Capital Market Earnings Crashout

0:02Tyler Crowe:Digesting today's earnings duds on Motley Fool Hidden Gems Investing.

0:09Tyler Crowe:Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors Lou Whiteman and Matt Frankel. So earnings season is in full swing here. We got a whole bunch of companies reporting, even related to the oil market. We're going to touch into Halliburton's earnings, but more on like a state of the oil market. sort of analysis. We'll also hit it in the mailbag. But today, we're going to start with the two companies that reported earlier this morning, and we could say were the duds of the earnings reports so far because they were MSCI and Equifax.

0:42Tyler Crowe:Shares of both stocks were down more than 10 % in pre-market trading. And as of our recording right now, MSCI is still down about 11%. Equifax is down about almost 7%. So obviously, the market didn't like what they were seeing. The funny thing was, as I was looking at the results, just as a cursory glance before I got to talk to you guys, is it looked like they both posted improving results. And even MSCI's earnings per share was up almost 20%. So guys, what happened here? I mean, Matt, I know you looked at Equifax, Lou, you looked at MSCI. What was going on? Yeah. And I mean, Equifax earnings, on the surface at least, were not a dud.

1:19I mean, 11 % year-over-year revenue growth, earnings per share grew 13 % on an adjusted basis and beat estimates. Revenue from the U.S. mortgage business is up 25%, which is nice to see given the state of the mortgage market. The company actually doubled its AI-driven cost reduction estimate to$150 million through 2028. Cost reductions are a good thing. The stock was down, like you said, double digits in pre-market. It's rebounded a little bit, but it's still down despite the earnings beat. A few potential reasons and things to flag here. There was a$100 million charge related to a credit miscalculation glitch that happened in 2023.

1:59Gap earnings were down 4 % year over year as a result. So that's worth noting. The adjusted EBITDA margins actually fell in all of the segments of the business year over year. Essentially, rising compensation costs, incentives, they're both rising faster than revenue. And most importantly, there's no easier way to make a stock go down than to lower your guidance. And while they didn't really lower their guidance, they kept their full year. The third quarter guidance was a little softer than expected. The adjusted EPS estimate would actually represent a sequential decline. And investors aren't thrilled.

2:36So really, this was a solid quarter with a disappointing outlook and margin trends that seem to be scaring investors.

2:43Lou Whiteman:Kind of a similar story over to MSCI. I don't know if people know this one as well. This former Morgan Stanley unit, it's a market data and analytics company separate from Morgan Stanley now. They grew revenue and earnings by double digits. The earnings number was a little light relative to expectations. Guys, I'm tempted to blame AI here. The company said that expenses were up 9%, primarily due to, quote, higher IT costs, among other expenses. So, you know, maybe they are adding to their tech stack. There are also some accounting things going on. They recognize some amortization on related to acquisitions.

3:17Lou Whiteman:Tyler, as he said, stock is down double digits. The market just has this one wrong, period. I'm just going to say it. Company is in growth mode. It launched twice as many products in the first half of 26 as it did in all of 2024. Growing does come with costs. The costs are investment in the business. There's nothing wrong with the core business here.

3:36Tyler Crowe:I want to pick at something a little bit, because reading through the lines of both of these, you know, Matt, Equifax says that, you know, these AI driven cost reductions of 150 million, but then their margins were down. Lou, as you said, like the higher IT costs, it's all kind of like, some of it seemed to me implying like, you know, tech costs, IT costs, AI costs, token, whatever cost you want to associate with, you know, using AI in their business seems to be rising. And, you know, the whole theory here was that, you know, AI costs were going to drive down personnel costs, you know, put, you know, the big doomer sort of approach was people out of jobs.

