Patrick Healey, President & Chief Investment Officer at Caliber Financial Partners, breaks down Tesla's blowout earnings report and highlights the challenges the Fed will face if interest rate hikes are front-loaded. 

Opening Bell

Tesla Reports $18.76 Billion in Revenue, Record Margins in Q1

this is certainly on the backs of a ton of earnings that have come out just in the last 24 hours, certainly even earlier this week. And for the most part pretty decent pictures we've had names like. American Airlines United, even Tesla kind of reporting and again, underlying fundamentals showing kind of bright signals and brightness, you know, for their respective industries moving forward for some more inside an early morning activity and some more inside on the earnings picture. I am joined by Patrick Healy president and chief investment officer at caliber Financial partners obviously gotta talk earnings that's what seems to be moving the market and probably is going to continue to move the market over the next couple of weeks as these earnings kind of continue to pour in the latest batch kind of topping that batches Tesla right has opposed it Record quarter with the company projecting 50% annual growth on a multiyear basis despite the recent plants shut down and some of the issues that have been dealing those tail winds, you know, related to the chip shortage, it seems like the company is managing well around these issues. What were your takeaways from Tessa's report? Yes, well, good morning. I was impressed with the numbers from Tesla this morning. They, they seem to be ramping up production not only globally, but some of the manufacturing in china and they seem, they seem to be solving some of those supply chain issues or disruptions and look they have a huge head start over the rest of the industry and they're advancing that head start and look the strong numbers this morning. Not only um, for past quarter, but really the projections going forward and that's what the market looks at. They're looking at guidance going forward. The growth numbers are something that the market has been starving for. As we see higher inflation and you need to have investments in companies that can overcome that inflation number and Tesla is certainly doing that. Yeah, it does seem to be like one of the situations where you are the leader in the space that you're not resting on your laurels, you are able to kind of manage some of the downside or some of the headwinds better than your competitors who are trying to catch up and maintain that momentum conditions like the profit margin. I was looking at that 32.9%. What, what, what are your thoughts on Tesla being able to kind of eke out that kind of margin yet deal again with some of the issues from raw material costs going up. two semiconductor shortage in the relation to that. Yeah, it's, it's, it's been impressive to say the least. Uh, the, the, the sourcing of raw materials which are necessary for electric vehicle, batteries is always gonna be a challenge. I think certainly in the years to come and and Tesla has made no, uh, you know, hiding of that. And so the ability to deliver a good gross margin in light of that challenge is very impressive And it'll be interesting to see how some of their competitors follow suit moving from the E. V. Space. Another hot space right now is kind of the airline space. The travel sector overall especially so much of us have have been dealing with two years of not being able to go anywhere. And the idea is that this summer is going to be kind of that revenge travel season. We obviously had american airlines to report this morning and then United after the bell yesterday in kind of their respective Q. One earnings. Even with Delta kind of in the picture here overall we're seeing the airliners say this is going to be the revenge summer travel season. They expect to kind of return to profitability this year thanks to the surge that where they're already seeing in bookings and fairs. What is this signal to you about the demand going forward? How long does this demand last for example? And and how do these these reports really change the outlook of overall the travel and leisure industry in the in the next couple of quarters? Yeah. Great question. So it's good to see some of the airlines rallying. I think there's been a bottled up amount of demand for or thirst for wanting to travel again and get back to normalcy. And I'm certainly in that category as well. I think there's two counterbalancing things that's going on with the airline industry in general. And specifically with american airlines uh fuel prices continue to push higher and that's gonna cut into profitability. And it'll be interesting to see how the airlines manage around that challenge. Um, but the demand is strong and they have some pricing pressure, uh, in terms of affairs and um, look, I've been, I've traveled a number of times in recent months and I've been on a lot of full flights, so that's generally good for the airline industry. Um, how much the fuel prices impact profitability and how they offset that with increasing fares and whether that Quelch is demand is really the question of the hour with the airlines. Speaking of profitability with the airlines, I always think about business travel and the margins is certainly a lot better there than they are on the kind of the consumer travel side. It doesn't seem like there's a lot of attention being paid to that at the moment. Just given again, that the focus seems to be on just the broader, you know, summer season coming up, but at what point do you think we should expect or what's the level that we should expect when it comes to business travel for these airliners moving forward. Again, given that we are in a very different environment. Right. So many more people working hybrid, so many more businesses got comfortable with the idea of doing business via zoom or other kind of, you know, video system. Yeah, it's, it's interesting to see whether there's been a paradigm shift in terms of, as you said, conducting business remotely or, or virtually. And I've gotten very accustomed to doing that with clients. Um look, the convention season is starting to open up again and I think people are traveling for those types of events. There's less fear around covid spread, which I think is generally a good thing