Ticker Reports for July 24th
Food Processing Company Stock Gets Fried by Recall: Time to Buy
Lamb Weston (NYSE: LW) share prices got fried after Q4 results were worse than expected. The move shaved 20% off the share price, putting the market near long-term lows, but now is not the time to sell. As bad as the implosion looks, the existing market is capitulating and setting up an attractive buying opportunity for new investors. While headwinds persist, the company’s results aren’t as bad as they look, and there are catalysts ahead for consumer staples.
Sluggish restaurant sales globally are among the causes of poor performance, a dynamic that will change over the next four quarters because of lower interest rates. The FOMC is expected to lower rates at least once this year, possibly twice, and to continue cutting in 2025. With this in play, the guidance is likely cautious, and investors can expect an upgrade cycle in the back half of the fiscal year, extending into the back half of the calendar year.
Lamb Weston Has a Weak Quarter Compounded by a Recall
Lamb Weston had a weak quarter, missing estimates on the top and bottom lines, but the big news is the sharp contraction in earnings. While the contraction is concerning, it is due to a voluntary product recall that accounts for more than 50% of the decline. The top-line revenue of $1.61 billion is down compared to last year and missed the consensus by a slim 580 bps compared to the larger 3800 basis points bottom-line miss. Guidance for the new fiscal year is also weaker than expected but likely cautious, given the economic outlook.
Lamb Weston’s $1.61 billion in revenue is down 5.3% year-over-year due to an 8% decline in volume offset by a 3% gain in price and mix. A global slowdown in restaurant volumes and the exit of lower-margin businesses are blamed for roughly 25% of the decline; the remainder is due to the recall.
Margin news is mixed. The company widened its gross margin and lowered its SG&A expenses, setting itself with leverage offset by the recall expense. The recall is estimated to have impacted adjusted revenue by $40 million or 55% of the YoY decline, and the impact on net earnings is comparable. Operating income is up due to improved operational quality but offset by recall expenses that left the adjusted earnings at $0.78 or down 40% YoY.
Guidance is what has the market moving lower. The company issued guidance for revenue and earnings in a range below the consensus, sapping market sentiment but leaving the capital return outlook in fine shape. The dividend is only 30% of the earnings guidance and safe, leaving ample room for share repurchases and capital expenditures in addition to the yield. The yield is at historical highs, near 2.4%, now that the share price has been discounted. CAPEX is estimated at $850 million and will target capacity stabilization and stimulating growth.
Lamb Weston Builds Value for Shareholders
Lamb Weston built value for shareholders in F2024 despite its headwinds. Highlights from the cash flow and balance sheet include a negative cash flow year and a reduction in cash balance offset by acquisitions, improving assets, and rising equity. Debt is also up but offset by positives, which left equity up 26% YoY. Share repurchases add to the value, reducing the count by an average of 1.2% for Q4.
Analysts may cap Lamb Weston’s share price advance this year. However, the sell-off is overblown, putting the stock at a deep value and trading at rock bottom near the 2020 lows. The fall to $60 has the market over 50% below the lowest analysts' target, and the sentiment is firm at Buy. The company’s struggles are not over; the salient point is that its position as the world’s leading french fry supplier and supplier to McDonald’s (NYSE: MCD) has it positioned for long-term success. It is also a value relative to its peers, trading at only 10.8x the guidance midpoint, and it is among the cheapest consumer staples available today.
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Entertainment Stock Offers A Rare and Tempting Entry Opportunity
Despite having been one of the core members of the once famous FAANG group of tech stocks, Netflix Inc (NASDAQ: NFLX) holds the dubious honor of also being the one that fell the hardest from its 2021 peak. A red-hot rally, fuelled by pandemic-era lockdowns, turned to dust in 2022 as the streaming giant struggled to meet investor expectations. An 80% drop from peak to trough tells its own story, and you'll be hard-pressed to find a recent article that talks about the FAANG group in the present tense.
However, investors will ignore Netflix at their peril. Sure, looking at performance since February 2020, it has the lowest returns of all the FAANG group with just 90%. For context, Meta Inc (NASDAQ: META) is up 120% in that timeframe, while Apple Inc (NASDAQ: AAPL) is up 185%. But for those of us who avoided being washed out during the post-pandemic plunge, there are several reasons to be excited about Netflix right now.
Solid Recovery: Netflix's Impressive Rebound
In the two years since the stock bottomed out in May 2022, Netflix has returned 265%. Since the start of this year alone, it's up 33% and has all but recovered its losses. Only earlier this month did Netflix's shares come within a few dollars of topping 2021's all-time high of $701. It's been a stunning recovery, and it feels like there's a lot more to come.
Last week's Q2 earnings report will have done a lot to set the foundation for the next rally phase, which is surely on track to take the stock to record prices. Netflix beat analyst expectations on both earnings and revenue, with operating margins jumping from 22% to 27% year on year. The company's forward guidance for full-year 2024 revenue growth also came in hot, with it now expected to land somewhere between 14-15%. Their acquisition numbers were strong, as was retention, both of which went a long way to justifying the ongoing rally.
