Ticker Reports for July 13th
This Industrial Stock Signals a Bullish Move for Trend Followers
Trend-following is one of the most basic and widely used technical trading strategies because it works. AZZ Inc. (NYSE: AZZ) sends a signal to trend-following investors: a solid, sizeable green candle confirming support at a critical level that coincides with a long-term moving average.
The signal on AZZ’s chart is compounded by increased volume and coincident signals in the MACD and stochastic indicators, which suggest a significant shift in market dynamics. With stochastic at the low end of its range, showing support coincident with the price action, and MACD rolling into a bullish crossover, this market could quickly move back to the top of its trading range, but a more significant move is in play.
Results and analysts' sentiments drive the more significant move. The analysts' activity in AZZ is light but bullish, with four ratings tracked by MarketBeat.com. This year's trend is upgrades and price target increases, with sentiment rising to Buy from Moderate Buy. The price target is almost double compared to last year. The critical detail is that the analyst's lowest target corresponds to the high end of the existing stock price trading range, suggesting a deep value opportunity and a new all-time high is likely.
Industrial Services AZZ Inc. Generates Cash, Improves Balance Sheet
AZZ Inc. is an industrial services company specializing in metal coatings, galvanizing, and corrosion protection. Its business is supported by public and private spending, global infrastructure projects, the oilfield upcycle, and the renewable industry, which combined to drive record quarterly results in FQ1.
The top-line $413.21 million in revenue is up 5.7% compared to last year and outpaced the consensus estimate by nearly 300 basis points on strength in both operating segments. The smaller metal coatings segment grew by 4.7%, led by a 6.5% gain in the larger Precoat Metals segment, and both contributed to a wider margin.
The company’s EBITDA margin improved by 100 basis points to leverage top-line strength into accelerated earnings growth. The GAAP results look bad despite the margin improvement because of debt reduction. The company used its considerable free cash flow (and capital raised from a share offering) to pay down debt and redeem Series A preferred shares.
The dilution is a minor concern but is offset by the improving capital structure and balance sheet. Those improvements will help the company build long-term shareholder value over time. The takeaway is that adjusted earnings grew by 28%, outpaced the consensus by 1450 basis points, allowed substantial balance sheet improvement, and the guidance is favorable.
The company reiterated its guidance for 2025, which assumes revenue is flat to up 5% compared to 2024 with a wider margin. Earnings are expected to grow by 10% and support additional balance sheet improvement and capital return. Capital return is primarily a dividend worth $0.68 or about 0.9% in yield with shares near $80. The payout is reliable at 15% of the relatively unimpeded earnings now that the Series A shares are redeemed. There is still some debt, but the 2.8x leverage ratio is low and expected to fall further.
A Tailwind for AZZ Inc.
The June CPI data strengthened a tailwind for AZZ and other business services stocks. The data was cooler than expected and aligns with the outlook for two interest rate cuts this year. Lower rates will trigger earnings growth, if not accelerate top-line growth, because the cost of money will fall. Public and private spending can increase in this environment, driving demand for AZZ services and products.
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10-for-1 Stock Split: A Game-Changer for This Bitcoin-Heavy Stock
MicroStrategy (NASDAQ: MSTR) is a leader in business intelligence and analytics, but the company has carved a unique niche for itself through its aggressive embrace of Bitcoin (BTC). On July 11, 2024, MicroStrategy announced a 10-for-1 stock split, which has sparked significant interest among investors and MicroStrategy analysts. This action, coupled with the company's continued investment in Bitcoin, has raised questions about MicroStrategy's future and its appeal to investors.
Impact of MicroStrategy's Stock Split on Shareholders
A 10-for-1 stock split, as MicroStrategy has implemented, is a corporate action that increases the number of shares outstanding while proportionally reducing the price per share. In this case, each shareholder will receive nine additional shares for every one they hold, increasing their total share count by a factor of ten. This results in a lower price per share but does not fundamentally alter the overall value of their investment.
MicroStrategy's stock split is designed to make its shares more accessible to a broader range of investors, particularly retail investors who may be deterred by a high share price. By lowering MicroStrategy’s price per share, the company aims to attract a wider pool of buyers, potentially increasing trading volume and liquidity. The stock split will be effective on August 1, 2024, and shares will be distributed to shareholders of record as of that date.
