Japan Gets a Trade Deal and Earnings Season Ramps Up

0:04Travis Hoium:Who will earn the gold medal for earnings so far this week? Motley Fool Money starts now.

0:20Travis Hoium:I'm Travis Hoium, joined by longtime fools Lou the legend Whiteman and Matt the reed whisperer Frankel. Today, we're going to get to earnings from General Motors, Intuitive Surgical, and Enphase Energy, and rate them gold, silver, and bronze. But first, let's talk a little bit about tariffs. We found out late yesterday that the U.S. and Japan have struck a deal that will lower the rate of tariffs from products coming from Japan from 25 % to 15%. Japan is also going to invest$550 billion in government-affiliated institutions to, quote, build resilient supply chains in key sectors like pharmaceuticals and semiconductors.

0:58Travis Hoium:Lou, I'm going to give you today's softball. Is this a massive change to global trade or a nothing burger?

1:04Lou Whiteman:So it isn't a nothing burger. Japan is our fifth largest trading partner. So this is an important deal to get done. And also, historically, this has been a market that has been somewhat closed to outsiders. So to the extent that whatever this agreement is, they can open up the market for U.S. exporters, that could be significant. But yeah, let's be honest. This is one step in a very long process. Japan, if anything, looks like an easier negotiation than some when we started. So incrementally positive, but we still have a long way to go.

1:38Travis Hoium:Matt, I want to take this back to manufacturing, in particular, some of the auto companies in the U.S., which we'll talk about GM in a moment. But how does this impact companies like Toyota and Honda, some of the biggest auto importers, and also big employers in the U.S.? How are these companies going to be impacted by these tariffs? Yeah, so it's a big deal for the automakers. As we've seen from, you mentioned GM, which we'll get to in a minute, the impact of the current 25 % import auto tariffs can be in the billions, which they were for GM. So, cutting it from 25 % to 15 % is significant. It's kind of unclear if this is going to apply to the rest of the auto industry, or if other automakers are going to have to do things like invest in the U.S.

2:19and things to that extent. But GM's already investing$4 billion to bring some of its manufacturing domestic. So, maybe it'll be a give and take with the administration. But it's really unclear beyond Japan. But for the Japanese automakers, this is a big deal.

2:36Lou Whiteman:Well, my question is, and as things stand right now, it's subject to change, but since U.S. automakers don't import a lot from Japan, the 15 % tariff really doesn't matter to them as much. We could be looking at right now, Toyota's, for example, paying a 15 % tariff to bring vehicles into the U.S. to be sold in the U.S., but GM or Ford having to pay significantly higher tariffs on parts from China and elsewhere that go into U.S. assembled vehicles, it doesn't feel like that's a fair trade-off. And again, we have a long way to go in the global negotiation process, right?

3:10Travis Hoium:Yeah, this is going to be a long story that we'll definitely be covering here more. Let's move over to the U.S. manufacturing space and GM's earnings, which were reported on Tuesday, revenue$47.1 billion, adjusted earnings per share$2.53. Guidance for the year was flat from three months ago. That was when after those initial tariffs were announced. But the stock dropped 8%. Lou, was this a good report or not?

3:34Lou Whiteman:On the face of it, just looking at the print on the paper, it was a solid report. Demand is holding up well. GM is doing a good job controlling what it can on the cost side. But investors, understandably, there's a lot more than just what's going on inside the business. We're focused on tariffs. Net income was down 35 % on a 2 % decline in revenue. That's a great way to illustrate just how much higher costs are taking a toll. And look, the problem is, there's no reason to believe that changes in the second half of the year. So we have a situation where the company is operating well, but there just isn't a lot of reason to get excited about near-term prospects.

4:15Lou Whiteman:There's just too many headwinds right now.

4:17Travis Hoium:Matt, we've talked about Mary Barra being one of our favorite CEOs, But you look at GM stock, the stock is down over the past four years, despite great profitability, market share gains in EVs. They're actually taking market share from Tesla. They're the No. 2 player there now. And buybacks have reduced shares outstanding by 20 % on a compound annual basis over the past seven quarters. And the stock only has a five price-to-earnings multiple based on their guidance. What is going on and what do we need to get investors actually excited about GM stock? I've been hearing for years, and people have used this to justify that low multiple that you just mentioned.