4:18Tyler Crowe:But it appears that, you know, this is actually starting to, you know, for high data companies doing a lot of data processing like Equifax and MSCI, it is becoming a real cost headwind. And I'm curious your thoughts, how is this going to play out? You know, people continuing to jump into these frontier models that are getting incredibly expensive? And are they going to have to kind of change their AI strategies? Well, with Equifax in particular, it would have been easier if they gave the explanation MSCI did that, you know, higher IT costs while lowering personnel costs and things like that. But their margin compression was specifically blamed on rising compensation and incentive costs.

5:01So it's a bit of a head scratcher. I mean, there are a few possible explanations to, you know, in order to, you know, train AI models and things like that. They need to bring on some new talent that could that could definitely be a part of it. But, yeah, it's kind of a it's a two way street, right? When it comes to AI cost savings by making your business more efficient and, you know, having to pay more for the personnel that are putting those cost reductions in place. So it remains to be seen if that's kind of a temporary margin headwind as they ramp up these AI savings or if it's something that is worth further discussion.

5:39Lou Whiteman:Yeah, I don't think we know yet if it's ongoing. There's definitely going to be investment, just like I said, investment and growth. There is always one time investments as you're implementing. Is it one time investments or is this tokens and it's just going to be an ongoing thing? I don't know if we know the answer to that. I don't think the companies know the answer to that yet. But for now, I think there's at least an argument to be made that this is more investment capital than it is just permanent, ongoing expense. All right.

6:08Tyler Crowe:I want to put a last question here because we've got two companies. Stocks are down quite a bit today in particular. Equifax is actually down 34 % over the past year. MSCI has done a little bit better than that. So looking at stock prices right now, where the businesses are right now, which one do you think is the better buy today, Equifax or MSCI? Yeah. So on the surface, Equifax is definitely the cheaper stock. It trades for like 18 times forward earnings last I looked versus about 24 for MSCI. But there are concerns. I mean, dependence on the mortgage market for growth, for one thing, those margin trajectories I mentioned, it's a bit of a head scratcher that their compensation costs are rising while AI is making the business more efficient.

6:51MSCI is a more expensive stock, but you get what you pay for. It's a higher margin business. It honestly has a more defensible moat, which is validated by its record high revenue that we're seeing or retention rate that we're seeing. It's more of an expense problem with them than anything else with the rising IT costs and things like that. To be clear, I'm not buying either of these right now and don't really have any plans to, but I'd probably lean toward MSCI if I were forced to choose one today.

7:18Lou Whiteman:Yeah, I just don't want to buy a credit bureau. More of an ethical stance. I want them to be disrupted out of business, so I'm not going to buy it. But that's not a business case. Look, MSCI is a fantastic company. It scores really well on our Hidden Gems Moneyball database, which I think is a great place to go to screen for ideas. Definitely MSCI would be my choice. It's been on my radar for a while. I'm talking about it now, so I'm not going to take advantage of this drop. But it's a really good company.

7:45Tyler Crowe:Coming up at the break, we're doing an analysis of the oil market.

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8:27Tyler Crowe:You know, there's this small set of companies out there where even if you don't really have a financial stake, like owning the stock, or I don't know if you're one of those people, short stocks does that too. Just listening to what they have to say about their respective markets can be incredibly illuminating. and Halliburton is one of those companies. It may not be on everyone's radar as a potential stock to buy, you know, being a oil and gas service company, but often it's market commentary that it provides. It gives a rare window into the oil market that we can't really get elsewhere because they work with the biggest companies in the world, the ExxonMobil's, all the way down to the Wildcat drillers.

9:05Tyler Crowe:And they can really give you a sense of like what the vibes, if you will, of the market is at any given moment. And, you know, with the war in Iran escalating again, traffic through the state of Hormuz is grinding back to a halt. It seemed like a good time to check in with what Halliburton was saying on its most recent earnings report, which came out earlier this morning. So, guys, we had a task of looking through the earnings report, a little bit of market commentary. What were some of the key takeaways for you when you were looking at this report? Yeah, so, I mean, a few things to unpack here.

