Should Stellantis Investors Be Concerned About Long-Term Profitability?

Posted on by The INO.com Team

Stellantis N.V. (STLA) announced a massive recall of over 1.2 million Ram 1500 pickups due to a software glitch that could potentially disable the electronic stability control (ESC) system. According to the National Highway Traffic Safety Administration (NHTSA), the recall affects specific 2019 models and 2021 through 2024 Ram 1500 trucks, as reported by CNN.

Stellantis stated that the issue was uncovered during a “routine review of customer feedback,” which led to an internal investigation. This revealed that certain Ram 1500 trucks might be equipped with ABS module software prone to inadvertently disabling the ESC system.

The malfunction could cause the anti-lock brake system (ABS) to disable the ESC, posing a higher risk of crashes if the driver continues to operate the vehicle without the system's support. However, Stellantis assured that the brakes would still function normally, and drivers would be alerted to the problem with indicator lights for ABS, ESC, Adaptive Cruise Control, and Forward Collision Warning upon starting the vehicle.

Though no accidents or injuries have been reported due to the defect, the company emphasized that U.S. safety standards require ESC to function during nearly all driving conditions. Stellantis plans to update the software to resolve the issue at no cost to owners, with notification letters expected to be sent out beginning October 3.

In addition to this recall, the company addresses potential instrument panel failures in certain 2020-2024 Jeep Gladiator and 2018-2024 Jeep Wrangler models caused by an internal short circuit. It isn't the first time Stellantis has dealt with software-related recalls, either.

Earlier in June, the company recalled nearly 158,000 Ram 2500 pickups due to a similar issue with the stability control system. The total recall in June impacted over 211,000 vehicles, including the 2022 Dodge Durango and Ram 2500 and 3500 models. It was reported that more than 53,000 Dodge Durangos and 524 Ram 3500s were included in the recall.

Following the recall, Stellantis, which manages a portfolio of 16 international brands, moved quickly to address the problem and prioritize customer safety. Vehicle owners were urged to act promptly on the recall notice to ensure their vehicles remained safe for use.

Financially, the recall comes at a challenging time for Stellantis. For the first half of the year ending June 30, the automaker’s revenues decreased 13.6% year-over-year to €85.02 billion ($94.24 billion). Operating income took an even steeper hit, falling 50.9% to €6.64 billion ($7.36 billion).

Moreover, Stellantis reported a 48% drop in net profit for the six-month period, amounting to €5.65 billion ($6.26 billion). This sharp decline was primarily due to decreased sales volumes, ongoing production challenges, and a shrinking market share in North America. The company’s adjusted earnings per share also fell 34.6% year-over-year to €2.36.

CEO Carlos Tavares acknowledged that the company’s performance lagged behind expectations, citing both industry-wide challenges and internal hurdles such as inventory mismanagement and manufacturing inefficiencies. Nevertheless, Tavares remains optimistic about Stellantis’ strategic vision, which includes launching 20 new models and focusing on affordable electric vehicles (EVs).

Despite these setbacks, Stellantis is holding firm on its 2024 financial targets, which include achieving a double-digit operating income margin and returning significant capital to investors. The company is doubling down on new model launches, addressing specific issues in the U.S. market, and considering aggressive measures like price cuts and potential layoffs to improve its bottom line.

However, investor sentiment has been lukewarm, with STLA’s shares dropping more than 33% year-to-date, reflecting ongoing concerns over the company’s declining market share in North America and a 16% drop in U.S. sales.

While the recent recall and financial challenges may seem concerning, analysts maintain a cautiously optimistic outlook for Stellantis. Despite facing short-term headwinds, such as the cost of repairs and potential regulatory fines, the company’s global footprint and diversified operations could help mitigate the long-term financial impact.

Street expects STLA’s revenue and EPS to increase 5% and 10.3% year-over-year to $198.42 billion and $5.23, respectively. These projections suggest that while the recall may cause some immediate turbulence, the company remains positioned for steady growth in the coming years.

Citi analyst Harald Hendrikse maintains a “Hold” rating on the stock and has slightly raised the target price from $23.58 to $23.74, representing a potential upside of over 52% from current levels. Jefferies analyst Philippe Houchois has also issued a “Hold” recommendation, reflecting the overall sentiment that Stellantis, despite current issues, could deliver in the long run.

Investors must consider that the automaker operates across multiple regions and sectors, with a robust presence in EV production and a broad portfolio of brands. This global diversity helps cushion the blow from challenges in individual markets, such as the recall in the U.S. while allowing the company to tap into high-growth areas like EVs and emerging markets. With that in mind, it could be wise for investors to wait for a better entry point in this stock now.