4:52I've been hearing for years that the auto industry is about to turn, become unprofitable. They're going to lose their pricing power. The market dynamics are going to change. And it just hasn't happened. GM keeps making money. You mentioned those aggressive buybacks. Investors just generally don't seem to be sold on the fact that GM's EV strategy will be as profitable as the current sales mix is. And to be fair, they are lower margin vehicles as it stands right now. But there's a lot to like about what GM is doing right now. You mentioned there, the clear No. 2 in the U.S. EV market. They had a 16 % market share, which that's disrupting even Tesla.

5:30There's a lot to like about the quarter, $2.8 billion in free cash flow despite the tariffs impact. The market just really is not rewarding capital-intensive businesses right now, especially those with uncertainty from tariffs, from EV strategy and all that. So I just think the market is not convinced that this is going to go well.

5:50Travis Hoium:They're buying back shares at a pace. And if this stock doesn't go anywhere, eventually there just won't be any shares left. So we'll see what happens with GM. I would be fine with that. Next up, we're going to examine Intuitive Surgical's quarter with robotic precision. You're listening to Motley Fool Money.

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7:02Travis Hoium:Okay, Lou, Intuitive Surgical is one of the most iconic Motley Fool companies. It It has crushed the market since its IPO, more than a 200-bagger over that period of time. What did we learn in the second quarter?

7:14Lou Whiteman:We learned what we already knew. We learned momentum remains strong. They grew revenue by 20%, earnings per share by 23%. The installed base grew by more than 1 ,000 systems to 10 ,488. That's important because Intuitive operates the Razor-Razorblade model, and a bulk of the profits, a bulk of these sales come from reoccurring sales after the machines are installed. So, there are near-term headwinds. Tariffs are concerned, they clouded guidance, and it remains to be seen whether changes in hospital funding coming out of this new tax legislation, it's possible they will slow sales of new DaVinci devices.

7:51Lou Whiteman:I'm not sure what becomes of hospital capex from this, but those feel like small speed bumps relative to a long-term growth story that is very, very much intact. I like that you mentioned the Razor and Blades model there. It's my favorite thing about this company. One thing to note that I've noticed from the earnings report from a long-term investor's perspective is that the installed base of DaVinci machines increased by 14 % is the year-over-year percentage increase, but the number of procedures performed using those machines increased at a faster 17 % rate. That tells me that the industry is becoming increasingly more reliant on robotic-assisted surgeries.

8:27That's a very positive thing looking long-term. As Lou pointed out, other than a few minor speed bumps. It really was a solid quarter.

8:34Travis Hoium:Next up, we're going to look at how the solar sector is holding up with Enphase Energy. We'll be back after a short break.

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9:33Travis Hoium:Matt, Enphase Energy has been the darling of the solar market for years, but the stock is falling on Wednesday after what I thought was an okay report, given all the wonkiness around solar right now. Revenue was$363 million, gross margin held pretty strong at 46.9%. They've moved more production into the U.S. to avoid tariffs. But is this as good as it gets for Enphase, given the recent policy changes in the U.S.? It might be as good as it gets for now. I don't think it's the best that it gets. It's worth noting that solar technology itself is evolving very rapidly and will naturally become more cost-effective over time, meaning that the government incentives or lack thereof that we're seeing this year should matter less and less over time.

10:17I agree it was a pretty solid report given the situation. The gross margin you mentioned is 170 basis points higher than it was a year ago. The company is doing a good job of mitigating tariff impacts, like you said. Just for example, they recently started shipping one of its products with higher domestic content than previous models. I think they're doing the right things.

10:36Lou Whiteman:Similar story to what we just said about GM, I think. Enphase is doing the best of what they can with the situation they are in. Assuming solar is a big part of the clean energy answer, long-term, and I do think it is, I still think Enphase should benefit and should be a winner here, but it's hard to look at the world right now and see any reason to believe there's a catalyst right around the corner. And that's kind of just where Enphase is.

