Earnings season is back in full force and we had multiple featured companies here at Stocktrades report.
In an effort to save you time, keep you more informed on your holdings, and help you invest stress-free, we compile what you need to know about every company in our weekly newsletter.
However, one order of business before we start, and a notable one.
Portfolio now available on website
As a bonus this week, I’d like to announce that I’ve (Dan) placed my portfolio on the dashboard in an effort to increase transparency and provide additional insight.
I’ll be reporting any transactions made in the portfolio, along with all of my holdings and allocations.
You can view the portfolio here, which is updated in real time, and the transactions will be placed below it and also on the main dashboard. If you ever want to access it again, simply hover or click on the “Premium” menu item when you’re logged in, and it is the bottom selection.
I am happy to field any questions on it via the Q&A on the website.
But, lets dive right into earnings, first with the US Foundational Stocks.
Starbucks (SBUX)
Starbucks reported a mixed first quarter of 2024. It missed expectations on the top and bottom lines, but they were relatively small misses, and there was lots to like about the quarter.
Earnings per share of $0.90 came in 3 cents lower than expected, and revenue of $9.4B came in about $100M lighter than expected.
Revenues increased by 8% compared to the first quarter of last year to sit at a record $9.4B, and same-store sales growth increased by 5% in North America and 7% internationally.
Over the same period, earnings have grown by 20% as the company continues to make its operations more efficient to boost margins.
Starbucks’s sales this quarter had some interesting elements. Its US segment saw a 5% growth in same-store sales, but nearly all the growth was fueled by an increase in ticket price, not actual transactions.
On the other hand, its International and China segment’s same-store sales growth increased by 7% and 10%, respectively, but their average ticket price declined. What to take from this? It’s difficult to say at this point. It could be that their US business is more mature while it is still establishing a brand in its International and China segments.
On the other hand, with a decline in average ticket in China, this could mean consumers are cutting back. It will be something to keep an eye on.
The company opened 549 net new stores on the quarter and now sits at 38,587.
The company expanded its operating margin by 1.4% to sit at 15.8%, and it did so by improving in-store efficiencies.
Overall, the quarter’s double-digit earnings growth, record revenue, and improving margins are bright spots. The company also reaffirmed its guidance for 15-20% earnings growth this year.
Alphabet (GOOG)
US technology stocks were seemingly priced to perfection heading into this quarter. So, despite topping expectations on all fronts, Alphabet failed to impress investors during a huge run-up in tech. As long-term investors, this really doesn’t phase us, and the company put up some strong results.
Earnings of $1.64 topped expectations of $1.60, and revenue of $86.31B came in about a billion dollars higher than expected. However, the company reported softer ad revenue than many analysts had predicted, so the stock dropped on earnings day.
Overall, the company closed out 2023 with constant-currency revenue growth of 10%, a 1% increase in operating margins, and 27% growth in earnings per share.
Google Search continues to dominate, as the company controls a 90%+ market share in search. Revenue in this segment grew by 12.7% compared to the fourth quarter of last year, and YouTube is seeing a resurgence in growth after a relatively soft 2022. It reported a 15.5% growth in YouTube Ads.
Google Cloud revenue, a strong growth driver for the company, increased by 25.6%, and the segment is close to overtaking YouTube Ads and becoming the 2nd largest revenue driver for the company behind Google Search. The segment also reported positive operating income on the year, a strong sign.
Overall, there wasn’t much out of the ordinary this quarter, and Google had a relatively solid quarter.
In our opinion, it remains one of the cheapest big tech options despite being one of the best performing big tech stocks in 2023.
Amazon (AMZN)
Amazon reported a strong fourth quarter, topping expectations on both the top and bottom lines. It reported revenue of $170B when $166.26B was expected, and earnings per share came in at $1, $0.20 higher than expected.
The company is witnessing a large expansion of its operating margins, significantly improving its profits. In fact, its operating margins globally have more than tripled, and its operating margins at Amazon Web Services have grown from around 24% to nearly 30%.
If you go to our overview of Amazon on the US Foundational Stock page, you’ll see our commentary that we had mentioned in 2023 that the company’s margins wouldn’t remain compressed forever and were being temporarily pressured by inflationary headwinds. We are seeing this play out in real time now.
Another core thesis around Amazon is its strong AWS and advertising services growth. On a year-over-year basis, Ad Services grew by 27% and Amazon Web Services 13%.
Although the company’s retail segment makes up the bulk of revenue, it is pretty clear that Amazon is much more than a retail company, with its underlying smaller business segments growing at some impressive paces.