Why Beaten-Down Bath & Body Works Is Poised for a Comeback

Posted on by The INO.com Team

In July, U.S. retail sales rose 1% from the previous month, exceeding economists’ forecasts of a 0.3% gain. However, Bath & Body Works, Inc. (BBWI) has lagged behind the overall specialty retail sector's growth. Despite the broader Consumer Discretionary Select Sector SPDR Fund (XLY) being up about 4% so far this year, BBWI has seen its shares fall more than 30% year-to-date. This decline is significant, especially compared to the sector’s modest growth.

In this article, we'll examine Bath & Body Works’ recent earnings to gauge its performance and discuss its turnaround efforts.

With more than 1,700 stores across the U.S. and a global presence in Canada and through international partners, the Ohio-based retailer of home fragrances, body care, and soaps still relies heavily on in-store sales. However, the company’s recent performance has disappointed investors and fell short of Wall Street's expectations.

In the second quarter ended August 3, 2024, BBWI’s net sales decreased 2.1% year-over-year to $1.53 billion, slightly below analysts’ expectations of $1.54 billion. Its adjusted earnings per share for the second quarter came in at $0.37, just above the consensus EPS estimate of 36 cents but down from $0.40 last year. Non-GAAP net income also fell from $92 million to $83 million year-over-year.

Additionally, the company adjusted its full-year outlook due to economic uncertainty and cautious consumer spending. For fiscal 2024, Bath & Body Works anticipates a net sales decline of 2% to 4%, compared to the previous forecast of a 2.5% decline to flat sales. The company also lowered its full-year adjusted EPS guidance, with the midpoint now at $3.16, falling short of analysts' forecast of $3.25.

CEO Gina Boswell acknowledged the need for adjustments, citing challenging macroeconomic conditions and slower-than-expected sales recovery. “While I’m dissatisfied with the pace of our return to sales growth, I remain confident in our strategy and the progress we are making,” Boswell stated during an analyst call. Further, President Julie Rosen noted that the semiannual sale underperformed, particularly affecting body care. She pointed out that issues with store presentation and marketing failed to resonate with customers, contributing to weaker performance.

Despite this, certain areas showed promise, including the men’s body care category, one of the fastest-growing segments. Additionally, the lip care line has gained traction, especially among younger customers, with year-to-date sales doubling in stores that feature popular items like scrubs, masks, and tints. In another move to diversify its product offerings, the company plans to introduce its laundry line across all U.S. stores by the end of September, supported by a national ad campaign to drive customer awareness and adoption.

One of BBWI’s most significant strengths is its growing loyalty program. With 37 million members, an 8% increase from year-over-year, the program now accounts for 80% of U.S. sales, which is quite impressive given that it was launched just two years ago. Additionally, 43% of enrollees are new customers, indicating untapped potential for increased sales.

To leverage this loyal customer base, Bath & Body Works could explore strategies like encouraging frequent purchases or introducing a subscription tier to boost engagement and revenues.

Moreover, the company continues its expansion efforts internationally, with new store openings in South Korea and London. CEO Gina Boswell emphasized that “international markets remain an attractive pillar” of the company’s growth strategy, noting that international retail sales grew by double digits in the second quarter, particularly in areas unaffected by conflicts in the Middle East. It underscores the brand’s potential to thrive as it taps into new markets and builds on its global footprint.

Bottom Line

As the U.S. economy shows resilience with stronger-than-expected GDP growth, largely driven by solid consumer spending, there’s a growing case for a soft landing. With inflationary pressures easing, evidenced by the lower second-quarter core PCE price index, the Fed will likely move forward with a rate cut in September. This creates a favorable environment for retail stocks like Bath & Body Works to rebound.

The potential rate cuts, coupled with improving consumer sentiment, could spur a resurgence in consumer spending, particularly as we approach the holiday season. BBWI is well-positioned to benefit from these tailwinds. Therefore, investors could consider buying this stock now, ahead of a potential recovery fueled by easing interest rates and a boost in holiday shopping.

Coinbase’s $50 Million Bet on Pro-Crypto Candidates

Posted on by The INO.com Team

The 2024 U.S. Presidential election has seen a surge of activity from the crypto industry, with various groups and lobbyists backing candidates who they believe will best represent their interests. So far this year, crypto companies have collectively invested approximately $119 million in political contributions, primarily channeling these funds into crypto-focused super PACs. And that’s just up until June 30.

This level of spending has positioned the crypto industry as the largest corporate political donor in 2024, making up 48% of all corporate donations. In fact, political contributions from crypto firms have skyrocketed by over 3000% this year, making them a dominant force in the election.

