Ticker Reports for August 3rd
Investors Flock to Auto Retail Stock as It Hits New Highs
Investors have grown worried about the current state of the United States economy, especially now that the ISM Manufacturing PMI index has delivered a 21-month contraction. A reading of 46.8% for July makes it the worst reading in nearly two years. Markets figured that the promise of interest rate cuts from the Federal Reserve (the Fed) was insufficient to justify higher stock prices amid declining fundamentals.
But, despite being part of the consumer discretionary sector, shares of AutoNation Inc. (NYSE: AN) gave investors a reason to stick around, notably after the company released its latest quarterly results. As an initial reaction to the news, the stock rallied by 12.5% to a new all-time high price of $197.2 a share, so there must be a reason for markets to ignore the weakening state of the consumer.
Investors keeping exposure to stocks like AutoNation are worried about inflation, unemployment, and declining new and used vehicle prices. However, the quarter's financial results showed why the stock is still being rewarded with additional upside from markets and Wall Street analysts. Here are some reasons AutoNation stock has delivered a 26.9% year-to-date price performance.
Improving Financial Metrics Justify New Analyst Targets for AutoNation Stock
There are two types of issues that can affect a company's financial quarter: systemic (market or industry-wide issues) or company-specific issues. For AutoNation, it wasn't a company-specific issue that caused its revenue to decline by 2% on the year.
Falling average sales prices (ASPs) per vehicle caused AutoNation's top line to contract. Still, that trend is likely to affect peers like CarMax Inc. (NYSE: KMX), so investors can safely assume that there isn't anything specifically wrong with AutoNation that is causing the financial contraction today.
In fact, management feels so strongly about this that they've allocated up to $350 million in share buybacks as a vote of confidence that the stock is not only on the cheaper end today but also expected to see a brighter future ahead. Funding these buybacks is the $519 million in free cash flow (operating cash flow minus capital expenditures) that AutoNation generated.
While free cash flow has fallen by 2.1% over the past 12 months, the conversion rate matters more—or should matter more—to investors. A conversion rate (free cash flow as a percentage of net income) rising to 147% is significant, showing an improvement in the company's capital cycle and inventory management.
As current inventory values decrease, investors want to see that out of AutoNation as proof that the company is effectively managing this new environment. Of course, others on Wall Street share this satisfying financial metric.
Those at Bank of America decided to boost their price targets on AutoNation stock, this time up to $220 a share as of July 2024, where they previously saw a valuation of $210. To prove these new price targets right, AutoNation stock will need to rally by 21% from where it trades today and make a new all-time high price.
AutoNation's Strong Results Masked by Technical Difficulties
In June 2024, AutoNation, along with other peers in the automotive industry, suffered from a system outage. A hack into CDK Global, an integrated information (IT) company that serves most of the vehicle market with sales, financing, and marketing solutions, caused (again) a systemic issue that masked AutoNation’s actual results.
Ending the quarter with an unexpected incident such as this one could have caused some of the issues that came to light in the company’s quarterly results, which gives investors more reason to watch the stock now that the market is declining due to weak PMI data.
On August 1st, Natixis Advisors decided to boost their stake in AutoNation stock by 4.2% as an initial reaction to the company’s announced quarter. Today, that boost brought the asset manager’s net investment in AutoNation stock up to $2.5 million.
All of this bullish evidence may have caused some bears to bail out of AutoNation stock. Over the past month, its short interest has declined by 4.5%, opening up more room for bullish investors to step in and replace them.
It was also enough for markets to bid up AutoNation stock’s valuation, specifically on a price-to-book (P/B) basis. Trading at 3.6x today will command a premium of over 20% from the automotive sector’s average 3.0x P/B multiple today, and there’s always a good reason for stocks to trade near highs and at premium multiples.
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Take a Bite: This Snack Giant Is a Safe-Haven Stock Worth Buying
With sector rotation upon us, it is time for investors to take a more significant bite out of safe-haven names like Mondelez (NASDAQ: MDLZ). The rotation is due to the recent inflation data and FOMC policy statement, which were sell-the-news events. They are sell-the-news events because they signal a shift in policy that will lead to easing economic conditions and a broader rally in stocks sometime in the future.
The market will experience volatility and turbulence between then and now, seeing many previous leaders fall. The market is heavily concentrated in leaders like NVIDIA (NASDAQ: NVDA) and Microsoft, which are already experiencing some of the largest declines.
The term "safe-haven" refers to stocks with established, resilient businesses, such as consumer staples, that are capable of weathering market volatility. One way to measure that is with beta; the lower the beta, the less volatile relative to the S&P 500 (NYSEARCA: SPY). Because Mondelez has a beta of 0.5x, it is half as volatile as the S&P 500 and is already trading near significant lows and critical support targets, unlikely to fall further.