Analysts Predict Further Upside for Netflix Shares
Based on the report, the team at UBS Group didn't hesitate to reiterate their Buy rating on Netflix shares while boosting their price target to $750. From Tuesday night's closing price of $643, that's pointing to an additional upside of some 16%. Analyst John Hodulik was impressed by the company's increasing edge on competition, while the focus on widening margins also caught his eye.
Redburn Atlantic took a similar stance, although with a fresh price target of $760. Similarly to UBS Group, analyst Hamilton Faber zeroed in on Netflix's strong forward guidance and increasing momentum on the acquisition front.
Appealing Technical Setup for Netflix Investors
Beyond the strong bullish outlook of these analysts who are calling for record highs in the near term, interested investors also have an appealing technical setup on their side. The Relative Strength Index (RSI) of a stock is a popular measure to assess how overbought or oversold a stock might be. It considers a stock's recent trading history, usually the previous 14 days, and then spits out a number between 0 and 100. Anything under 30 puts it in the oversold camp, while anything over 70 suggests it's overbought.
Netflix was straying into the latter category just last month, which can make a stock unattractive to many investors as there's the risk of a pullback. However, with equities in general after softening in the past week, Netflix has also been dragged down a little. This has brought its RSI down below 40, which, considering the bullish outlook on the stock for the second half of the year, lends itself to the feeling that there's a serious bargain to be had right now.
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Will China's Interest Rate Cuts Ignite a Rally for This Stock?
The answer is that nobody knows. If anyone had a way of timing a new market rotation or rally, there would be a lot more billionaires around. That being said, investors can follow a relatively simple blueprint to position themselves and wait for the potential moves that certain events tend to cause.
In the case of China’s stock market, many indicators are showing that a rally could be in the cards for those who are willing to go into that market, such as Ray Dalio, by allocating into the iShares MSCI China ETF (NASDAQ: MCHI) as his own bet on a Chinese economic expansion to bring higher stock prices. As Michael Burry did, investors can also take the individual stock route rather than an ETF.
The same investor who correctly called the 2008 financial crisis had just as much conviction when looking over the potential opportunities in China’s stock market. But, rather than diversifying like Dalio, Burry decided to make Alibaba Group (NYSE: BABA) as well as JD.com Inc. (NASDAQ: JD) his two largest positions today, and rarely does this fund manager place so much weight into a single country, let alone a single sector like the technology names.
Why Alibaba Has Become a Top Chinese Pick for Investors
When investors think of E-Commerce, they typically think of Amazon.com Inc. (NASDAQ: AMZN) in a vacuum. While they might be right in their thinking, as this household name has taken the throne as one of the most entrenched operators in the space and one of the largest companies in the world, there’s more to the story.
On a gross merchandise value (GMV) basis, Alibaba sells more than its American counterpart, reaching $1.2 trillion, while Amazon sells less than half at $575 billion. The difference is in revenues, as Amazon generates more revenue from this merchandise than Alibaba, which could be undercutting strategies to take on market share.
In other segments, such as the cloud business known as Amazon Web Services (AWS), Alibaba has a bigger reach. It taps into the fastest-growing middle-class populations in the world, who are now going online at a faster rate.
Michael Burry may have spotted, apart from these potential tailwinds, the potential effects that these new stimulus measures may have on the company. Triggering more domestic and international demand will likely have a trickle-down effect (benefit) on Alibaba’s financials.
This could be why analysts at Citigroup still see a price target of $122 a share for Alibaba stock, daring it to rally by 60.4% from where it trades today. More than that, Alibaba stock’s short interest has declined by 1.9% in the past month, opening the way for more bullish capital to enter the stock.
China's Economic Stimulus and Interest Rate Cuts: What's Next for Investors?
Because the iShares China ETF has some of China's blue-chip stocks among its top holdings, investors should consider what this move may mean for those with a more significant risk appetite. The ETF's top holding is Tencent Holdings (OTCMKTS: TCEHY), followed by Alibaba in second place and PDD Holdings Inc. (NASDAQ: PDD) in third.
Interestingly, the concentration is all in the technology and consumer discretionary spaces, disproving the dominant belief that China is primarily a manufacturing nation. Because these companies are highly dependent on the national – and international–consumer cycle, Dalio chose this as his Chinese bet.
The Chinese government has recently added the newest round of economic stimulus, this time by lowering several interest rate benchmarks that would, in turn, help lower rates on other consumer instruments like credit cards and mortgages.
This is what Dalio may have predicted, and therefore, his bet in the concentrated ETF. But there's more to it. The Chinese ten-year treasury bond now pays investors a 2.24% yield, significantly below the Hang Seng Index's 5.3% dividend yield. Whenever stocks pay a higher yield than bonds, it typically triggers a mass of stock buyers.
Not this time, though, as the obstacle is made up of those fearful of investing in Chinese names. That could be the gap Michael Burry is trying to exploit today.
Over the past 12 months, this is what happened. Up to $5.7 billion in institutional capital was invested into Alibaba stock. Will the rate cuts make the stock rally? Will the inverted stock versus bond yields get it done? No one knows, but Burry and Dalio are willing to find out.
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