3 Resilient Stocks to Safeguard Your Portfolio During Conflict

Posted on by The INO.com Team

The decades-old Israel-Palestine conflict over territory held sacred to both nations saw its deadliest escalation when Hamas initiated a widespread onslaught early morning on October 7. The calamitous events that unfolded that day led to the most significant loss of lives.

The Israeli cabinet officially declared war against Hamas the next day. This was succeeded by an order from the defense minister to the Israeli Defense Forces (IDF) to put Gaza under a complete siege. Subsequently, bombings in the Gaza Strip commenced, ensnaring the region in a harrowing humanitarian crisis. The Gaza Strip, home to 2.3 million Palestinians, is rapidly depleting its reserves of water, fuel, and other supplies due to the imposed Israeli aid blockade.

Rocket fire exchanges have become a daily occurrence between the two factions, with Israel urging over a million civilian Palestinians residing in northern Gaza to evacuate ahead of a potential ground incursion. Furthermore, the risk of conflict proliferation is high, as witnessed by escalating cross-border strikes in Lebanon and Syria.

Casualties keep mounting on both ends of the battlefield with little to no signs of peaceful negotiations, especially after the blast at a hospital in Gaza has further intensified the loss of innocent civilian lives.

Sectors Affected by the Conflict

Amid amplifying tensions in the Middle East, the world is simultaneously confronting the diplomatic turbulence spurred by the Russia-Ukraine conflict and global economic instability underpinned by stubborn inflation and escalating interest rates.

In situations of military conflict, defense corporations often witness a rise in earnings, an effect reflected in the upward trajectory of aerospace and defense stocks when geopolitical strife unfolds. Military contractors' shares soared in the Israel-Hamas conflict's immediate fallout, attracting institutional and individual investors. The iShares U.S. Aerospace & Defense ETF (ITA) has spiraled upward about 7% since the initial onslaughts on Israel earlier this month.

The potential for disruptions in oil supply increases during such times and usually results in abrupt surges in oil prices. Furthermore, geopolitical unrest persuades investors to avoid risky stock market investments and instead explore safe-haven or defensive assets as a precaution against heightened escalation or worldwide economic deceleration. These assets encompass U.S. Treasury bonds, gold, utilities, and energy.

UBS Wealth Management states, “In a scenario where the conflict expands and draws in other regional actors, we believe safe-haven assets, including U.S. Treasuries and gold, would gain further from investors' attempts to hedge against stronger escalation or a global economic slowdown driven in part by higher oil prices.”

Early reactions to the unrest saw oil prices rising by about 3%, a slight drop in stock futures, and a 1% climb in gold, while Treasury futures experienced a rise, consequentially diminishing yields.

Given this backdrop, we undertake an in-depth analysis of stocks Lockheed Martin Corporation (LMT), ChampionX Corporation (CHX), and Dundee Precious Metals Inc. (DPMLF) now.

Lockheed Martin Corporation (LMT)

Amid burgeoning global geopolitical tension, interest in military spending has not dwindled, fueled by the necessity to refresh existing conflict arsenals and prepare for future defense requirements. This situation benefits LMT, whose sizable order backlog has remained robust at $156 billion due to healthy domestic and international demands.

Bethesda, Maryland-based company LMT, with a market cap of over $111 billion, reported a better-than-anticipated third-quarter revenue and profit as geopolitical unease stimulated sustained demand for its military equipment. Consequently, the U.S. defense contractor shares rose about 2%.

The conflict in Ukraine has elicited a need for restocking weaponry such as shoulder-fired missiles, artillery, and other arms, providing a profitable avenue for U.S. defense-related firms to secure significant contracts from the Pentagon.

Among the sought-after hardware are LMT's offerings, particularly its guided multiple-launch rocket system and Javelin anti-tank missiles. These products, which LMT co-produces with defense firm Raytheon Technologies Corporation (RTX), have emerged as critical components supporting the Ukraine war efforts.

LMT executives highlighted the ongoing conflicts in Israel and Ukraine as potential catalysts for revenue growth in the foreseeable future.

Despite these circumstances, LMT's operations continue to reel from the effects of ongoing pandemic-linked labor and supply chain disruptions. These interruptions are particularly detrimental to the company's aeronautics division, renowned for manufacturing the advanced F-35 fighter jet. Sales at its aeronautics unit, the largest by size, saw a 5.2% year-over-year decline in the third quarter that ended September 2023.