11:01Travis Hoium:Yeah. The stock is down almost 90 % from its late 2022 high. So not sure if we have value there, but eventually this will become attractive. One of the things they talked about during the quarter was going a little bit more direct to consumer, including what they called IQ Balcony Solar. So this is one to four solar panels. You just plug into an outlet to keep critical appliances running. They're starting to build an end around around the utility connection that is always kind of problematic with solar energy. Matt, are you interested in direct to consumer solar products? Yes, especially the ones that are designed to not rely on government subsidies.

11:38Like it sounds like this, you know, the balcony solar that you're talking about. But I do think there's a lot of long-term opportunity here, especially with a stock about 90%. I can't believe that. 90 % off its all-time highs, which were in the 300s. Enphase could be worth a look. But I do agree that a turnaround isn't likely to happen overnight. It's going to be a long-tailed turnaround story. And there's a lot of risk here.

12:00Travis Hoium:So as we look at these results and we try to wrap our heads around what's going on in the second quarter, I want to get gold, silver, and bronze for these three stocks. And your takeaways for so far. What can we take away towards the rest of earnings season? Lou, I'm going to start with you. Who is your gold pick?

12:16Lou Whiteman:So intuitive is clearly the safest pick here, but it also comes at a premium valuation. I'm going to go out on a limb, say the stock that is my gold, the one I'm most excited about in the group is Enphase. The risks are real. And as we've said, I think patience is required, but I do think that there is a there there and over time it can work. As for GM, I've been involved in the automakers a lot in my career. even when times are good. This is a very, very difficult business. I respect what GM has done, but I have no desire to be a shareholder. I'm not sure any of these three earnings reports are truly worthy of a gold.

12:53The stock didn't jump afterwards. They didn't raise guidance, anything like that. I'd say GM was the most pleasant surprise to me. I get it. I'm biased. It's one of my largest investments, unlike Travis, who ran away when they got rid of Cruz. That was my most pleasant surprise. They restarted buybacks at the end of the second quarter because of, quote, more tariff clarity. They affirmed their guidance, which, given what's going on in the auto industry, is actually pretty impressive. But I'd give Intuitive Surgical, the Silver. I mentioned the world's becoming more reliant on robotic surgeries, and that's clear in their earnings.

13:30Enphase is by far the biggest turnaround of the three, but it's making the best of a bad situation. So I'd give them the bronze medal if I had to name one.

13:40Travis Hoium:Looking at these reports, I've got to say my gold here is GM. This is one of those stocks I don't own right now, but I just love the way that they're operating. And I live in the Midwest, so maybe I have a different view than a lot of people, but I see GM vehicles all over the place, and they have just a dominant position in those massive trucks and SUVs. And that's fundamentally where the money is made in the auto industry. I got to say, I'm intrigued by Enphase Energy. That would be my silver. I don't know if I'm looking for a bottom here, trying to find value where there isn't any. But this is the one company that kind of consistently seems to be able to have high margins and doesn't end up getting disrupted.

14:20Travis Hoium:So sorry, Intuitive Surgical. They win the bronze for me. As we get through earnings season, we're getting to some pretty big reports later this week. Matt, what are the reports that you're watching this week, and what are you looking to take away from it? Matt Frankels, Jr.: There are some big ones this week. The day we're recording this, Alphabet Reports. I'm really watching Kinsale Capital Group, KNSL. They report Thursday afternoon. They've had two consecutive quarters of, I don't want to say bad numbers, but definitely affected by catastrophic losses due to those California wildfires that stretched over a two-quarter period.

14:57So I'm kind of curious to see if they can rebound from that in this quarter and see if their growth story is really still alive. Because it is really hard to tell when things are offset by those catastrophic losses.

15:07Lou Whiteman:How can you not say Tesla? Let's grab your popcorn and have Tesla.

15:11Travis Hoium:Well, I'll be watching it. Yeah, and I think Alphabet's going to be really interesting. Is search being disrupted? What's the story with their cloud business? Is that going to get back to 30 % growth? So a lot of things that we'll be covering later this week on Motley Fool Money. As always, people on the program have interest in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only.

15:45Travis Hoium:To see our full advertising disclosure, please check our show notes. For Lou Whiteman, Matt Frankel, and our production magician, Dan Boyd, and the entire Motley Fool team, I'm Travis Hoiam. We'll see you tomorrow.