberg Intelligence technology analyst. Next, we look at earnings from one of the world's biggest producers of heavy machinery, Caterpillar. This week, Cat reported third quarter earnings and revenue that beat analyst estimates. The company stated their boost in earnings was driven by their power generators and turbines that keep AI data centers running.

18:39For more on this, we were joined by Chris Cialino, Bloomberg Intelligence Senior U.S. Machinery Analyst. It was a great quarter, you know, despite pretty elevated expectations coming into the print, a bigger tariff headwind. CAT really delivered very solid 3Q results. It was really driven by higher volumes across all three of their core businesses, with particular strength in energy and transportation again. But I think one of the more encouraging signs that we took away from the results were that orders accelerated here in the quarter, and we also saw backlog improve sequentially to a record$40 billion.

19:17So we think we see above-average production and earnings visibility as we begin to think about next year. Did the company say a lot about the power producing equipment, including turbines and generators, that have investors excited about it being kind of a derivative play to the AI story? Absolutely. So, you know, we continue to hear more and more about AI and data centers and CAT's exposure there. PowerGens, probably, you know, roughly 30 % of the energy and transportation business, roughly, you know, 15 % of the overall enterprise. but it continues to be the fastest growing part of the portfolio.

19:55They're bringing on a lot of capacity here over these next three years. I think you'll really begin to see a step change as we move into 2027, particularly on the large engine side. So there is more of a focus and investment on the energy and transportation business, and it has become the biggest part of their portfolio. Wow. Are there other companies, or let me put it this way, Who does Cat compete with in that segment of the business? Yeah, so there's a number of different competitors, and it really breaks down relative by size on some of the gen sets. Cummins is a big one, Siemens Energy, and then you also have a few other European and Asian players.

20:38But this is certainly a market that's growing pretty exponentially here. Backlogs extend several years, so we think we have pretty good visibility. at least through the next three years. Does this part of the business mean that Caterpillar will need to rely more on domestic market opportunities as opposed to global market opportunities? So their footprint is the largest. The energy and transportation footprint is the largest in North America. But, you know, I think the opportunity is global. They are a large global producer. They serve, you know, essentially almost all markets around the world.

21:14I think even particularly within energy and transportation, It's like something like 100 different countries. So while I think the immediate near-term excitement is more focused here in North America, I do think longer term there's an opportunity international as well. What's the company saying about the impact, if any, on tariffs on their business now and going forward? Yeah, so tariffs were actually a much bigger headwind than we anticipated in the quarter. And even CAT, I think it kind of shook out somewhere around a$600 million headwind in 3Q. But margins were better than expected, really pretty remarkably resilient despite these price cost headwinds.

21:554Q will actually see a step up in the tariff costs. And then as we think about next year, you know, CAT's really been kind of hesitant to pull the pricing lever on a lot of tariffs thus far. We think that's, you know, more of an opportunity for them here in the near term to gain some market share. So as we think about 2026, it'll be interesting to see, you know, do they continue to offset through more cost and productivity efficiencies or do they lean into pricing a little bit more? But tariffs will step up here in the near term. And then, you know, 2026, it still remains to be seen, but I'd expect the demand backdrop to improve.

22:30So they certainly should have the opportunity to push pricing a little bit more aggressively next year. Our thanks to Chris Cialino, Bloomberg Intelligence Senior U.S. Machinery Analyst. We move next to news from the logistics company UPS. This week, UPS said it expects to cut 34 ,000 jobs this year in an effort to cut expenses and improve profitability. This comes despite the company's reporting third quarter earnings that beat analysts' expectations. For more on this, guest host Lisa Mateo and I were joined by Lee Clasgow, Bloomberg Intelligence Senior Transport Logistics and Shipping Analyst.

23:00What's going on with UPS is they are making progress and they're executing on their plan. And their plan really is to create a network that can not only handle but thrive in an ever-changing environment. And that change is being driven by e-commerce. It's being driven by the uncertainty around tariffs. And what they've been able to do is increase productivity through technology, whether it's automation or AI. And that also, they were stepping away from business from Amazon. You know, they noted on their morning call that they're three quarters into a six quarter glide down of Amazon business. And the reason why they want to move away from Amazon business, it tends to be lower margin, lower yielding packages.

23:50But that's not to say that they don't want to totally walk away from Amazon because their return business is a good business for them. And we're seeing, you know, the success in the numbers. And, you know, going into the quarter, I think investors were cautious or at low expectations and management kind of exceeded those with the results. And their outlook really shows us that, you know, expectations for the fourth quarter in 2026, at least as relates to, you know, sell side analyst consensus, is probably a bit low and it needs to move higher. Lee, can you get more into the cuts that we were talking about?

24:3034 ,000 job cuts. Where were they seeing it? And what kind of, let's say, year-over-year cost savings does it expect in 2025 from all of this? Yeah. So, you know, what they're trying to do, their overall cost savings, which includes, you know, the headcount reductions, you know, they're looking to get$3.5 billion in cost savings this year. They've done around$2.2 billion of that so far. and some of the reductions are driven by, you know, they offered early retirement for some of their drivers. They said they've had pretty good pickup with that and that payoff should be about a year from what it costs.

25:07It costs something$175,$180 million and they mentioned on the call that it will take about a year to make those costs back up. So, you know, it really should be paying for itself and they're closing a lot of facilities. So they've closed something like 1995 facilities so far and that's being driven by they don't need the network they had when they were really handling a lot of Amazon business. And now that, like I mentioned earlier, they're walking away from that business. They're kind of reconfiguring their network. And they're also, as I mentioned, they're increasing overall automation. They noted on their call that they've added automation to around 35 more facilities.