However, despite these challenges, the defense giant reported a 1.8% year-over-year boost in net sales, achieving $16.88 billion. The Missiles and Fire Control unit, producing the High Mobility Artillery Rocket System, saw a 3.8% uptick from the year-ago quarter, reaching $2.94 billion. LMT's earnings per share stood at $6.73, exceeding estimates.

LMT remains a mature, low-growth entity boasting robust profitability. On the one hand, it has prospects for expanding margins through easing supply chains and executing legacy contracts. Concurrently, it carries uncertainties regarding the margin impact of a classified missile program discussed during the earnings call.

Analysts expect LMT’s revenue and EPS for the fiscal fourth quarter ending December 2023 to come at $17.94 billion and $7.25. It surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

ChampionX Corporation (CHX)

Israel harbors significant ambitions to exploit its abundant offshore natural gas resources and establish a significant role as an energy hub in the Eastern Mediterranean, potentially becoming a central supplier to Europe. However, the surprise assault by Islamist militant group Hamas is causing Israel to falter, posing a global energy market disruption risk, most notably affecting regional gas supplies.

Following Hamas’ weekend attack, European natural gas and global oil futures spiked by 14% and 4%, respectively, reflecting accumulating apprehension and the potential escalation of conflict. This created ripples of uncertainty within the energy market.

Heightening global oil demand, combined with OPEC+ and Russia’s prolonged production cuts, have surged oil and gas prices, fostering favorable conditions for exploration and subsequent production activities. Recent oilfield service giant Baker Hughes report, indicates that the total U.S. rig count augments by two units to 624 for the week ending October 20, 2023.

Moreover, escalating oil prices can be attributed to concerns surrounding potential interference from Iran in the Strait of Hormuz, one of the most significant oil chokepoints in the world. Natural gas prices have risen due to Israel ceasing operations at an offshore production facility within the missile range of Gaza and a mysterious breach in a Baltic pipeline, which Estonian officials believe resulted from external influence.

CHX, a global provider of chemistry solutions, engineered equipment, and technologies to oil and gas companies worldwide, with an impressive market cap of over $6 billion, recently disclosed its third fiscal quarter results that ended on September 30, 2023.

For the quarter, its revenue stood at $939.78 million. Its net income attributable to CHX increased 236.9% year-over-year to $77.71 million, while adjusted EBITDA was $189.54 million, up 14.1% from the prior-year quarter.

Through its regular cash dividend of $17 million and $68 million of CHX’s share repurchases, it returned 52% of cash from operating activities and 74% of its FCF in the third quarter to the shareholders.

CHX expects its production-centric business portfolio, cost-reduction strategies, and digital innovation will yield financial growth. Encouragingly, progression is likely to continue within the international and offshore businesses.

Looking to the fourth quarter, CHX projects revenue between $930 million and $970 million and adjusted EBITDA between $187 million and $197 million. CHX's cash generation remains robust, demonstrating its intent to convert at least 50% of its adjusted EBITDA into free cash flow for the full year and reaffirming its commitment to distribute a minimum of 60% of said cash flow to the shareholders for the year.

Analysts expect CHX’s EPS for the fiscal fourth quarter ending December 2023 to increase 16.1% year-over-year to $0.50, while its revenue for the quarter is expected to come at $979.99 million. It surpassed the consensus EPS estimates in three of the trailing four quarters.

Dundee Precious Metals Inc. (DPMLF)

During periods of instability, as exemplified by the recent outbreak of the Israel-Hamas conflict, gold prices traditionally rise, affirming its reputation as a safe-haven asset. But these geopolitical-instigated spikes tend to be fleeting. Adrian Day Asset Management President, said, "Geopolitical rallies in gold tend not to last long. In the longer term, monetary factors are more important for the gold price."

Amid the economic slowdown by the Fed’s continual interest rate hikes since 2022, gold stocks have emerged as particularly enticing in 2023. Instability in emerging market currencies coupled with an ascendant U.S. dollar has illuminated further investment opportunities, specifically within undervalued gold stocks – for individuals seeking to diversify their portfolios and capitalize on gold's long-term potential.

Canadian-based gold production company DPMLF, with operations in two Bulgarian mines and one Namibian mine, continues to intrigue equity investors despite the steady market prices of gold that have led to stagnant growth revenues.

