Ticker Reports for August 13th
Buy On Holdings Stock Before the Market Catches Its Second Wind?
On Holdings’ (NYSE: ONON) Q2 results were mixed regarding the analysts' expectations, but that is the only thing to hold against them. The strengthening of the Swiss franc impacts the details, which are still robust in every way and driving the stock price higher.
The critical detail is that this athletic apparel maker continues gaining traction, and its share prices will increase in time. The takeaway is that investing is more like a marathon than a sprint, and this race is less than half over. Sales are growing at a robust pace but still a drop in the bucket compared to consumer industry leader Nike (NYSE: NKE), more so when compared to the global athletic shoe sales outlook, leaving ample share to be gained.
On Holdings Growth Accelerates: Reaffirmed Guidance is Cautious
On Holdings had a stellar quarter despite missing the analysts' estimates for earnings. The revenue of $656.15 (converted from CHF; amounts may not be exact) is up 28% on strength in all metrics and outpaced the consensus estimate by 100 basis points. The outperformance is slim but strong in light of the revisions trend; most revisions in the last 90 days were upward, and growth is accelerating and setting another record.
Internally, Asia-Pacific and Apparel were the strongest, with gains of 73% and 63% reported, but all segments produced double-digit gains. The core shoe segment grew by 27%, the core European market by 22%. Accessories grew by 23%; US sales grew by 25%; DTC up 28% across the system; wholesales up 27.6%. There is nothing wrong with those numbers.
Margin is also an area of strength. The company widened its gross margin by forty basis points and increased the adjusted EBITDA margin by 200 bps to significantly improve cash flow and profitability. Adjusted EBITDA is up 44%, driving triple-digit GAAP and adjusted EPS gains. The adjusted EPS of $0.16 fell short of the consensus by a penny but is up 250% compared to last year, and guidance is strong.
The company reaffirmed its guidance for at least 30% top-line growth and the expectation that margins will continue widening. The company CEO is forecasting business to strengthen in the back half of the year, stating that the company is well on track to hit its goals. This suggests that guidance is cautious and outperformance is expected.
On Holdings Accelerates Improving Shareholder Value
The balance sheet improvements are among the critical details from On Holding’s Q2 report. The company increased its liability, offset by the positive cash flow quarter, the 32% increase in cash, a 14% increase in working capital, and a 15% increase in shareholder equity. Equity gains are accelerating from last year’s 6% gain and will continue to drive value as the year and year’s progresses. Among the CAPEX plans for this year is to continue with the automation of U.S.-based warehousing, which will improve leverage now through efficiency and provide improved scalability for the coming years, another driver for margin.
Analysts Lead On Holdings to Fresh Highs
The analysts' response to the news is bullish. The first revision tracked by MarketBeat.com is a reiterated Outperform rating with a price target of $47, which aligns with the trends. The trends in sentiment have the consensus rating edging higher from Moderate Buy to Strong Buy over the last two quarters and the consensus price target up 35% to $43.65, with most fresh targets in the range of $45 to $55 or a gain of 12% to 37.5%. A move to the consensus would align the market with the all-time high.
The market response is favorable. The stock price faltered immediately after the release, but the market quickly found its footing. It is now up more than 5%, showing support at the 30-day moving average and a strong buy signal in the indicators. The stochastic and MACD indicators show bullish crossovers with room to move higher, suggesting this market could advance to the $44 level or higher. The $44 level is today’s critical resistance point; a move above it would likely lead to another sustained rally and a high potential for a new all-time high.
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3 High-Potential Stocks That Could Turn Into Multi-Baggers
For most investors, the best fit for their capital is a passive index fund or mutual fund, which outsources their financial future to the hands of the stock market, often the S&P 500. While this is the surefire way to build capital over the long term, another way could provide a faster path to wealth without necessarily added risks. Warren Buffett understood this.