9:37I mean, Halliburton's international strength, especially when it comes to Latin America and Europe, it's helping to offset the disruption they're seeing from the Middle East. They're keeping their Middle East crews in place, which really kind of sets them up nicely to capture demand once the war deescalates, which hopefully happens. Hopefully we actually get a lasting agreement at some point and the war doesn't start and end another 72 times or whatever it is. It's also worth quantifying the disruption, which management did. They said on the call that, you know, rerouting due to the Hormuz situation and other conflict-related disruptions could cost seven to nine cents of earnings per share.

10:11But they did sound very optimistic when it comes to, you know, the next quarter.

10:15Lou Whiteman:So most interesting part about this report, and maybe I'm just showing my ignorance of the oil market is, but it was the North American numbers they posted. North American revenue was flat at$2.2 billion, due in part to lower specialty chemical activities, but also due to decreased drilling activity in the Gulf of Mexico. That really surprised me. Given the geopolitical backdrop, everything we're talking about with the Middle East, I thought that was interesting. Now, I know that CEO Jeff Miller said he was encouraged by signs that drilling and fracking are picking up in the U.S. So I get, and maybe it's just a timing thing that we're getting there.

10:49Lou Whiteman:It just takes time. There's a lot of noise about, you know, the global picture, but North America is Halliburton's largest market. So I think that that is good for the stock if it's picking up. I'm just surprised that given all of the attention that North America was flat and it's just now starting to ramp up.

11:08Tyler Crowe:Yeah, the Gulf of Mexico, Gulf of America, whatever you want to call it these days, that's kind of been a weird sticking point for a lot of major oil and gas drillers because, it takes like 10 years sometimes to get one of these from exploration to production. And so committing that much capital that long has been challenging. When you've got fracking companies, it's like, well, in 30 days, I can have a well up and running. Yes, it's less oil, but the turnaround on the investment is much sooner. So I can see why that might be the case, but you would think with oil prices rising, that would start to ease a little bit, but we haven't seen that.

11:45Tyler Crowe:And, you know, one of the reasons we haven't discussed the oil market as much and, you know, and has been the challenge of kind of translating what we're seeing with the closure of the Stradar Hormuz, the Iran conflict and the Russia-Ukraine conflict as well. You know, it's been hard to translate that into something that's thesis altering for a company on the long term basis because we kind of see these as hopefully things will get better sooner than later. And I think the prevailing sentiment was that things would get resolved in Iran, Middle East area, so that movement of oil were in some relatively short order when things kind of started to happen.

12:22Tyler Crowe:And there was some supply and demand responses to soften the blow of the closure of state-of-home movies. But now we're several months in. Fighting's escalating again. And we just got a report today from Quartz that said that the U.S. Strategic Petroleum Reserve is now at a 45-year low. So I want to ask, and we can go in any direction you want here because oil, Strait of Hormuz, the Middle East in general has some wide implications on other markets and not just oil here. Has anything happened in the past days, weeks, months related to this conflict or the broader conflicts of Ukraine and Russia as well that's changed your position or thesis on anything in your portfolios.

13:05Tyler Crowe:It doesn't necessarily mean are you looking more at oil companies? Are you, you know, what is something that you're seeing or may be changing your thesis based on what we've been seeing? Yeah, so I'm not much of an energy investor in my own portfolio. So I'm not going to be buying oil stocks based on this, but you're right, this does affect a lot of other areas of the market. Any company that depends on shipping costs, it could be potentially affected here. And you're right, The Strategic Petroleum Reserve, or SPR, it ended the week at the lowest level since 1983, and it now sits at about 44 % of authorized capacity.

13:41So even if oil prices cooperate, you're talking about years for a full refill in the most likely scenario. I mean, the biggest thing, the biggest takeaway for me is that this doesn't specifically change anything right now, but it gives the U.S. a lot less of a shock absorber if the conflict escalates or if something else goes wrong. Remember, we're at the beginning of the worst part of hurricane season right now. That can cause oil disruptions. The point is there's a lot more that can go wrong for oil than the Iran war. So keep that in mind. And we now have less of a cushion to, you know, bolster prices artificially, I guess you would say.