The company’s impressive free cash flow generation, reaching $70.5 million and $135.5 million in the second quarter and the first half of 2023, respectively, expunges concerns regarding its growth trajectories. The substantial increase in FCF primarily resulted from higher earnings realized and strategic scheduling of cash outflows towards sustaining capital expenditures.

Share performance further corroborates DPMLF's appeal. DPMLF’s shares have outperformed many gold-mining entities, having appreciated over 30% year-to-date. Despite the rally, the overall valuation remains attractive. DPMLF’s forward EV/Sales of 0.96x is 31.2% lower than the industry average of 1.40x, while its forward EV/EBITDA of 2.03x is 72.3% lower than the industry average of 7.32x.

Although DPMLF’s Return on Equity (ROE) languishes slightly below the industry average, remarkable net income growth of 115.7% and 32.2% over the past three and five years, respectively, suggests robust growth. With a payout ratio of 36%, it signals the retention of approximately 64% of its profits for reinvestment and ensuing growth.

Indeed, the significant expansion in earnings testifies to the wisdom of the company's strategy, even when considering the less-than-stellar ROE. Further supporting these prospects, recent analyst forecasts predict DPMLF’s revenue to increase by 16.1% year-over-year to $149.30 million for the fiscal third quarter ending September 2023.

Is LG Display (LPL) Poised to Become the Hottest Tech Buy of 2023?

Posted on by The INO.com Team

Last week, LG Ad Solutions, the ad-tech division of South Korean electronics manufacturer LG Display Co., Ltd. (LPL) and Nielsen, a global leader in audience measurement, data and analytics, signed an agreement to create the largest automatic content recognition (ACR) data footprint in the United States.

LG Ad Solutions will provide Nielsen with ACR data for both linear and CTV measurement, offering enhanced stability for Nielsen National TV audience estimates. In addition, Nielsen will receive LG ACR data at the household level.

As a result of this agreement, advertisers activating campaigns on LG Smart TVs will have the opportunity to receive ‘Always On’ streaming measurement and big data from LG Ad Solutions through Nielsen ONE Ads beginning in the first quarter of 2024.

Under this arrangement, LG Ad Solutions joins previously announced Comcast, Vizio, Roku, Dish, and DirecTV deals, expanding Nielsen’s big data footprint to enable smarter decisions around linear campaign spend and optimization for customers. This deal also increases Nielsen’s CTV campaign coverage via direct integrations that leverage big data, joining Netflix, Sling, Samsung, Vizio, Amazon, Roku, and Hulu.

“Agencies and brands working with LG Ad Solutions can now seamlessly benefit from Nielsen ONE Ads measurement data and essential metrics, including co-viewing across millions of smart TVs and connected devices,” said Alistair Sutcliffe, Head of Product at LG Ad Solutions.

“This collaboration with Nielsen exemplifies our dedication to industry interoperability and underscores LG Ad Solutions’ strategy of fostering a forward-looking data approach with our strategic partners, prioritizing both consumers and advertisers for the overall benefit of the industry,” Sutcliffe added.

This strategic partnership announcement by LPL’s advertising arm, LG Ad Solutions, could positively impact the company’s share price in the near term. However, LPL’s shares have plunged approximately 10% over the past month and 25% over the past six months.

Now, let’s discuss the factors that could impact LPL’s performance in the upcoming months:

Favorable Recent Developments

On September 24, LPL announced mass-production of the 17-inch Foldable OLED panel for laptops. The company’s 17-inch Foldable OLED panel features a Tandem OLED structure for increased lifespan suitable for IT devices and a specialized material that minimizes creasing in the folding area of the screen, resulting in a seamless display and crystal-clear picture quality.

The panel also incorporates QHD+ resolution (2560 X 1920) on its 17-inch large screen and boasts an infinite contrast ratio unique to OLED technology, ensuring high-definition content. LPL intends to solidify its technology leadership in the OLED business for the IT industry, expanding its orders based on differentiated technologies like Tandem OLED and unique folding structures.

On June 26, LPL announced that its OLED TV and monitor panels earned the ‘Circadian Friendly’ certification from TÜV Rheinland, a global independent testing, inspection and certification body. The company’s industry-leading OLED panels have become the first displays to receive this certification, marking a groundbreaking achievement for the industry.