By picking individual stocks, as long as they fit certain profitability and growth criteria, Buffett grew his wealth at over 20% a year for several decades, making him the richest man in the world at one point. Replicating Buffett’s track record might not be realistic, but being 10% as good as the best out there will still end up being life-changing. On that note, investors can pick up on the few characteristics that Buffett looks for before considering buying a business.
First is the return on invested capital (ROIC) rate, driven by both steady and predictable revenues and a high gross margin, enabling capable management to compound this leftover capital for investors. Predictable cash flow software names like Alphabet Inc. (NASDAQ: GOOGL), China’s biggest E-commerce player, Alibaba Group (NYSE: BABA), and a simple grocery play for the consumer staples sector like Sprouts Farmers Market Inc. (NASDAQ: SFM) all fit this profile.
High ROIC Fuels Google's Double-Digit Upside Potential
One of the perks of being a big software company like Google is that cash flows start to become predictable, as subscriptions and advertising revenue are a less cyclical way to navigate the market’s volatility. Google’s business model allows it to manage costs to a point of predictably having a 57.6% gross margin, leaving plenty of capital to work with.
Management uses this capital to reinvest at high return rates, which reach an ROIC of over 25% on average for the past five years. ROIC matters because annual stock price performance tends to match the long-run ROIC rate, so investors can now start to get closer to Buffett’s 20% or so annual return and compound.
Looking at the stability and growth of the business, Wall Street analysts now forecast up to 13.1% earnings per share (EPS) growth for Google in the next 12 months. While this may not be the most aggressive growth rate, it is significant considering that Google’s size is over $2 trillion today.
Leaning on these trends, BMO Capital Markets has set a $222 a share price target for Google stock, daring it to rally by as much as 36% from its current level. Considering the stock already trades at 89% of its 52-week high, this also represents a further vote of confidence in the potential momentum the company can deliver.
China's Growth Momentum Puts Alibaba Stock in the Spotlight
While the United States economy has been struggling with slowing inflation, throwing the manufacturing sector into a 21 consecutive-month contraction, China has been doing the opposite. Reporting accelerating growth in inflation in every month of 2024 will help consumer discretionary stocks like Alibaba.
Knowing this, legendary investor Michael Burry (who called the 2008 financial crisis) has made both Alibaba and JD.com Inc. (NASDAQ: JD) his largest holdings today. Ray Dalio joins Burry in the optimistic sentiment for China, as he has been accumulating positions in the iShares MSCI China ETF (NASDAQ: MCHI) since 2023.
Now, a 37.7% gross margin for Alibaba will place the company among the top retail and e-commerce names today. Being able to keep so much capital from each sale, management is taking advantage of the low business cycle by allocating up to $25 billion to share buybacks.
These programs represent over 13% of the company’s market capitalization. While ROIC rates are below 10% today, as China's stocks have been severely compressed in the cycle, management is putting aside enough capital to make this stock a potential multi-bagger once the cycle turns up and the ROIC returns to historical levels.
Knowing this, Wall Street forecasts 11.3% EPS growth, leading to the $116 price target set by Jefferies Financial Group, which calls for a 43.3% upside from where the stock sits today.
Sprouts Farmers Market: A Perfect Blend of Stability and Growth
No matter whether the economy is booming or busting, consumers will likely always find room in their budgets to buy groceries. While this may not create the exciting growth rates investors can expect out of the technology sector, Sprouts Farmers Market stock offers more stability and a less bumpy ride to wealth building.
Building on this fundamental factor, investors shouldn’t be surprised to see a 37.6% gross margin out of this company, which is higher than other peers like Walmart Inc. (NYSE: WMT), which only generates 24.5% gross margins. This gross margin superiority signals investors that there might be more pricing power or market penetration.
This pricing power and superior position have allowed management to reinvest at ROIC rates above 12% over the past five years. Again, this is not the most exciting growth, but it still outpaces most alternatives in the market.
Leaning on these trends, analysts at Goldman Sachs decided to boost their valuations on the stock from $89 a share up to $111 a share as recently as July 2024. This new view calls for a 15.6% upside from where it trades today.