for our society. But in terms of routine business travel, people going to visit clients or go to corporate meetings. Some of that is still being done virtually and and maybe more of a permanent phenomenon. Um and that may impact profitability for the airlines are more longer term. Yeah, it's certainly a place that I think we should continue to watch again. I just feel like this quarter, it wasn't in focus given the attention was so much on this upcoming summer season. But it's the first thing I think about when I think about profitability and margins, you know, for these airliners pivoting though from kind of the airliners and those who have already reported, we have some more earnings obviously coming out later on this week, big names like Verizon, we did get a T and T earnings earlier this morning. Those are on the fundamental picture pretty decent. But then we also have later on this week Snapchat, American Express, they're all set to report Q one earnings, what are you going to be watching with these names. So with a company like Amex for example, right. I think they will trade largely in line with the enthusiasm around travel, right? They make a lot of their money around their corporate card initiative. Um, the amount of spending that's going on in our, in our economy continues to be strong and people are financing that. So I think Amex will catch some tail winds with the rest of the enthusiasm around return to travel. Um, Snapchat. I don't follow as closely, but there remains a lot of demand and adoption by sort of the younger generation for their technology and, and the fact that a lot of our, our lives is still are done through social media and virtual platforms. And so, um, I think the adoption or the number of subscribers, there is an important factor to consider from earnings to the Fed. Right? Because the Fed historically, especially the last couple of months has been a major market mover. We've seen Fed chair jerome Powell kind of expected to further cement the case for more aggressive kind of rate hikes moving forward during, you know, the end of the year and throughout the year. His discussion with the I. M. F at the conference kind of signaling some that could we see more clarity on whether the Fed could do a half point interest rate rise come this may or even dare I say three quarters of a percent. I think bullard has tried to signal that in the recent days. Yeah, great question. I would be very surprised to see a three quarter point rate hike. I think the market, excuse me, The Fed is, is really trying to signal to market, hey, we're gonna do 50 basis points. I think behind closed doors, the Fed is panicking and they're a bit stuck. They don't want to have to aggressively raise interest rates because that's going to put our economy into a recession. I think that may be inevitable anyway. But as inflation numbers continue to accelerate and tick higher in the CPI, I print, I think the last one was 8.5%. I think behind closed doors, they're probably fearful that they, they waited too long. They're trying to play catch up. Um, they're not sure what impact they can have in the short term on pushing inflation back down or curbing it. Um, and so again, I think 75 basis points, that's not something they were telegraphing. Uh, if you had asked the question a few weeks ago was a quarter point and probably a quarter point at every meeting going forward. But I think 50 is probably on the table right now and the fear that the Fed has is that they're going to throw the economy into a recession with some of the activities that they need to do. The other thing that you need to worry about is, you know, we have to be able to finance our debt as a nation and the higher interest rates go in the economy, the harder it is to do that. So that's something else that you have to consider. Yeah. I mean I think you make some fair points. Bullard seems to be a bit of an outlier even on the first hike I think he wanted and he was a soul one who voted for about a 50 basis point hike when the kind of consensus and what we ended up getting was about a 25 basis point hike. But to your point there, I think there is a lot of concern and whether the Fed is moving fast enough and inflation is kind of getting ahead of things. But when I think about inflation, I obviously think about the consumer and we hear the consumer you know complain that there's these you know consumer sentiment reports that show the consumer is is seemingly fed up with inflation. Yet we don't really see the consumer fully pulling back here and that just defies gravity, so to speak for me because there's that old adage, you know, the cure for higher prices is higher prices, but that's not quite happening here at least. I don't think so when you look at the earnings picture that's being painted so far and we are at the beginning of early earning season. Do you see any signal that americans are pulling back? Yes. So the earnings that are being reported bear in mind are from the previous quarter. So as the C. P. I. Number continues to print higher. Um That's being digested in real time and consumer decisions are being made um more in real time as opposed to the prior quarter. Um But the longer that that inflation persists um I think people will tolerate it if they think it's a short term situation but the longer persists and the more it hits their pocketbooks um the more I think they need to start evaluating whether they make different decisions or they pull back on spending and so you know again energy prices are under a lot of pressure. It cost me almost $80 to fill my gas tank the other day whereas last year was probably half that. So you know that gets harder and harder as we get into the summer driving season. Um and the the challenge for households to you know feed their families as as food prices go up so they have tolerated up till this point. But I think if it persists they're going to have to re evaluate whether to make different decisions. We'll see if that ends up happening here or if in best case scenario inflation has piqued by the way on the gas front. I feel your pain there. It cost me 70 bucks when it used to cost me about a year ago, about $40 to fill up my tank. Patrick really appreciate your insight in your time. Patrick Healy president and chief investment officer at caliber financial partners.