Deteriorating Financial Performance

For the third quarter that ended September 30, 2023, LPL’s revenue came in at KRW 4.79 trillion ($3.55 billion), down 29.3% from the prior year’s quarter. The company’s revenue also failed to surpass the consensus estimate of $3.98 billion. It recorded an operating loss of KRW 662 billion ($490.03 million) for the quarter.

In addition, the company’s adjusted EBITDA profit was KRW 382 billion ($282.77 million), a decline of 2.3% year-over-year. Its net loss came in at KRW 775 billion ($573.68 million), compared with the net loss of KRW 774 billion ($572.94 million) in the same period of 2022. Also, the company reported a loss per share of KRW 2,167, compared to KRW 2,163 in the previous year’s quarter.

Mixed Historical Growth

LPL’s revenue and total assets have grown at respective CAGRs of 1.4% and 2.2% over the past three years. However, the company’s EBITDA has declined 51.7% over the same timeframe.

Delays In Full Recovery of Demand

During the third quarter, LG Display experienced a delay in full recovery of demand for personal computers (PCs), TVs, and mobile phones due to several macroeconomic uncertainties and inventory adjustments continuing in downstream industries, resulting in disappointing financial performance.

According to Counterpoint Research, global smartphone shipments in 2023 are projected to decline 6% year-over-year to 1.15 billion devices, marking the worst performance in a decade amidst sluggish consumer demand.

Meanwhile, as per preliminary results by Gartner, Inc., Worldwide PC shipments totaled 64.3 million units in the third quarter of 2023, down 9% from the third quarter of 2022. While the third quarter’s results represent the eighth straight quarter of decline for the global PC market, Gartner expects the market to begin recovery in the fourth quarter of this year.

Further, Gartner projects 4.9% growth for the global PC market in 2024, with growth expected in both the business and consumer segments.

Management Hints at a Potential Turnaround

After posting losses for six consecutive quarters, hit by continued weakness in demand and excess inventory, LPL expects a return to profit in the fourth quarter. The company is accelerating the reorganization of its business structure and steadily improving profitability by implementing cost innovation.

“We expect to achieve a turnaround in profit in the fourth quarter as excessive panel inventory adjustments are eased in downstream industries and panel shipments for mid- and large-sized OLEDs and new mobile devices increase to meet year-end seasonal demand,” said Sung-Hyun Kim, CFO and Senior Vice President at LG Display.

Jeff Kim, head of research at KB Securities, said, “LG Display made it clear it will turn to profit. The market is recognizing that there will be no further deterioration.”

“We expect LG Display to supply small-to-midsized OLED for about 55 million devices this year, and about half will go out in the fourth quarter. Although iPhone 15 demand is a bit sluggish, LG Display only supplies high-end models, and the iPhone 15 Pro and Pro Max are seeing comparatively solid demand,” Jeff Kim added.

Mixed Analyst Estimates

Analysts expect LPL’s revenue to decline 15.2% year-over-year to $5.04 billion for the fourth quarter ending December 2023. The company is expected to report a loss per share of $0.06 for the ongoing quarter. Moreover, it missed the consensus revenue and EPS estimates in all four trailing quarters.

Furthermore, Street expects LPL’s revenue for the fiscal year 2023 to decrease 28% year-over-year to $15.31 billion. The company is also estimated to report losses for at least two fiscal years. However, for the fiscal year 2024, analysts expect its revenue to grow 19.9% from the previous year to $18.36 billion.

Bottom Line

LPL has struggled over the past few quarters due to weakness in demand stemming from a global economic slowdown and excessive inventory levels. However, the company recently hinted at a return to profit in the current quarter with cost innovation and reorganization of its business structure.

But analysts don’t seem convinced by the company’s optimistic comments and continue to have a bleak short-term outlook. Given its poor financials and weak near-term prospects, the stock could be best avoided now.

Visa Inc. (V) Q4 Earnings Assessment: Tracking the Financial Services Titan's Trajectory

Posted on by The INO.com Team

Financial services giant Visa Inc. (V) beat revenue and earnings forecasts in its last reported quarter, propelled by a sustained resurgence in international travel post-pandemic. The results, announced following market closure on October 24, 2023, illustrate a persistent global inclination towards “Tap to Pay” transactions in in-store locations.

Despite escalating interest rates, a measure implemented by the Fed as part of its strategy to curtail inflation, American consumer spending has shown a striking tenacity. A surge in consumer expenditure prompted substantial growth in sectors like travel and retail, benefitting credit card companies like V.