MicroStrategy's Bitcoin Strategy: A Bold Bet
MicroStrategy's Bitcoin strategy has been a defining factor in its recent growth and the company's overall direction. The company began accumulating Bitcoin in 2020, making it an early adopter of the digital currency and establishing itself as one of the largest corporate holders of Bitcoin. This strategy has propelled MicroStrategy to the forefront of the Bitcoin investment world, making the company a proxy for Bitcoin's price and its future potential.
As of April 29, 2024, MicroStrategy held 214,400 Bitcoin at a total cost of $7.54 billion. This strategy has undoubtedly paid off, as Bitcoin's value has soared in recent years. However, it is essential to acknowledge that the inherent volatility of Bitcoin's price presents significant risks for MicroStrategy's stock performance. Since its Bitcoin investments began, the company has taken substantial impairment charges due to the fluctuating value of Bitcoin. These charges have impacted the company's profitability, but MicroStrategy remains committed to its Bitcoin strategy.
MicroStrategy's Recent Financial Performance: A Balancing Act
MicroStrategy's financial performance has been mixed recently. Its earnings report for the first quarter of 2024 revealed a net loss of $53.1 million, which translates to a loss of $3.09 per share on a diluted basis. This loss was driven by impairment losses on digital assets, which reached $191.6 million in the quarter.
While these losses concern investors, MicroStrategy's revenue performance has been more encouraging. Total revenue for Q1 2024 was $115.2 million, a 5.5% decrease year over year. However, the company's subscription services revenue, a key area of focus for MicroStrategy, grew by 22% year over year, reaching $23 million.
MicroStrategy's recent financial performance highlights the company's balancing act. Its Bitcoin strategy has contributed to its valuation and growth but carries significant risks. The company's ability to navigate this volatility while maintaining a solid core business will be critical to its future success.
Impact of Recent Losses on MicroStrategy's Valuation
Before the stock split, MicroStrategy's stock price was trading at around $1,362.10 per share, giving the company a market capitalization of $24.16 billion. With the split, the adjusted price is expected to be around $136.21 per share, making the stock more accessible to retail investors.
However, due to its recent losses, MicroStrategy's price-to-earnings (P/E) ratio is currently unavailable. This lack of a traditional earnings metric makes evaluating the company's valuation based on conventional financial ratios complex. Instead, investors must consider the company's Bitcoin holdings, potential future value, and the underlying performance of MicroStrategy's software business.
The Risks and Rewards of Investing in MicroStrategy
Investing in MicroStrategy carries inherent risks. Bitcoin's volatile price presents a significant source of uncertainty, and the regulatory landscape surrounding Bitcoin is still evolving. This presents potential challenges for MicroStrategy's future operations and could impact its ability to continue its Bitcoin strategy. Furthermore, MicroStrategy is highly leveraged, carrying substantial debt on its balance sheet. This debt adds to the company's financial risk profile and requires careful monitoring by investors.
However, MicroStrategy's Bitcoin strategy could yield significant rewards if Bitcoin's value rises, boosting its stock price. By focusing on becoming a Bitcoin development company, MicroStrategy aims to lead in the emerging Bitcoin economy.
Assessing Risk Tolerance Before Investing in MicroStrategy
Investing in MicroStrategy is not for the faint of heart. The company's reliance on Bitcoin creates significant volatility and exposure to regulatory risks. Investors must carefully consider their risk tolerance and investment goals before allocating capital to MicroStrategy.
However, MicroStrategy might be an appealing investment for investors who are comfortable with volatility and are bullish on Bitcoin's potential. The company's aggressive Bitcoin strategy has made it a leader in the cryptocurrency space, and its focus on Bitcoin development could position it for growth as the Bitcoin economy matures.
MicroStrategy's stock split presents a new opportunity for investors, particularly those seeking exposure to Bitcoin's growth potential. However, investors must carefully weigh the risks and consider their investment goals before deciding whether MicroStrategy fits their portfolio. As the Bitcoin economy continues to evolve, MicroStrategy's ability to balance its software business with its Bitcoin strategy will be crucial to its future success.
