Ticker Reports for June 26th
Stock Impact: McDonald's Price War with Starbucks, Wendy's
The U.S. consumer is going through one of the most significant constraints in the economy of all its fast food with the growing burning hole at the bottom of their pockets. With fast food being higher than the Federal Reserve’s (the Fed) goal of 2%, employees at work won’t do it anymore to keep the same standard of living most people had just a year ago.
That is why companies like Target Co. (NYSE: TGT) and even Walmart Inc. (NYSE: WMT) agreed – for the nation's sake – to lower prices on over 1,500 items recently. While this act could have been taken as a negative from the stock market since it will inevitably affect profits, Walmart has had a 30.4% run in the past six months. Target has finally recovered from its recent dip, pushing 2% in the past week.
After a period that was arguably driven by corporate greed, fast food restaurants like McDonald’s Co. (NYSE: MCD) saw their net margins rise to all-time highs, outpacing the supposed rising labor and commodity inputs costs. Realizing that taking advantage of these trends wasn’t the best move, the brand has announced a $5 meal to start cleaning the mess it made.
This move has started a price war for other fast food brands, as Wendy’s Co. (NASDAQ: WEN) and even Starbucks Co. (NASDAQ: SBUX) have joined in their own version of a price-driven combo. The question is, which brand stands the better chance to survive these cuts?
McDonald's Leverages Its Market Size to Outlast Competitors in Price War
Whether it was the right move or not, McDonald’s has pushed out the most inflation of all its fast-food peers in the consumer discretionary sector. Measures of inflation show that fast-food inflation rose faster than restaurant inflation, and McDonald’s led the way in that race.
Investors can notice, looking at the company's financials, that the brand's pre-COVID net margin hovered between 24% and 27%. The post-COVID picture looks very different, as McDonald's net margins rose to over 32% to outpace inflation.
Margins were driven by higher menu prices, justified by rising labor and food costs. However, if this were entirely true, then the net income margins would have remained close to their historical ranges or at least risen at a pace similar to inflation, and that wasn’t the case.
However, McDonald's decided to be more flexible because the brand's frugal audience finally tapped out; choosing their budgets was more important than a trip to the Golden Arches. The problem with this $5 meal is that franchisees will now see their profits falter, which is where McDonald's size comes into play.
Coca-Cola Co. (NYSE: KO) is subsidizing these franchisee losses since the brand knows that McDonald’s volumes also mean volumes for Coca-Cola products. Coca-Cola set aside $4.6 million to help cover the gap, and that’s why analysts still forecast 8.2% earnings per share (EPS) growth for McDonald’s.
Consumer Focus Drives Wendy's Stock to Better Odds
Wendy’s backlashed by launching its own – lower - $3 meal to its customers. These brands can go all day lowering prices until one of them breaks. The result that management wants, however, is not only to beat the competitor with a lower price point but to retain – and even expand – its market share.
Looking into Wendy’s financials, investors can see that the pre and post-COVID net margin range remained the same; it even lowered in the post-COVID scene, opposite McDonald’s. This means that the company passed on short-term profit opportunities to keep its loyal customer base instead.
Unexpectedly, analysts at Piper Sandler boosted their valuations for Wendy’s stock to $23 a share, calling for a 37% upside from where the stock trades today. This is an unlikely move considering the stock’s inferior net margins, which are set to keep falling on this $3 meal.
Has Wall Street grown a conscience? It seems like the Vanguard Group boosted its stake in Wendy’s stock by 6.4% over the past quarter, while Price T Rowe Associates actually dumped 20.3% of their position in McDonald’s stock.
Wall Street's Favorite Child: The Marketing Prowess of Starbucks Stock
There’s a reason why analysts at Bank of America boosted their valuations for Starbucks stock up to $112 a share, daring it to rally by 42.6% from where it trades today.
Starbucks is offering a $5 coffee and pastry combo, which isn’t far from the typical coffee price the company already sells. In any case, hidden by brilliant marketing, this deal’s value is found in a free pastry, which costs the company virtually nothing after the massive margins they generate on a $5 coffee.
Knowing this fundamental fact, institutions gave up $22.2 billion in capital to Starbucks stock over the past 12 months. More than that, now that the stock trades at only 74% of its 52-week high, its dividend payout of $2.3 a share translates into an annual dividend yield of nearly 3.0%.
This dividend would have the highest yield since 2018, excluding COVID-19 sell-offs. There’s a reason why Starbucks stock has outperformed McDonald’s and Wendy’s by over 6% in the past month.