The Federal Reserve Bank of New York discloses that American credit card balances have reached an unprecedented pinnacle of $1 trillion this year. In the second quarter of 2023 alone, credit card balances experienced a rise of $45 billion, marking a 4% increase year-over-year. According to Statista, around 242 billion global purchase transactions involved V payment cards during 2022, an average of nearly 0.66 billion transactions daily.

V's growth can also be attributed to the persistent shift towards digital payments, along with an extension of the company's service offerings – factors which are believed to have significantly boosted the fiscal fourth quarter performance.

For the fiscal fourth quarter (ended September 30, 2023), V’s net revenues soared 10.6% year-over-year to $8.61 billion, propelled by the burgeoning growth in payments volume, cross-border volume, and processed transactions.

With $3.20 trillion in payment volumes, V cemented its position as the unquestionable pacesetter in the payment realm. The company registered a 9% annual surge in payment volume while processed transactions touched 55.96 billion, seeing a 10% increase for both the fourth quarter and the full fiscal year. Excluding intra-European transactions, cross-border volume swelled 18% in the fourth quarter and an impressive 25% across the fiscal year.

Credit volumes reported an 8% growth, hitting $1.6 trillion during the fiscal fourth quarter, matching the debit volumes that rose by 9%. The company operates with over 8.5 billion endpoints, 3 billion cards, 3 billion accounts and 2.5 billion digital wallets in circulation.

Throughout the year, durable consumer spending patterns persisted, supplemented by the ongoing recovery of cross-border travel spending in comparison to 2019 levels, which resulted in sturdy growth across V's new flows and value-added services sectors.

V’s non-GAAP net income for the company reached $4.82 billion, and earnings per share stood at 2.33, signaling an uptick of 17.7% and 20%, respectively.

Let’s now direct our attention to other factors that may steer the course of the company's stock performance in the future:

Robust Growth

Over the past three and five years, V’s revenue grew at 11.6% and 9.7% CAGRs, respectively. Its EBITDA for the same periods grew at CAGRs of 12.1% and 10.2%, respectively. The company’s levered FCF grew at 10.3% and 9.9% CAGRs over the past three and five years, respectively.

Growing Institutional Ownership

V’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their V stock holdings.

Institutions hold roughly 95.2% of V shares. Of the 3,575 institutional holders, 1,577 have increased their positions in the stock. Moreover, 164 institutions have taken new positions (4,442,807 shares).

Optimistic Analyst Estimates

For the quarter ending December 2023, its revenue and EPS are expected to surge 10% and 9.3% year-over-year to $8.73 billion and $2.38, respectively. The company has surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Price Performance

The stock has gained over 12% year-to-date and about 23% over the past year. Moreover, V’s stock is trading above its 200-day moving average of $231.39, indicating an uptrend.

However, Wall Street analysts expect the stock to reach $279.38 in the next 12 months, indicating a potential upside of 19.1%. The price target ranges from a low of $240 to a high of $310.

Bottom Line

As a leading player in the payment processing industry, the V's services are employed every time an individual uses a V-branded credit card. This translates into millions of daily transactions – each contributing to the company's revenue.

The company has exhibited robust fiscal health and margins that make its business model highly enticing to investors. With its payment network firmly established, V can keep operational costs at bay, resulting in significant profits.

The strength and profitability of V's business elucidate its ability to increase its dividend payments consistently. Recently, V’s board of directors announced a 16% increase in its quarterly cash dividend to $0.520 per share of Class A common stock, payable to shareholders on December 1, 2023.

V pays a $1.80 per share dividend annually, which translates to a 0.78% yield on the current share price. Its four-year average dividend yield is 0.65%. The company’s dividend payouts have grown at a CAGR of 14.5% over the past three years and 16.9% over the past five years. The company boasts of a consistent record of dividend distribution for 14 consecutive years.

Moreover, in October, V’s board of directors authorized a new $25 billion multi-year class A common stock share repurchase program.

Given V’s robust profitability, optimistic analyst estimates, attractive returns to shareholders, and solid growth over the past years, it could be a wise portfolio addition now.

Walmart (WMT) Tackles Inflation: Buy or Sell Move for Investors?

Posted on by The INO.com Team

Inflation accelerated significantly last year, hitting a four-decade high of 9.1% in June 2022, pushing food prices higher. This led to many retailers experiencing consumers pulling back on spending. While inflation has fallen sharply from its peak, it is still higher than the Fed’s target.

