Ticker Reports for August 22nd
Advance Auto Parts Eyes Long-Term Growth Despite Q2 Hurdles
Advance Auto Parts (NYSE: AAP) witnessed a dramatic plunge in its stock price, falling over 20% in pre-market trading after the company released its second-quarter 2024 earnings report. The disappointing results triggered a strong adverse reaction from investors, including a miss on earnings per share (EPS) expectations, lower-than-anticipated revenue, and a reduction in full-year guidance. This performance comes as the company navigates a challenging economic environment marked by inflationary pressures, supply chain disruptions, and fierce competition in the automotive parts and retail sectors.
Advance Auto Parts Q2 Sales Flat, Misses Estimates
Advance Auto Parts' earnings report for the second quarter revealed net sales of $2.7 billion, which remained flat compared to last year's and fell short of Advance Auto’s analyst community’s consensus estimates. While comparable store sales showed a modest increase of 0.4%, this growth was not enough to offset the company's headwinds.
Gross profit decreased by 2.3% year-over-year, reaching $1.1 billion, with a gross margin of 41.5% compared to 42.5% in Q2 2023. The company attributed this margin compression to strategic pricing investments to maintain competitiveness and higher product costs from inflationary pressures.
Operating income also took a significant hit, declining to $71.8 million, or 2.7% of net sales. This is down from 4.7% of net sales in the second quarter of 2023. A key driver of this decline was increased selling, general, and administrative (SG&A) expenses, primarily due to wage increases for frontline employees and higher professional fees. These fees included costs associated with implementing the company's strategic plan and remediating previously disclosed material weaknesses in Advance Auto’s financial reporting.
Ultimately, Advance Auto Parts reported diluted earnings per share (EPS) of $0.75 for Q2 2024, falling significantly short of the consensus estimate of $1.32 and the $1.32 EPS reported in Q2 2023. This substantial miss on earnings expectations played a major role in the negative market reaction.
In the earnings release, Shane O'Kelly, President and Chief Executive Officer of Advance Auto Parts, acknowledged the difficult demand environment while thanking the team for their dedication. He emphasized the company's ongoing efforts to improve its sales trajectory and productivity, stating, "The next chapter of our strategic and operational review will now focus on the remaining Advance business, with the goal of improving our sales trajectory and the productivity of all our assets to deliver stronger returns for our shareholders."
Advance Auto Parts Refocuses on Core Business with Worldpac Sale
Simultaneously with the earnings release, Advance Auto Parts announced a significant strategic move: the divestiture of its Worldpac business to global investment firm Carlyle (NASDAQ: CG) for $1.5 billion in cash. This transaction, expected to close before the end of the year, is anticipated to generate net proceeds of approximately $1.2 billion after taxes and transaction fees.
The sale of Worldpac, a wholesale distributor of original equipment import parts, represents a clear step towards simplifying Advance Auto Parts' enterprise structure and sharpening its focus on its core "blended box" business model, which serves both do-it-yourself (DIY) customers and professional installers.
This divestiture is expected to provide multiple benefits. Firstly, it will generate significant cash proceeds, which the company plans to use primarily to strengthen its balance sheet by reducing debt and reinvesting in its core business. Secondly, by exiting a non-core business segment, Advance Auto Parts can allocate more resources and management attention to enhancing its core operations and improving profitability. This increased focus and financial flexibility could be crucial for navigating challenging market conditions and positioning the company for future growth.
Advance Auto Parts Revises 2024 Guidance, Focuses on Strategic Adjustments
In light of the Q2 performance and ongoing market challenges, Advance Auto Parts updated its full-year 2024 guidance, providing a more cautious picture than previously anticipated. The company now projects net sales between $11.15 billion and $11.25 billion, with comparable store sales ranging from a decline of 1.0% to flat growth. This revised guidance is lower than the previous outlook and falls short of analyst consensus estimates.
The company also lowered its operating income margin projection to a range of 2.1% to 2.5% and adjusted its diluted EPS guidance to $2.00 to $2.50. This is significantly below the consensus EPS estimate of $3.55. Advance Auto Parts also expects to generate a minimum of $100 million in free cash flow for the year.
These downward revisions reflect the company's ongoing headwinds, including inflationary pressures on both product costs and operating expenses, as well as increased competition within the industry. However, despite the challenges, Advance Auto Parts is actively implementing strategies to improve its performance. These include cost optimization initiatives to enhance efficiency, operational improvements to enhance the customer experience and drive sales, and targeted investments in key growth areas. The company also continues focusing on its "blended box" strategy, aiming to cater to DIY customers and professional installers effectively.
Market Reacts to Advance Auto’s Challenges with Mixed Analyst Ratings
The market reacted swiftly to the Q2 earnings miss and lowered guidance, with Advance Auto’s stock price plummeting over 20% in pre-market trading. This negative reaction underscores investor concern about the company's near-term prospects and ability to navigate the current economic environment.