According to Public Citizen, no industry “has so wholeheartedly embraced raising as much directly from corporations and openly using that political war chest as a looming threat (or reward) to discipline lawmakers toward adopting an industry’s preferred policies.”

Leading the charge is Coinbase Global, Inc. (COIN), America’s largest registered crypto exchange, which has funneled more than $50 million into key races and pro-crypto political action committees (PACs) this election cycle. However, the overall decline in the crypto market has taken a toll on COIN’s performance, with the exchange seeing a 28% drop in average daily trading volumes compared to the previous quarter. This decline is partly due to decreased user engagement and trading activity on the platform.

COIN’s market share fell from 44.6% in the first quarter to 41.2% in the second quarter due to heightened competition from platforms like Robinhood Markets, Inc. (HOOD), which led to users migrating elsewhere. The recent bearish trend in the crypto market is primarily attributed to Vice President Kamala Harris's surge in the polls, which suggests she has a strong chance of winning the presidency.

Critics fear her policies might be even less favorable to the sector than the Biden administration’s. This worry is compounded by the fact that Harris has been relatively quiet on the issue, unlike her opponent, Donald Trump, who has been a vocal supporter of the crypto industry.

The crypto market’s reaction seems heavily influenced by these shifting political dynamics, especially after President Joe Biden’s decision to step back, which has caused unease among crypto investors. Many fear that without Trump’s support for more lenient crypto regulations, Harris might implement stricter measures that could stifle the market’s growth. However, it’s possible that these risks are now being overestimated in the market.

Despite these concerns, the long-term fundamentals of the crypto industry appear strong. Institutional adoption is rising with the introduction of Bitcoin and Ethereum ETFs, and cryptocurrencies are gaining broader acceptance as legitimate investment options. Let’s look at the fundamentals of COIN in more detail.

COIN's total revenue for the second quarter (ended June 30, 2024) amounted to $1.45 billion, up 104.8% year-over-year, while its subscription and services revenue increased 17% sequentially to $599 million. The exchange managed to stay profitable even in a challenging crypto market with a modest net income of $36.15 million, compared to a loss of $97.41 million in the prior year’s quarter.

Previously, Coinbase relied heavily on transaction fees, which fell by 27% due to lower trading volumes. However, its focus on expanding subscription-based revenue through products like blockchain rewards and custodial services has bolstered its income stream. Additionally, the company has delivered positive adjusted EBITDA for six consecutive quarters despite various crypto market conditions.

Coinbase has evolved into an all-weather company with increasingly diversified revenue streams, making it more stable and less dependent on the volatile nature of cryptocurrency markets. This diversification not only helps mitigate the impact of market volatility but also provides resilience if any specific part of the business faces challenges.

Bottom Line

While there’s been a lot of concern about what a Harris presidency might mean for the cryptocurrency market, I believe these fears are overblown. Both the U.S. stock market and crypto have shown resilience under various administrations, and the global nature of crypto makes it unlikely that any one leader could derail its progress.

Additionally, Congress appears to be moving in a more supportive direction for crypto, with bipartisan efforts to establish favorable legal frameworks. For instance, Senate Majority Leader Chuck Schumer has expressed optimism about passing crypto-related legislation by the end of the year. This continued legislative push should provide a more stable environment for the crypto industry.

Considering COIN’s ability to adapt to political shifts and the growing investor confidence in crypto, we believe holding on to this stock could be a wise choice. As the crypto market matures, Coinbase is expected to thrive regardless of who occupies the White House, making it a solid long-term investment.

Why CrowdStrike and Fortinet Could Be September's Top Performers

Posted on by The INO.com Team

August was a wild ride for the S&P 500, marked by sharp swings that kept investors on their toes. After a sharp 6.1% drop in the first three days, the large-cap benchmark managed to rebound, closing the month with a 2.3% gain. The S&P 500 finished August at 5,648.40, just shy of its record high from mid-July.

Surprisingly, the so-called “Magnificent Seven” stocks that have driven much of the market’s momentum this year, didn’t top the gainers list. Instead, two cybersecurity giants, CrowdStrike Holdings, Inc. (CRWD) and Fortinet, Inc. (FTNT), took the spotlight. With their recent performance, there's an expectation that these companies could be September’s top performers. So, what’s fueling their rally?

CrowdStrike’s Rebound from Its Global-Outage-Induced Slump

July 19 was a tough day for CrowdStrike investors. A software update from the company led to a major IT outage that affected some of its biggest clients, including airlines and banks, causing an estimated $5.4 billion in losses. This sparked fears that the brand damage could hurt CrowdStrike's future business.