According to a Labor Department report, the Consumer Price Index (CPI), a closely followed inflation gauge, grew 0.4% in September and 3.7% year-over-year, beating respective Dow Jones estimates of 0.3% and 3.6%. Food costs were up 0.2% for the third quarter in a row. On a 12-month basis, food costs jumped 3.7%, including a 6% surge for food away from home.

Walmart Cuts Grocery Prices Amid Inflation

With persistent inflation in mind, popular grocery chains are trying to help customers save with new deals. Walmart Inc. (WMT), the country’s largest grocer, recently announced that it would be “removing inflation” on some of its grocery prices starting next month.

“This year, finally, we are able to have the Thanksgiving basket that the prices are coming down versus a year ago -- we are really proud to say that the price of a Thanksgiving meal is going to come down,” Walmart U.S. President and CEO John Furner said during an exclusive interview on “Good Morning America.”

Last year, during a period of historically high inflation, WMT sold Thanksgiving ingredients at the same price as 2021. This year, the Thanksgiving basket from Walmart includes ingredients to make a meal for up to 10 people, which the company will “sell for around $2 less than last year” at just over $70.

Furner added that this move of cutting prices comes on the heels of consumer feedback: About 92% of its shoppers have expressed “some level of concern about inflation and how it will impact holiday celebrations.”

Like Walmart, fast-growing discounter Aldi expressed a similar sentiment about “high food prices” and announced price cuts of up to 50% starting November 1 and running through the year-end on more than 70 Thanksgiving favorites.

With food retailers offering temporary discounts on select items during peak seasons, including the holidays, a high volume of customers would drive into their stores and online for substantial savings. This is an effective way to boost sales, build customer loyalty, and have a competitive edge over peers.

Overall, holiday sales in November and December have averaged approximately 19% of total retail sales over the last five years, and the figure can be higher for some retailers, according to the National Retail Federation. 

Strong sales during the holiday season should give a solid boost to WMT’s stock. Shares of the retailer have gained nearly 6% over the past six months and 17% over the past year.

Let’s look at several other factors that could influence WMT’s performance in the upcoming months.

Robust Financial Performance

For the fiscal 2024 second quarter that ended July 31, 2023, WMT reported revenue of $161.63 billion, beating analysts’ estimates of $160.27 billion. This represents a 5.7% year-over-year increase. Its adjusted operating income rose 8.1% from the prior-year quarter to $7.40 billion. The company’s consolidated net income was $8.05 billion, an increase of 56.5% year-over-year.

Furthermore, the retailer’s adjusted EPS came in at $1.84, compared to $1.77 in the previous year’s period and the $1.71 expected by analysts. Its free cash flow for the six months ended July 31, 2023, was $9 billion, representing an increase of $7.20 billion compared to the same period in 2022.

“We had another strong quarter. Around the world, our customers and members are prioritizing value and convenience. They’re shopping with us across channels — in stores, Sam’s Clubs, and they’re driving eCommerce, which was up 24% globally. Food is a strength, but we’re also encouraged by our results in general merchandise versus our expectations when we started the quarter,” said Doug McMillon, WMT’s President and CEO.

“Our associates helped deliver increases in transaction counts and units sold, and profit is growing faster than sales. We’re in good shape with inventory, and we like our position for the back half of the year,” McMillon added.

Walmart’s CFO, John David Rainey, said he feels better about spending patterns than he did three months earlier, yet he described the consumer as “choiceful or discerning.” He added that seasonal moments like the Fourth of July holiday and back-to-school have helped drive sales during the second quarter.

Upbeat Full-Year Guidance

WMT raised its full-year 2024 forecast as the retailer stays committed to its low-price strategy to draw grocery customers and boost online spending. The big-box retailer now expects full-year consolidated net sales to grow by about 4% to 4.5%, compared with its prior guidance for consolidated net sales gains of 3.5%.

Further, Walmart said that its adjusted EPS for the year will range between $6.36 and $6.46, above its previous guidance of $6.10-$6.20. The company anticipates its consolidated operating income to increase approximately 7% to 7.5%.  

Impressive Historical Growth

Over the past three years, WMT’s revenue and EBIT grew at CAGRs of 5.2% and 4.6%, respectively. The company’s normalized net income increased at a CAGR of 5.8% over the same time frame, while its tangible book value grew at a CAGR of 3.9%.