14:18Lou Whiteman:And I'm not buying energy here. I mean, to me, this this year is the reason you have energy, just kind of lurking in the portfolio for a decade. And so, you know, now is not the time to buy. I don't think I've made any moves yet, but I am watching closely because I do think kind of what Matt was saying, the macro implications could get interesting for a lot of different companies. The biggest surprise of 2026 in energy to me, bigger than the Middle East war, was China's demand flexibility. I'm oversimplifying it a bit here, Tyler. You can tell me if I'm wrong, but the way I read it is the biggest reason and we didn't see oil spike to 200 or whatever the way oil experts thought it might if the strait was closed, was Chinese demand just came out of the market, which kind of took the pressure off others.

15:02Lou Whiteman:We know nothing about Chinese reserves. We don't know if that demand pullback is sustainable, if they're just tapping into massive reserves they have, if there's something else going on. We now have the Red Sea potentially closing to go along with issues in the strait. We don't know what China is going to be able to do from here. It's impossible to predict, but we do at least have it on the radar as a potential headwind that does finally zap to consumer in the U.S. And that would have a lot of ripples through the economy.

15:30Tyler Crowe:Yeah, when it comes to the oil market, it always seems like the price of oil tends to move the most when you see like reports of American drilling activity, American storage activity. There seems to be some sort of oil price movements when we get those sorts of reports, in part because it's the most information we get when it comes to oil in general. Like you said, the Chinese inventories, consumption, things like that, those numbers are – I don't want to say they're necessarily state secrets, but they're not nearly advertised or published like we see here in the United States. and to that point there's been a lot of either draws on capacity or not filling unknown capacity that they've had for a long time that has been you know in some ways a a massive sell for this i think the numbers i saw was something like five million barrels per day of chinese imports just kind of went away for for reasons undetermined other than they just said we're gonna we're gonna stop buying whether or not that was going into storage or actual consumption we don't really know.

16:34Tyler Crowe:It's coming up after the break. We're going to dip into the middle.

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18:41Tyler Crowe:Hey everyone, quick reminder, if you want to get your question answered live on air, go ahead and email us at podcast at fool.com. That's podcast with an S at fool.com. Also, So the email is in the show description. Three requests that we always have is, number one, keep it foolish, keep it short. And three, keep it as impersonal as possible so we don't get in trouble for giving individualized advice. So today's question comes in from Thomas Hanks. And it's actually kind of oriented towards you, Matt. So we wanted to make sure you were on when we did this. The question is, hello, fools. I believe on one of your episodes, Matt said he had exposure to different banks through ETFs.

19:18Tyler Crowe:I was wondering if you could tell us which banking financial ETF he likes. And I had looked up a few and was looking at the tickers are XLF and VFH. And I know XLF is a state street ETF and VFH is vanguards. They're both financials ETFs. Could you discuss the pros and cons of each or let me know if there are better choices? I've been wanting to hold it long term and obviously lower expense ratios. Thanks, Thomas. So I did a quick cursory glance. And to be honest, over the past 20 years, I think the difference in performance on a net basis for both of these was something like 10 or 15 percent difference in terms of total performance.

19:58Tyler Crowe:So part of me says splitting hairs here. But guys, what are some of the things that may be different about these two ETFs or if maybe there's some better alternatives out there? Well, first of all, I had no idea Tom Hanks was a fan of the show. That's pretty awesome. That would be great, right? So those two, yes, you're right. I actually ran a statistical correlation, and they have a 0.99 % correlation between the performance of the two over the long term. So you're absolutely right. It's hard to make the case for one versus the other. They are rather different, despite the similarities in performance.