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General Mills Q4 Sales Miss Expectations, Triggering Stock Drop
General Mills (NYSE: GIS) is the global food manufacturing sector giant known for iconic brands like Cheerios, Yoplait, Pillsbury, and Blue Buffalo. General Mills' earnings report for the fourth quarter and full-year fiscal 2024 revealed a disappointing performance, which sent General Mills' stock price downward. Despite a challenging macroeconomic landscape marked by shifting consumer sentiment and persistent inflation, the company demonstrated resilience in certain areas while grappling with headwinds in others.
General Mills Q4 2024 Revenue Falls Short of Expectations
General Mills' financials revealed that Q4 2024 revenue came in at $4.714 billion. This reflected a 6% year-over-year decrease and fell short of General Mills' analyst community expectations of $4.85 billion. This decline was attributed to a confluence of factors, primarily lower sales volume and an unfavorable comparison against the previous year's fourth quarter, which benefited from advantageous trade expense timing. This timing difference created a 3-point headwind to price/mix and a significant 17-point headwind to adjusted operating profit in the recent quarter. However, General Mills management emphasized that these headwinds are largely transitory and that management expects the underlying momentum to improve going forward.
Despite the revenue decline, General Mills' earnings report displayed strength in profitability. The adjusted operating profit for the quarter stood at $800 million, representing a 10% decline in constant currency. This decline was primarily due to the trade expense comparison mentioned previously. Excluding this impact, the company delivered solid cost savings through its Holistic Margin Management (HMM) program, which successfully offset input cost inflation and the impact of lower volume. Adjusted diluted earnings per share (EPS) reached $1.01, mirroring the adjusted operating profit decline, with share repurchases counterbalancing higher net interest expense and a slightly higher adjusted effective tax rate.
Looking at the full fiscal year 2024, organic net sales contracted by 1% compared to the previous year, which saw double-digit growth. This moderation was driven by lower organic pound volume, partially countered by positive organic price/mix. Segment performance varied, with U.S. Meals & Baking Solutions, U.S. Snacks, and U.S. Morning Foods all experiencing a 2% decline in net sales, while the Canadian market saw a 5% increase. Adjusted operating profit for the entire year climbed 4% in constant currency, bolstered by substantial HMM cost savings, favorable price/mix, and reduced compensation and benefits expenses. However, input cost inflation, higher supply chain costs, and lower volume partially offset these gains.
General Mills’ FY 2025 Guidance and Strategic Priorities
General Mills provided its financial outlook for fiscal year 2025, projecting organic net sales growth to range from flat to a 1% increase. General Mills' earnings guidance reveals that under constant currency conditions, adjusted operating profit is anticipated to remain flat or decline by 2%, primarily due to a 2-point headwind resulting from the realignment of incentive compensation to targeted levels. Adjusted diluted EPS is anticipated to fluctuate between a 1% decrease and a 1% increase in constant currency. The company remains committed to strong cash generation, aiming for a free cash flow conversion rate of at least 95% of adjusted after-tax earnings.
To navigate the anticipated economic landscape and achieve these targets, General Mills outlined a multi-pronged strategy centered around delivering "remarkable experiences" across its portfolio. This strategy encompasses amplified brand communication, emphasizing consumer-centric messaging and increased media investment across key brands. Examples include a collaboration between Big G cereals and NFL stars, Totino’s partnership with Pete Davidson, and ingredient superiority campaigns for Blue Buffalo pet food and Häagen-Dazs.
Beyond marketing, the "remarkable experience" framework focuses on product innovation, including taste improvements, healthier options, and convenient formats. This translates to initiatives like flakier Pillsbury biscuits, cheesier Annie’s Mac & Cheese, and new varieties of Old El Paso Carb Advantage Taco Shells and Mott’s Apple Streusel Soft-Baked Bars.
Recognizing the importance of value in an uncertain economy, General Mills plans to optimize price points, offer larger pack sizes for certain products, and strategically utilize coupons and targeted promotions. These efforts extend to the Blue Buffalo brand, which aims to regain momentum through targeted advertising, new product launches, and price adjustments.
Enhancing Efficiency: General Mills’ FY 2025 Cost Management Plan
General Mills' ongoing commitment to cost management through its HMM program is integral to its strategy. The company aims for an impressive 4% to 5% cost savings in its cost of goods sold for FY2025. These savings will be achieved by streamlining operations, leveraging digital tools for greater manufacturing and logistics efficiency, and reducing supply chain complexity.