Favorable Analyst Estimates

Analysts expect WMT’s revenue for the third quarter (ending October 2023) to come in at $158.30 billion, indicating an increase of 4.5% year-over-year. The consensus EPS estimate of $1.51 for the same period reflects a 0.6% year-over-year improvement. Moreover, the company has topped the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

In addition, Street expects WMT’s revenue and EPS for the fiscal year (ending January 2024) to increase 5.5% and 2.9% from the previous year to $639.22 billion and $6.47, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to grow 3.6% and 10% year-over-year to $661.94 billion and $7.11, respectively.

Attractive Dividend

Earlier this year, WMT’s Board of Directors approved an annual cash dividend for fiscal year 2024 of $2.28 per share, up nearly 2% from the $2.24 per share paid for the last year 2023. The final quarterly installment of $0.57 per share would be paid on January 2, 2024, to shareholders as of record on December 8, 2023.

WMT’s annual dividend translates to a yield of 1.40% on the current price level, and its four-year average yield is 1.60%. Its dividend payouts have grown at a 1.8% CAGR over the past three years. The company has raised its dividend for 49 consecutive years.

Bottom Line

WMT’s second-quarter earnings beat analysts’ expectations as more Americans turned to the retailer for groceries and to shop online. Further, the company raised guidance for the fiscal year 2024 to reflect the second quarter upside, confidence in continued business momentum, and ongoing customer response to its value proposition.

As it sticks to its low-price reputation to draw grocery shoppers and boost online spending, the big-box retailer recently announced slashing grocery prices amid elevated inflation and help customers save more money with new deals for the holiday season, starting November.

In the previously reported quarter, seasonal moments such as the Fourth of July holiday and back-to-school have helped drive sales significantly. These sales trends typically signal patterns for the months ahead, including the holiday season.

Given its robust financials, attractive dividends, and promising growth outlook, WMT could be an ideal investment now.  

Is Ford Motor (F) Stock Gearing up to Crash and Burn?

Posted on by The INO.com Team

Ford Motor Company (F) has been dealing with the United Auto Workers (UAW) strikes. Now, another difficulty confronts the automaker — it recently issued two separate recalls, affecting 273,127 vehicles across the United States. The two models impacted are the 2020-22 Ford Explorer and the Ford Mustang Mach-E.

The larger recall applies to 238,364 Ford Explorers produced between 2020 and 2022. According to filings with the National Highway Traffic Safety Administration (NHTSA) from Ford, a defectively manufactured mounting bolt in the rear axle might snap, potentially resulting in vehicle roll-aways even when parked. The issue stems from this bolt enduring constant bending forces during acceleration, resulting from torque transmission.

If the bolt fails after sufficient vehicular launches, the axle might shift, disconnecting the driveshafts or half-shafts from the integrated powertrain system. If complete separation occurs, the transmission becomes unlinked from the car's wheels, paving the way for possible roll-aways as engaging the park gear would no longer prevent wheel spin.

According to a Ford report, 396 customers reported incidents linked to this problem, often signaled by loud clunking or grinding sounds. Less than 5% of these cases resulted in vehicle roll-away or impaired vehicular control. However, as a remedial measure, F will replace the faulty bolt and implement a re-engineered subframe bushing to ensure correct axle positioning.

The second recall targets 34,763 Mustang Mach-E models fitted with extended-range batteries. This rectification is due to an overheating battery contactor potentially causing a loss of motive power when driving. As per F, this can occur when the vehicle has experienced fast DC charging followed by intense acceleration.

This is the second recall to involve battery contactors on the Mustang Mach-E. Last year, a similar complication led the company to recall 48,924 Mach-E models and replace a diagnostic control module with an alternate model capable of monitoring the battery contactor's temperature. Unfortunately, the initiative did not successfully nullify the issue.

Hence, in this latest recall, F will replace the high-voltage battery junction box at no expense to its customers. The car manufacturer has confirmed that the previous recall has adequately addressed power loss issues affecting standard-range Mach-E units; hence, this recall targets only extended-range versions.

The recall follows an investigation initiated by the auto safety regulator, assessing whether F adequately addressed the issues during the June 2022 recall of about 49,000 Mach-E vehicles.

Implications

F is already grappling with UAW strikes, with predicted impacts of $120 million being realized in the upcoming quarter. As per industry experts, F is losing $44 million daily. Additionally, cuts to F’s future product investments could come if the UAW deal turns out unfavorable. Further, potential reductions in F's future product investment could follow if the UAW deal proves less favorable.