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Hidden Opportunity: This Stock's Sell-Off Signals a Buy
It is no secret now that while most of the market is focused on the developments inside the technology sector, particularly around stocks exposed to the wave in artificial intelligence, other extremes in the market are feeling a bit of pain. Some of these forgotten and beaten down sectors include the consumer discretionary names, as judged by the 14% underperformance from the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY) against the broader S&P 500 in the past year.
Leading this decline are stocks like Starbucks Co. (NASDAQ: SBUX), PepsiCo Inc. (NASDAQ: PEP), and Nike Inc. (NYSE: NKE), all of which are trading near their 52-week low prices to showcase bearish momentum and price action. But all of these have enough reasons to sell off, some of which justify bearish traction, so investors need to look into those that are simply affected by outside—rather than inside—forces.
One perfect example can be found in McDonald’s Co. (NYSE: MCD), especially now that the stock is trading within 3% of its 52-week low of $243.5 a share. While this weakness in the stock price may turn some investors away from even considering the stock, other savvy investors will find this a potential gem inside the sector sell-off.
Identifying the Weak Points in McDonald's Stock
There aren't many, and most are qualitative rather than hard facts. Qualitatively, the trend in global eating habits is toward healthier choices, which the McDonald's brand has yet to be known for. Quantitatively, this dietary trend isn't making a dent in the company's financials, at least not yet.
Looking into McDonald's' first quarter 2024 earnings results, investors can see that management began the press release by quoting a 2% comparable sales growth, making this quarter the thirteenth consecutive quarter of growth for the company. Chris Kempczinski, McDonald's CEO, reminded investors that the past four years have seen up to 30% revenue growth.
So, if the risks aren't coming from new dietary trends, where can investors find the blame for the recent sell-off? Fear of contracting margins, and therefore earnings per share (EPS), dominate McDonald's stock after the company decides to make a limited-time deal for a $5 meal.
A solidary move to help the inflation-choked American consumer created worries over accumulating losses through these discounts. Unfortunately, these fears are real, but one of McDonald's biggest partners is tending to them.
Granting up to $4.6 million in capital to subsidize temporary company and franchisee losses from this $5 menu, the Coca-Cola Co. (NYSE: KO) is securing part of its daily volume through McDonald's locations. Knowing that a loss for McDonald's could mean a loss for Coca-Cola's daily sales, this move makes enough sense for both companies.
Those are the only reasons behind McDonald's stock's sell-off; both have been addressed. The remaining blame could be credited to a systemic sell-off in peers like Starbucks and other discretionary names rather than a company-specific issue.
Analyzing McDonald's Stock Upside: What Investors Need to Know
Starting with some of the technical factors, investors can look at McDonald’s stock’s short interest, which has declined by over 4% in the past month alone. A withdrawal from short sellers, especially during a sell-off, can signify capitulation, typically followed by a bottoming and potential rebound.
Investors can also focus on what others on Wall Street have been doing lately. The UBS Group slapped a valuation for McDonald’s stock of up to $335 a share, daring it to rally by 32.5% from where it trades today.
While UBS is an outlier bull in its ratings, the consensus isn’t far from what those analysts see. A consensus price target of $312.8 a share still calls for a 23.8% upside from today’s stock price. The other nice thing, apart from a higher ceiling, from having a sell-off is that the stock’s dividend yield also goes up.
With a payout of $6.68 a share, McDonald’s stock offers investors an annual dividend yield of up to 2.6% today. This dividend yield would be enough for investors to beat the current U.S. GDP growth rate for the past quarter, which has been revised to only 1.3%.
Now comes the angle regarding valuation multiples, as it is safe to assume that investors understand that McDonald’s stock has enough upside today. On a price-to-earnings (P/E) ratio, McDonald’s stock trades at only 21.3x, whereas the rest of the eating places industry trades at a higher 33.1x P/E ratio.
McDonald’s is an undeniable moat and business moats typically trade at valuations that are multiples above industry averages. The tiebreaker score comes from the company’s financials, especially profitability ratios like return on invested capital (ROIC).
Pushing out a 20.6% ROIC rate would build the foundation for the stock’s recovery, as annual stock price performance tends to match the longer-term ROIC rate given enough time.
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