Despite the challenging environment, the company remains committed to rewarding shareholders. This commitment is evident in the recent announcement of a 2% increase in General Mills' quarterly dividend, bringing the new rate to $0.60 per share. This move underscores the company's dedication to balancing strategic investments for future growth with consistent returns for its investors.
General Mills: Balancing Challenges and Opportunities
General Mills faces a complex and volatile landscape marked by evolving consumer behavior, inflationary pressures, and heightened competition. The company acknowledges that regaining consumer trust and market share requires a delicate balancing act.
However, potential roadblocks remain. The current economic climate, characterized by high inflation and cautious consumer spending, could pressure General Mills' ability to raise prices without impacting volume. Additionally, supply chain disruptions, while easing, continue to pose a risk. The company's ability to navigate these external factors will be crucial to its success.
Despite the challenges, General Mills possesses several advantages. Its portfolio boasts a diverse range of iconic brands with strong consumer recognition. The company's commitment to innovation, evidenced by its increased focus on taste improvements, healthier options, and convenient formats, positions it to capitalize on evolving consumer preferences. Furthermore, General Mills' robust HMM program and disciplined approach to cost management provide a buffer against inflationary pressures and empower the company to reinvest in growth initiatives. Investors must closely monitor the company’s ability to translate these plans into tangible results and reestablish itself as a leader in the ever-evolving food industry.
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Enovix Stock Rises 35% in Short-Squeeze: This Rally Has Legs
Enovix (NASDAQ: ENVX) stock surged 35% in a single day, and it looks like the rally has legs and room to run. The technical signal is strong, and fundamental factors are in play. Those factors include a new deal to supply batteries for a virtual reality headset that points to a new reality for ENVX investors. This company is gaining traction and building momentum; two large, high-profile deals now validate its technology.
Why Enovix? Enovix is a leader in advanced lithium-ion batteries. Its silicon anode design allows for greater energy density, discharge, and recharge rates, making it perfect for most applications. Among the first wave of business are government and military clients that need a longer range and higher power output for their always-on applications. Those include aviation (drones) and man-portable equipment systems. Consumer applications likely to utilize Enovix battery technology include cameras, video recorders, PCs, and mobile and IoT-connected remote devices.
A Double-Shot of Game-Changing News for Enovix Investors
Enovix's stock price was supercharged when it revealed a contract to deliver batteries for a prominent, California-based virtual reality headset manufacturer. The company did not reveal who the manufacturer was, but is likely one of a handful of names, including Apple (NASDAQ: AAPL), Google parent Alphabet (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META). Apple is a leading candidate because the company mentions style in its press release.
The deal includes an upfront payment for tooling, battery pack design, and future expenses for test and production models. The VR headset market is worth upwards of $32 billion today and is expected to grow by 10x over the next decade for a near 30% CAGR—quite a tailwind for the business.
The deal to supply battery packs for VR headsets is great news but is just the tip of the iceberg for Enovix. The company also announced a deal with Elentec Co, whose largest client is Samsung. Elentec provides battery packs for numerous Samsung (OTCMKTS: SSNLF) products, including consumer, industrial and military applications.
The deal with Elentec is contingent on finalized negotiations but would allow Enovis to utilize Elentec Co’s capabilities and footprint for its battery production. The near-term goal is to adapt Enovix technology to fit Samsung battery packs and fast-track them to the broad market. The end goal is for long-term collaboration to support growth for both.
Buy-Rated Enovix Has Growing Support from Institutions
Enovix’s analyst activity is light and tepid this year but will likely change soon. The takeaway is that this Moderate Buy-rated stock is forecast to advance another 20% from its current levels, and the forecasts may rise, given the rapidly improving outlook. Rising forecasts will provide another catalyst for higher prices.
The more significant detail is that institutions are buying. Institutions represent the bulk of investment dollars and are powerful market forces. Institutions have bought this stock on balance for four of the last five quarters and increased their holdings to over 50%. Enovix’s share price will likely continue to rise with this trend in play.
Enovix: Short Covering Leads to Sustained Rally
Short interest is a factor in the rally. The market for Enovix stock was more than 30% short at the last report but has likely fallen since. If not, it will soon because the technical outlook is bullish; higher prices are expected for this stock.
The rally for Enovix is supported by indicators, including volume, moving averages, MACD, and stochastic, firing strong signals on the weekly and daily charts. The candlestick action on the daily charts is also bullish, showing a Harami continuation pattern, and suggests market support is advancing along with the price action. In this scenario, shares of Enovix could surge another $4 soon to reach the $20 level and then another $4 by year’s end to set a multiyear high.
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