A challenge no company wants to find itself dealing with is product recalls. Recalls can significantly reshape a company's financial landscape, have far-reaching effects on its market performance and negatively impact its reputation.

Under consumer protection laws, manufacturing and supplying companies are required to shoulder full responsibility for the cost of recalling products and any associated costs. Though insurance may cover some costs for defective product replacement, many product recalls result in lawsuits. Considering the accumulated costs from lost sales, replacing faulty units, government sanctions, and legal proceedings, a large recall can quickly escalate into a daunting, multi-billion-dollar predicament.

For example, F's recall of 169,000 vehicles in the United States to replace faulty rear-view cameras and perform software upgrades would take a $270 million toll on the company's finances.

Large-scale organizations such as F can recover relatively quickly from such short-term financial loss. However, diminishing confidence among shareholders and consumers could lead to more severe long-term consequences, such as a marked drop in stock prices. Hence, it would be prudent for F to take measured steps swiftly toward addressing vehicular recalls and safeguard their reputation.

Despite the second-quarter earnings surpassing expectations, these unforeseen expenses could affect the upcoming quarter earnings.

During the second quarter, F’s revenues rose 11.9% year-over-year to $44.95 billion, and automotive revenues peaked at $42.43 billion, surpassing the $40.38 billion estimate. The net income almost tripled to $1.92 billion, marking an 187.4% year-over-year increase.

The automaker anticipates its full-year adjusted EBIT guidance between $11 billion and $12 billion, while its adjusted free cash flow is projected to come between $6.5 billion and $7 billion. The company anticipates to hit an 8% EBIT target by 2026.

Investors' apprehension arises from multiple aspects of the company's earnings and projections. The EV segment of the business, recently rebranded as Model E, reported a pre-tax loss of $1.08 billion. The firm anticipates losses for this segment could mount to $4.5 billion in 2023, a staggering 50% surge on prior predictions.

Additionally, the company has publicly acknowledged the sluggish uptake of EVs, which has led to a scaling back of their previously ambitious production objectives for EVs. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026.

Analysts expect F’s revenue and EPS in the fiscal third quarter (ending September 2023) to be $42.51 billion and $0.46, registering 14.3% and 53.8% year-over-year growths, respectively.

Considering these developments, F’s shares have been facing pressures, sending its stock down to May 2023 levels. Over the past year, the stock declined 5% and 8.2% over the past month to close the last trading session at $11.53.

Institutions hold roughly 54.6% of F shares. Of the 1,765 institutional holders, 797 have decreased their positions in the stock. Moreover, 128 institutions have taken new positions (11,202,366 shares), while 132 have sold positions in the stock (10,742,511 shares).

Bottom Line

F has unveiled a bold scheme to invest billions in the advancement of EVs while also returning capital to its shareholders. This plan is predicated on robust revenue streams from its traditional combustion-engine trucks and SUVs portfolio. Given the increasing costs associated with UAW strikes, contract resolutions, and vehicular recalls, these plans seem to be in considerable peril.

To counteract these losses, the automaker could reduce capital spending, delay EV targets, increase cost-sharing initiatives, and make other alterations to its corporate portfolio.

The company experienced negative free cash flow in 2022 and forecasts a similar scenario for this year owing to lofty capital expenditure commitments.

While the company continues offering its shareholders dividends, its history is somewhat mottled. Given the ongoing difficulties, there is an elevated risk of dividend discontinuation or minimization. This eventuality was seen during the pandemic in 2020 and was resumed at the tail-end of 2021. A previous incident occurred before the Green Financial Crisis, with reinstatement happening three years later. This inconsistency may dissuade shareholders from seeking stability in their dividend returns.

Compounding the issues at F is their escalating debt load, which jumped from $105.06 billion in 2012 to nearly $139 billion in 2022. Simultaneously, the firm increased its cash holdings to boost liquidity.

One factor that could entice investors is the relatively low valuation of F. Its forward non-GAAP Price/Earnings of 5.78x is 59.7% lower than the industry average of 14.33%. Also, its forward Price/Sales multiple of 0.28 is 66% lower than the industry average of 0.83.

However, considering the automaker’s tepid price momentum and mixed profitability, it could be wise to wait for a better entry point in the stock.