As a result, CRWD stock took a hit, plunging 36% to a low of $218 by early August. It was the second-worst performer in the S&P 500 during July. However, the company managed to turn things around in August, with its stock climbing 20% for the month to rank as the index’sc.

Investors were relieved to see that the fallout from the outage wasn't as severe as initially feared. When the company reported earnings, it did lower its guidance but reassured investors that customers still wanted to do business with it.

In the second quarter, CRWD generated $963.87 million in revenue, up 32% year-over-year, beating the high end of management's forecast. Perhaps it suggests the global outage in July had a minimal financial impact, especially since it occurred just two weeks before the quarter’s end. However, for fiscal 2025, the company adjusted its full-year revenue forecast slightly downward to a range of $3.89 billion to $3.90 billion, from the previous $3.98 billion to $4.01 billion. Despite this, the new forecast still indicates a healthy 27.5% growth from fiscal 2024, which is encouraging for investors.

On the bottom line, its non-GAAP attributable net income came in at $260.76 million or $1.04 per share, reflecting an increase of 44.9% and 40.5% year-over-year, respectively. Despite the challenges, the company’s long-term outlook remains promising, with a goal to reach $10 billion in annual recurring revenue (ARR) by fiscal 2031. This ambitious target represents a potential 159% growth over the next six years. Moreover, CrowdStrike's introduction of “commitment packages” for customers is expected to positively impact the net new ARR.

Analysts like Stephen Bersey remain optimistic about CrowdStrike’s future and believe that “the bad news is behind us.” In this view, “CrowdStrike’s native-AI design gives it a structural competitive advantage and places it ahead of peers and leverages AI-driven growth.” With that said, CRWD’s 20% gain in August could be just the start of a continued recovery in September.

Fortinet’s Strong Comeback Reverses Six-Month Downtrend

Fellow cybersecurity company, Fortinet’s impressive rebound in August has been a breath of fresh air for investors who were reeling from its previous billings miss. After a robust earnings report that exceeded expectations, the cybersecurity giant made a strong comeback reversing a six-month downtrend, which sent its stock soaring as much as 28% on that day.

The company's strong market position has translated into an impressive financial performance. In the second quarter of 2024, FTNT’s revenues increased 10.9% year-over-year to $1.43 billion, driven by strong growth in services revenues. Its non-GAAP net income amounted to $439.90 million and $0.57 per share, indicating an increase of 46.4% and 50% year-over-year, respectively.

Building on this quarter’s momentum, Fortinet projects third-quarter revenues between $1.45 billion and $1.51 billion, alongside billings of $1.53 billion to $1.60 billion. Shares of FTNT have already surged more than 30% year to date, catching the attention of both investors and analysts. With the cybersecurity sector booming and Fortinet's continued innovation in security solutions, the company is well-positioned to capitalize on emerging trends.

Fortinet’s strength lies in its robust market position and relentless focus on innovation. The company's FortiOS operating system and Security Fabric architecture provide a seamless and integrated security solution that meets the complex demands of today's digital landscape. Moreover, FTNT’s commitment to innovation is evident in its development of advanced technologies like AI-powered FortiGuard Labs and the GenAI assistant, FortiAI, which streamline threat investigation and network management.

For 2024, FTNT anticipates revenue between $5.8 billion and $5.9 billion, with a non-GAAP operating margin of 30% to 31.5%. Non-GAAP earnings per share are projected to fall between $2.13 and $2.19. As the focus on digital security intensifies, Fortinet’s cutting-edge solutions are well-positioned to maintain its leadership in the industry.

Bottom line

Cyber-attacks are becoming more frequent and severe, with a 30% year-over-year increase in weekly attacks on corporate networks in the second quarter of 2024 and a 25% rise compared to the previous quarter. On average, organizations now face 1,636 attacks per week, highlighting the relentless and sophisticated nature of today's cyber threats.

As businesses increasingly prioritize digital security, the cybersecurity market is projected to soar, reaching $500.70 billion by 2030, growing at a CAGR of 12.3%. This continued expansion in the cybersecurity sector could create a promising environment for CRWD and FTNT, making them attractive additions to your portfolio.

Is It Time to Buy SBUX After August’s Surge?

Posted on by The INO.com Team

Starbucks Corporation (SBUX) has been brewing up lately, with its stock appreciating over 24% in the past month. But what’s fueling this caffeinated surge, and is it a good time for investors to jump in?