Several research firms have recently adjusted their ratings and price targets for Advance Auto’s stock. Wells Fargo & Company (NYSE: WFC) maintained a "hold" rating with a price target of $60.00, while JPMorgan Chase & Co. (NYSE: JPM) downgraded the stock to "neutral" and lowered their price target to $55.00. Mizuho (NYSE: MFG) and Truist Financial (NYSE: TFC) also reduced their price targets, reflecting a more cautious outlook.
According to MarketBeat data, the overall analyst sentiment appears to be one of reservation. The stock has a consensus Reduce rating but a consensus price target of $63.36, representing about a 22% upside.
Advance Auto Parts: A Path Forward Despite Challenges
Advance Auto Parts faces a challenging road ahead as it grapples with a difficult economic climate and internal challenges. The Q2 2024 earnings miss and lowered full-year guidance highlight the company's headwinds. However, the divestiture of Worldpac provides a strategic opportunity to streamline its operations, strengthen its financial health, and focus on its core business.
The success of this strategy will depend on the company's ability to effectively execute its cost optimization and operational improvement initiatives, as well as its success in capturing market share in the competitive automotive aftermarket parts industry. Investors will be closely watching the company's progress in the coming quarters to assess its ability to navigate these challenges and deliver stronger returns.
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Toll Brothers Stock Up on Q3 Beat: Luxury Homes Drive Growth
Toll Brothers (NYSE: TOL) is one of the largest home-building companies in the United States. In 2023, the company's revenue was nearly $10 billion, putting it in fourth place behind giants like Lennar Corp (NYSE: LEN) and D.R. Horton (NYSE: DHI).
Shares have performed well in 2024, providing a total return of 38%, significantly outpacing the market and its industry. The iShares U.S. Home Construction ETF (BATS: ITB) has returned just under 17%. The consumer discretionary stock reported fiscal Q3 2024 financial results on Aug. 21.
Let’s examine Toll Brothers' annual report to understand its operations. We'll then review the firm’s earnings results and try to reconcile them with recent economic data. I’ll close by providing some outlook on the firm.
Toll Brothers: Luxury is the Name of the Game
Toll Brothers is in the business of building, selling, marketing, and arranging financing for luxury home communities. Most of the company’s business focuses on single-family homes, but it also has a significant multi-family business. The company’s homes are expensive. In the last quarter, the average price of homes it delivered was $968,000.
The company delivered over 46,000 homes in the five years ended October 2023 in over 900 separate communities. These communities are “master-planned” and may include features like parks, trails, pools, or community areas.
Toll Brothers Surpasses EPS Forecasts, Shares Climb in Response
Toll Brothers beat estimates on adjusted earnings per share (EPS) and revenue, and the market rewarded it. Adjusted EPS was a particularly good beat, coming in at $3.60 versus consensus estimates of $3.31. This was a surprise of 10% and a decrease of around 3.5% from a year ago.
Revenue came in $20 million above expected at $2.73 billion, an increase of 1.5% from a year ago. Additionally, the company raised its full-year adjusted EPS guidance to a mid-point of $14.63 from the $14.00 previously expected. On the day of the release, shares jumped over 5%.
Housing Data Challenges Toll Brothers' Outlook
The decrease in earnings is not surprising given that several economic indicators important to Toll Brothers have shown unfavorable readings as of late. For example, construction spending growth was negative for the first time since October 2022. Spending fell 0.4% and 0.3% month over month in May and June, respectively. These numbers are even worse when looking specifically at residential spending.
Building permits fell by over 10% from February to May of this year. In July, they hit the lowest level since June 2020. Housing starts have also dropped considerably since February. These measures are indicators of demand for housing; however, they are somewhat forward-looking and may not have fully affected Toll Brothers' revenues. They could put pressure on revenues going forward.
Lower Rates and Customer Strength May Benefit Toll Brothers
However, other factors will likely help Toll Brothers, namely mortgage rates. The U.S. 30-Year Fixed Rate Mortgage Average has been down nearly 75 basis points since May and could continue to drop. The expected Federal Reserve rate cuts could benefit homebuilders like Toll Brothers, and these cuts may lower mortgage rates even further.
According to the CME FedWatch Tool, there is a 35% chance of a 50-basis point rate cut and a 65% chance of just a 25-basis point rate cut as of Aug. 21. The 50-basis point cut percentage jumped from 29% in just one day, likely on news of one of the largest revisions in job growth numbers on Aug. 21.
The Labor Department found that from March 2023 to March 2024, the economy added 818,000 fewer jobs than it previously calculated. This makes it more likely that the Fed will cut rates, as the economy is weaker than previously thought. It may need monetary policy stimulus faster than expected to secure a “soft landing.".