Cash Flow, Capital Returns, and Value Make Mondelez Worth Owning
What makes Mondelez a low-volatility stock worth holding? Its cash flow, financial health, and capital return. The dividend is only part of the story, yielding about 2.5% at current price points, but it is central to the story. The company pays about half of its earnings in dividends, about 53% of the 2024 consensus estimate, allowing ample room to sustain dividend increases. Dividend increases foster buy-and-hold investing.
Buy-and-hold investing helps to reduce volatility. Aside from the single distribution cut associated with the separation from Kraft in 2012, the company has only increased its dividend and is now tracking for Dividend Aristocrat status. That will reduce volatility further as Dividend Aristocrat-tracking funds and investors buy into the stock. Share repurchases help to provide upward price pressure to the market by reducing the share count; Mondelez's share count fell by 1.7% in Q2 and 1.4% in the first half, and buybacks are expected to continue for the foreseeable future.
Modelez Reports Mixed Results for Q2
Mondelez reported mixed results for Q2, with revenue falling nearly 2% compared to last year and missing consensus estimates. Offsetting factors include the 2.5% organic growth and cash flow efficiency it produced. The company’s GAAP earnings were impacted by non-cash impairments and costs related to ERP implementation. However, the adjusted earnings rose by 25% compared to last year, beating the consensus estimate by a wide margin and sustaining flat cash flow levels despite the top-line weakness. ERP costs will fade over the next few quarters while increasing efficiencies and highlighting growth opportunities, so they are acceptable today.
The analysts' response to the news was promising, ending a string of price target reductions with several raised targets. The takeaway is that MDLZ stock offers deep value trading below the analysts' lowest target, the consensus offers nearly 20% upside, and the sentiment is improving. In this scenario, the price action in MDLZ could begin advancing soon and move up to the consensus $79 before the year’s end, setting a new all-time high.
The price action in MDLZ is favorable to a rebound. The spring sell-off stalled at the critical moving averages, where it shows signs of support. The critical hurdle is the 150-day moving average, which is still above the action. If MDLZ can’t move above that level, it will likely remain range-bound at the current levels. Because the indicators also show support at this level and are set up for a strong trend-following entry signal, that is not expected, and higher prices are likely soon.
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EA's New Game Launch Boosts Stock: Is It Time to Buy?
July 19, 2024, was Christmas in July for fans of the Electronic Arts Inc. (NASDAQ: EA) college football franchise. For the first time in a decade, gamers had the opportunity to play as their favorite college football teams and players as EA Sports College Football 25 launched online.
During its early access period, which started on July 19, the game had 2.2 million unique players. By the time the company reported earnings on July 31, that number had reached over five million.
However, with EA stock up 9.9% in the last month and 10% in 2024, is all the momentum from this launch priced into the stock? Early price action would suggest that may be the case. After climbing 4.7% after the report, EA stock has returned most of those gains.
EA Issues Optimistic Guidance for Upcoming Quarter
On July 31, EA delivered its first quarter earnings report for its 2025 fiscal year. The company reported earnings per share (EPS) of 45 cents, which was above the consensus estimate of 41 cents. Revenue of $1.26 billion was also higher than the $1.22 billion that was forecast.
The company also issued guidance for the upcoming quarter for bookings ranging from $1.95 billion to $2.05 billion. At the midpoint, that’s higher than analysts’ estimates for $1.95 billion.
That has to be a little comforting to investors, as the coming quarters are supposed to reflect growth from its College Football title, the launch of Madden NFL 25 in August, and its soccer title FC 25 in September. Both titles have a rabid base of fans that will help drive bookings growth.
Growth Concerns for EA Are Keeping Analysts Cautious
However, investors may still be concerned about the success of the company’s non-sports games. Apex Legends, the latest addition to the company’s Apex franchise, has been reporting lower bookings.
Plus, while the company beat analysts’ estimates for the quarter, the top and bottom lines are still lower YoY, and not by just a little bit. Furthermore, even with the anticipated earnings growth for the remainder of its fiscal year, the company’s earnings will still be trailing YoY levels.
Is EA Stock a Good Value?
With a forward price-to-earnings (P/E) ratio of around 26x, EA stock is a good value compared to the broader software sector. However, technology stocks have been battered recently, and investors may need to see more before deciding if the stock offers a fair value.
The EA analyst ratings on MarketBeat show that nine analysts have raised their price targets on EA stock since the earnings report. The highest comes from TD Cowen, which gives the company a new price target of $184. However, the consensus price of $158.95 gives investors only about a 6.9% upside.
It’s also important to note that institutional buying has dried up after strong buying in the first quarter. That was likely in anticipation of the College Football release.
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