The Brian Niccol Effect

The recent rally was ignited by the announcement that Brian Niccol, currently CEO of Chipotle Mexican Grill Inc. (CMG), will take over as Starbucks’ new chief executive on September 9. This news came after a challenging period for the coffee retailer under the leadership of Laxman Narasimhan.

Narasimhan's tenure saw a dip in same-store sales in the U.S., complaints about store staffing and long wait times, and increased competition in China. His strategy of focusing on non-coffee drinks and technology improvements diverged from former CEO Howard Schultz’s emphasis on coffee and customer experience, contributing to his departure.

Moreover, this leadership change has been met with enthusiasm by investors, causing the stock to jump 23% on August 13. Niccol is seen as a game-changer for Starbucks. Under his leadership, Chipotle managed to bounce back from food safety issues and maintain strong sales. His knack for integrating technology, automation, and improving customer experiences is just what Starbucks needs right now.

Niccol’s experience with streamlining operations and enhancing customer engagement could help address SBUX’s current issues, from fixing staffing problems to speeding up service. While it's still early to see the impact of Niccol’s leadership, his track record suggests that Starbucks might be in good hands. Given his success at Chipotle and his focus on technology and efficiency, there’s a lot of hope that he could turn things around for Starbucks.

Starbucks' Financial Resilience and Turnaround Efforts

Starbucks may have hit some rough patches recently, but it's still brewing a solid business with robust fundamentals. Despite a dip in sales, it continues to build a loyal customer base that keeps the coffee flowing. In the fiscal third quarter, SBUX's rewards program grew to 33.8 million active members in the United States, indicating a 7% increase year-over-year and 3% sequentially. This growing membership translates to $1.8 billion in deferred revenue on Starbucks payment cards as of June 30, effectively giving the company a handy interest-free loan.

However, the retailer struggled in its major markets: the U.S. and China. In the U.S., same-store sales dipped 2% compared to a 7% increase the previous year. Store traffic fell by 6%, though the average ticket price rose by 4%.

Moreover, due to the competitive landscape and cautious consumer spending in the Chinese market, its comparable-store sales plummeted 14%, down from a 46% increase last year, with both traffic and average ticket price dropping by 7%. However, Starbucks’ Rewards program in China grew by 1.6 million, reaching a record 22 million active members.

Overall, SBUX’s revenue dipped 1% to $9.11 billion, with global comparable-store sales falling by 3%. The company expanded its footprint by opening 526 new stores, ending the quarter with a total of 39,477 locations. The company reported a net income of $1.05 billion, or $0.93 per share, compared to $1.14 billion, or $0.99 per share, from the same period last year.

While these figures could disappoint some investors, Starbucks is brewing up a comeback with a three-part action plan designed to revitalize its business. First, the company is fine-tuning store operations to meet new demand, which includes improving partner scheduling, turnover, and inventory management across nearly 10,000 U.S. stores. New systems, like the Siren Craft, are already showing positive results, helping to speed up service and enhance performance metrics. Starbucks is also accelerating new store openings and renovations in key growth markets to drive expansion.

Moreover, in response to China’s wobbling economy, where competitors are aggressively undercutting prices, Starbucks is exploring ‘strategic partnerships’ to stay competitive. Meanwhile, activist investor Elliott Investment Management’s involvement could potentially push for significant changes like a slower investment pace in China, more aggressive share buybacks, or a faster rollout of new systems. BTIG analyst Peter Saleh believes Elliott’s involvement with Starbucks could accelerate ‘bigger changes’ and impact SBUX’s market strategy.

Additionally, Starbucks is focusing on faster service through new espresso machines and software updates and capitalizing on successful product launches like the Summer-Berry Refreshers. The company also plans to open dozens of delivery-only kitchens in the U.S. and is eyeing growth in smaller cities and suburban areas. With these moves, the retailer aims to boost customer engagement and drive growth, making its stock an exciting option for investors watching its turnaround.

Bottom line

While analysts expect Starbucks to show little to no sales growth this year, expectations are for a return to high-single-digit growth in the future. For the fiscal year ending September 2026, Wall Street forecasts its revenue and EPS to grow by 7.2% and 11.7% year-over-year, respectively. 

In terms of valuation, with a forward non-GAAP P/E ratio of 26.55, the stock remains reasonably valued for such a renowned brand. Although it isn't a bargain as it was a month ago, long-term investors might still find it attractive, especially with potential interest rate cuts on the horizon. With Federal Reserve Chair Jerome Powell signaling the likelihood of lower rates, Starbucks could benefit from a favorable economic environment, making it a stock worth considering for those looking to invest in its potential turnaround.