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CEO Swap: Starbucks Surges 22% on Hiring New CEO From Chipotle
Global coffeehouse chain and coffee supplier Starbucks Co. (NASDAQ: SBUX) made a bombshell announcement that it is replacing current CEO Laxman Narasimhan with the current CEO of Chipotle Mexican Grill Inc. (NYSE: CMG) Brian Niccol. The news caused Starbucks shares to surge by 22% in premarket trading, while Chipotle shares fell 13% as traders engaged in a pairs trade strategy.
Starbucks CFO Rachel Ruggeri will take the helm as interim CEO effectively immediately. Niccol will leave Chipotle on Aug. 31, 2024, and commence the CEO role at Starbucks on Sept. 9, 2024. Chipotle COO Scott Boatwright will assume the role of interim CEO at Chipotle on Sept. 1, 2024. Chipotle President of Strategy, Finance and Supply Chain Jack Hartung will remain on board, rescinding his earlier retirement plans for early 2025.
Starbucks operates in the retail/wholesale sector, competing with Dutch Bros. (NYSE: BROS), Luckin Coffee Inc. (OTCMKTS: LKNCY), and privately owned Dunkin Donuts.
Starbuck’s Gets a Much Needed Jolt
Starbucks has been struggling, with shares trading down 19.77% prior to the new CEO announcement. The company missed consensus analyst revenue estimates by $135 million for its third quarter of 2024 as revenue fell 0.7% YoY. Most concerning was the global comparable store sales falling 3%, driven by a 5% drop in comparable transactions. In North America, comparable sales dropped 2%, driven by a 6% drop in comparable transactions.
Contrast this to Chipotle's most recent earnings, which posted 18% YoY revenue growth, beating consensus estimates by $32.5 million. Chipotle also posted an impressive 11.1% restaurant-level comparable sales growth, driven by 8.7% transaction growth as average check size grew 2.4% YoY. Chipotle also managed to grow restaurant-level margins to 28.9%, surpassing the 27.5% consensus estimates.
Is Chipotle’s Loss Starbuck’s Gain?
Chipotle CEO Brian Niccol was largely credited for Chipotle’s success since he took the top role in March 2018. Niccol spearheaded the digitization efforts, tepid store count growth, food quality improvement, international growth efforts and the addition of drive-thru Chipotlanes. Chipotle also executed a record 50-to-1 stock split under his tenure, which opened the door to a new generation of investors who could finally afford the stock.
Frictionless and Seamless Engagements
Under Niccol's leadership, Chipotle has enhanced customer interactions and transactions, significantly contributing to the industry-leading 11.1% YoY growth in same-store sales. Chipotlanes underscores the frictionless model as customers place their orders in the Chipotle mobile app and pick them up seamlessly through the drive-thru without having to park. Customers can only place their drive-through orders through the Chipotle app, which helps to keep traffic flowing, rather than having customers place orders through a window and wait to be completed.
Incidentally, long wait times have been a major pain point with Starbucks, especially during the morning rush. The company has admitted that 17% of its mobile orders don't complete the checkout because customers can't handle the wait times. The company claimed it was a product of their success as their popularity is what drives the traffic. The company has been working on ways to improve order turnaround times. One distinction between the two brands is that Chipotle owns 100% of its stores. Starbucks also owns its stores but licenses an estimated 40% of them.
SBUX Stock Completes the Gap Fill
The daily candlestick chart for SBUX formed a gap fill through the $87.19 level on the morning gap and continued to gap and go. The 94.14 weekly upper Bollinger Bands and the $98.36 are the next upside resistance level to watch. The daily relative strength index (RSI) has surged to the $96-band. Pullback support levels are at $90.66, $87.18 gap fill, $84.42, and $81.48.
Starbucks analyst ratings and price targets are at MarketBeat. There are 26 Wall Street analyst ratings on SBUX stock, comprised of 11 Buys and 15 Holds.
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