The most impressive number may be the company generating $36.8B in free cash flow in 2024 compared to an outflow of $11.6B in 2023. Many investors have criticized Amazon’s lack of cash flow in previous years.
However, most of that cash flow was being invested into improving their infrastructure and logistics network, and it looks like we are starting to see the benefits of that now.
Overall, there isn’t too much to say about the quarter besides the fact it was a strong one. If the company can continue to drive growth in its smaller albeit faster-growing segments, it should be able to generate stronger free cash flows, as these are much higher margin operations.
Brookfield Renewables (TSE:BEP.UN/BEPC)
Despite a rough operating environment for Brookfield in 2023 it closed out the year with some relatively impressive numbers.
The company reported a 7% increase in Funds From Operations (FFO) compared to the fourth quarter of 2022. When we look to a year-over-year basis, the company increased FFO by 9%. Considering this company’s long-term target is to return 9-15%, hitting the low end of its target in terms of FFO growth during a challenging macro environment is certainly a positive sign.
The company is not slowing down on the development side of things, either. It commissioned nearly 5,000 megawatts of new clean energy capacity globally, primarily in wind and solar. The company’s project pipeline is impressive and should allow it to continually add new generation year in and year out, which should provide a relatively steady stream of FFO growth.
The company raised the distribution by 5% to a total of $1.42 USD per year. This distribution raise is in line with the last few raises we’ve witnessed from the company. If we look to the normalized funds from operations for the company, the distribution makes up about 75% of FFO. So, we will likely continue to see annual raises from this aristocrat.
Overall, it was a solid quarter and year from Brookfield. The environment has certainly been rough for renewable energy companies, and despite Brookfield being the best of the bunch in terms of overall returns the last year or so, it’s still been far from strong.
We still believe patient investors will be rewarded for holding this company long term.
Allied Properties REIT (TSE:AP.UN)
Allied REIT reported a relatively solid quarter from an operational standpoint. However, some fair value adjustments to its properties in real estate hotbeds here in Canada resulted in the fund taking a bit of a hit post-earnings.
The company’s adjusted funds from operations came in at $0.562 cents per unit, an increase of around 3%. The other strong sign was that despite a reduction in demand for office space, the company is continually able to increase rent prices on maturing and new leases, up 7.7% on its base rent charge.
The company has been able to maintain some strong payout ratios despite a pretty tough operating environment. Its AFFO payout ratio closed out the year around 80%, a healthy ratio for a REIT.
This is despite the fact that interest expenses have ballooned by 47% on a year-over-year basis and occupancy, while being best in class among all office REITs, is still mostly averaging around the mid-80% range.
Where the company stood out on earnings day was a $499M fair value adjustment to some of its major properties. The company witnessed a $70M fair value adjustment in its development properties in Toronto and Montreal, and a $429M adjustment to its rental properties in Toronto, Montreal, Calgary, and Vancouver.
This is what many investors have feared with office REITs and REITs in general: declining property values. This will ultimately decrease the NAV of the fund and, thus, the price. However, these declines are far from permanent. In a better operating environment, we could potentially see a price recovery.
Overall, we still believe Allied to be a relatively promising situation when it comes to office REITs as it has some of the highest-quality assets in the country. Investors will just need to be patient.
You can view our updated report of Allied Property REIT here.
Canadian Pacific Kansas City (TSE:CP)
CPKC reported a strong quarter to close out Fiscal 2023. Earnings per share of $1.18 topped expectations of $1.11, and revenue of $3.77B came in around $100M higher than expectations.
The company’s adjusted operating ratio decreased to 58.7% on the quarter, down 2.2% from the fourth quarter in 2022.
If you did not know, the lower the operating ratio, the better. This is because the operating ratio compares the company’s expenses relative to its net sales. If we compare two railroads, one having an operating ratio of 60% and the other with 80%, this means that the railroad with the 80% operating ratio requires more expenses to generate the same amount of sales.
When we compare Canadian Pacific’s operating ratio this quarter to CN Rail’s, CP Rail’s is lower (better) by 120 basis points (1.2%). It has certainly been the more efficient railway over the last bit.
Debt levels continue to improve as the company reduced its net-debt-to-adjusted EBITDA ratio to 3.4x from 3.8x. The company’s long term target is much farther below this, which is why you are unlikely to see any significant dividend growth, if it all, from Canadian Pacific. Instead, the company will likely aim to tackle debt levels.
The company issued 2024 earnings guidance, stating that it will grow at a double-digit pace in 2024 and return to a double-digit return on invested capital.
It was a strong quarter for CP, especially considering the current economic circumstances.
You can read our full report on Canadian Pacific Kansas City here