Another factor that could help Toll, compared to other homebuilding companies, is its customers' feelings about the economy's future. Look at the “Expectations” component of the University of Michigan Consumer Sentiment Index, broken down by income group.
It shows that people in the top third of incomes in the U.S. only feel 2% worse about the economy's future than they have on average over the past 10 years. In contrast, Americans in the bottom and middle thirds feel 10% worse about the economy's future than they have on average. This is favorable for the future demand for Toll Brothers' luxury homes compared to builders focusing on lower- and middle-income groups.
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4 No-Brainer Stocks to Hold This Fall for Steady Gains
When markets get volatile, investors of any size and background tend toward certainty in business models and predictability in cash flows. Fitting this category are stocks in the consumer staples sector, known for their defensive nature. This is born of the products and services these companies offer, which drive the stability in earnings that drive analyst targets higher along with stock prices.
Some of the United States technology sectors mistakenly categorized in the consumer discretionary space also fit this list. Companies like Alphabet Inc. (NASDAQ: GOOGL) will remain the go-to search engine for global users through the business cycle, making most of its money through advertising and cloud computing services. Apple Inc. (NASDAQ: AAPL) is also progressing as a commodity product globally.
Moving to a completely different but just as steady and predictable spectrum, investors can look at one of Warren Buffett’s latest picks, Ulta Beauty Inc. (NASDAQ: ULTA), for another commodity player in the skincare and makeup niche. Paired with another of Buffett’s older picks, Coca-Cola Co. (NYSE: KO) will give investors a strong mix to navigate today’s market.
As Long as the Internet Exists, Google Stock Will Always Have Upside
This may sound overstatement, but it’s closer to reality than any other statement surrounding U.S. stocks. As the global economy is increasingly digitized and taken online, businesses like Google will always have a place under the sun.
From storage, cloud computing, email, and office services, and even advertising, Google is there to serve. Having so much reach and such a broad audience allows Google to generate massive cash flows that have become easily predicted.
This very nature allows Wall Street analysts to quickly place a valuation on the stock. And those at BMO Capital Markets landed on $222 a share for Google stock, daring it to rally by as much as 33.8% from where it trades today.
Helping these price targets is the Wall Street forecast for up to 13.1% earnings per share (EPS) growth for Google stock in the next 12 months.
Apple Products: The Must-Have Commodity No One Wants to Let Go Of
It doesn't matter whether the economy is booming or busting; consumers are likely to leave room in their budgets for their necessary Apple products, and that makes the company as much a staple as a grocery store, in most markets' opinion.
Warren Buffett has been a bull on this stock for years and recently decided to sell half of his stake in his biggest winner. However, this move does not mean he has suddenly turned bearish on Apple stock. Buffett laid out his rationale for this sale as being tied to avoiding a higher tax rate on these capital gains down the line.
This is a wise move by Buffett but not one that retail investors have to make; after all, they won't face a multi-billion tax bill like Buffett does.
Wall Street analysts still forecast 12.3% EPS growth in the coming year for Apple, and the stock has recently recovered to 95% of its 52-week high. Meanwhile, those at Goldman Sachs want to see it hit a new high of $275 a share, calling for a 21.4% upside from today.
Ulta Beauty’s Stable High Returns Make It a Buffett Favorite
While business sectors and picks may change for Buffett, one thing does not change, and that is his process. He will always look for sustainable and growing businesses with high returns on capital, and Ulta Beauty's stock fits the bill just perfectly.
The company’s financials show a return on invested capital (ROIC) rate of over 29.6% in the past 12 months, making it one of the most profitable companies in the Buffett portfolio.
These high returns aren’t set up to fluctuate much, either, as makeup and skincare are just as much a commodity as any other.
This is why Wall Street analysts now forecast up to 10.4% EPS growth for the company, helping those at J.P. Morgan Chase land on a price target of up to $544 a share, calling for as much as 42.8% upside from where the stock trades today.
Coca-Cola Products Are Just as Adaptable as Its Stock
Coca-Cola covers it all, whether snacks, water, or good old soda. Warren Buffett knew that Coca-Cola consumers were likely to become addicted and loyal to its products, so he bought the stock very early on, even before it became the global behemoth it is today.
Realizing that, just by keeping up with inflation and raising the price slightly on the billions of Coca-Cola servings daily, the company can generate a few additional millions in earnings per year, analysts are always happy to give their opinion on this stock.
A 6% EPS growth forecast is enough for this giant consumer company to fuel a $75 a share price target coming from those at Citigroup, which also calls for a 7.7% upside from where the stock trades today.
On top of this high single-digit upside, investors can enjoy a 2.8% dividend yield with a 63-year record of increasing each year.
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