Tag: second quarter

Tesla vs. BYD: The Battle for Global EV Dominance in Ride-Hailing

Posted on by The INO.com Team

In 1995, while Elon Musk was kicking off his first venture in Silicon Valley, another entrepreneur, Wang Chuanfu, was starting his own journey in Shenzhen with BYD, making batteries for Motorola. It’s wild to think that nearly three decades later, Musk and Wang would be leading two of the biggest names in electric vehicles, caught in a geopolitical tug-of-war that’s all about manufacturing, energy, tech, and tariffs.

The rivalry between Tesla, Inc. (TSLA) and BYD Company Limited (BYDDY) isn’t as clear-cut as it seems. Despite being on opposite sides of a geopolitical divide, their businesses are deeply intertwined. Tesla’s second-largest market and biggest factory are in China, with significant investment from billionaires like He Xiaopeng. On the flip side, BYD’s largest external shareholders are American giants like Berkshire Hathaway and Blackrock, and it even supplied the largest-ever order for electric buses in the U.S. Plus, BYD sells batteries to Tesla.

These examples illustrate the difficulty of 'de-risking' between two deeply intertwined economies and determining who is 'winning' at any given moment. One thing’s for sure, though: both Wang and Musk remain optimistic about the future.

Tesla vs. BYD: The Competition Is Hot on Its Heels

While TSLA enjoys a near-mythical status among EV enthusiasts, BYD is rapidly closing the gap. In the last quarter, Tesla delivered 443,956 all-electric cars, 5% less than a year ago but 14.8% more than the previous quarter. Meanwhile, BYD’s sales volume surged 28.8% in July compared to the previous year, reaching 342,383 vehicles. In the first quarter, BYD was only 18,000 cars short of Tesla’s deliveries from April to June 2024, indicating how close this race is getting.

TSLA’s total revenues for the second quarter ended June 30, 2024, increased 2.2% from the previous year to $25.50 billion, showcasing its continued growth and success. However, BYD’s strong performance, with a 4% year-over-year increase in operating revenue, indicates a shifting landscape in the EV market, with BYD poised to challenge Tesla’s long-standing dominance.

On the bottom line, TSLA’s non-GAAP net income and EPS for the second quarter declined by 45% and 43% year-over-year to $1.81 billion and $0.52, respectively. In contrast, BYDDY’s attributable net profit for the March quarter grew 10.6% from the prior year to RMB4.57 billion ($640.82 million). Moreover, its EPS stood at RMB1.57, up 10.5% year-over-year.

Despite Tesla’s recent decline in profits, it has maintained its leadership position in EV deliveries, thanks to its significant advantage over other manufacturers in previous years. But with BYD closing in, the competition in the EV market is only getting hotter.

Tesla Has a Massive Leg Up on Its Competitors

Tesla is building EVs cheaper than anyone else, and it's giving Elon Musk's company an edge even with increasing competition. According to Bank of America, Tesla spends less than $30,000 on components per vehicle. This is $17,000 cheaper than other EV makers and about $10,000 below the industry average. Despite shrinking margins and slowing sales, these lower costs keep Tesla ahead of traditional automakers like Ford Motor Company (F) and General Motors Company (GM), who still rely on profits from gas-powered cars and haven't yet made a profit on their EVs.

High input costs lead to higher consumer prices, making it challenging for TSLA’s competitors to compete in a price-sensitive market. To make its cars even more affordable, the company offered attractive financing options in Q2, helping to offset high interest rates.

Elon Musk has big plans to compete with Uber Technologies, Inc. (UBER) through Tesla's autonomous (self-driving) robotaxis dubbed ‘Cybercab’. Musk is heavily investing in this technology and aims to release a more advanced, steering-wheel-free model possibly this fall. He envisions Tesla owners renting out their cars as self-driving taxis, similar to Airbnb, Inc. (ABNB), which could pose a severe challenge to ride-sharing giants like Uber and Lyft.

The idea is that Tesla owners can earn extra income by letting their cars operate as robotaxis during their off hours, with Tesla taking a cut of the profits. Musk even predicts that each participating Tesla could generate around $30,000 in gross earnings annually for its owner.

In a recent earnings call, Musk mentioned significant progress in full self-driving technology, with version 12.5 showing notable improvements. He also announced a slight delay in the Robotaxi product reveal, now scheduled for October 10th, to allow for essential updates and enhancements. Additionally, Tesla is ramping up production in its U.S. factory and building a new Megapack factory in China, potentially tripling its output.

BYD Joins Forces With Uber to Close the Gap With Tesla

BYD, Tesla's biggest competitor, has just struck a major deal with UBER. The deal aims to bring 100,000 BYD electric vehicles (EVs) to Uber’s global fleet, starting in Europe and Latin America before expanding to other regions. To encourage drivers to switch to EVs, both companies would offer incentives like discounts on maintenance, charging, financing, and leasing.

This move comes as global EV sales slow and Chinese automakers face higher import tariffs. The collaboration aims to lower the total cost of EV ownership for Uber drivers, boosting EV adoption on Uber’s platform and providing greener rides for millions of users.

BYD is also working on integrating its self-driving technology into Uber’s platform. With $14 billion invested in smart cars, BYD is developing a “Navigate on Autopilot” feature similar to Tesla’s “Autopilot,” which could potentially make BYD-Uber autonomous vehicles direct competitors to Tesla’s robotaxis.

BYD is expanding its production facilities outside China in response to increased tariffs on Chinese-made EVs. The company has recently secured a $1 billion deal to build a new manufacturing plant in Turkey, which will produce up to 150,000 vehicles annually and create around 5,000 jobs by 2026. They’ve also opened an EV plant in Thailand, with similar production capacity and expected to generate 10,000 jobs. Additionally, BYD plans to establish a passenger car factory in Hungary and another in Mexico.

Given these strategic diversifications and a focus on innovation, BYD has transformed into a global EV powerhouse. The company’s hefty investments in expanding its production capacity and approach to vertical integration have further solidified its competitive edge in the EV market​​.

Bottom Line

BYD’s strategic focus on electric and hybrid vehicles, along with its tech innovations and global expansion, makes it a serious contender against Tesla. As the EV market evolves, the competition between BYDDY and TSLA is expected to intensify, with both companies pushing hard to lead the charge and grab a bigger slice of the global market. The battle for EV dominance is far from over, and it would be interesting to see how these two giants move forward will shape the future of electric mobility.

Inflation-Resilient Stocks: Why Progressive (PGR) Stands Out

Posted on by The INO.com Team

In July, U.S. consumer confidence unexpectedly ticked up, offering a glimmer of optimism despite ongoing concerns about inflation and rising borrowing costs. The Federal Reserve's closely watched gauge revealed that inflation eased slightly in June, with the personal consumption expenditures price index inching up by just 0.1% on the month and 2.5% year-over-year. While this slightly improved from May’s 2.6% increase, inflation still hovers above the Fed’s long-term target of 2%, keeping the door open for a potential interest rate cut in September.

In such an inflationary environment, the insurance industry emerges as a safe harbor for investors seeking stability. Insurance isn’t just a safety net; it’s a lifeline for individuals and businesses alike, offering protection from unforeseen events and often fulfilling legal and financial requirements. The industry is notoriously competitive, with many insurers struggling to stand out. However, The Progressive Corporation (PGR) has distinguished itself by excelling in balancing risk and reward.

Progressive's Strategy for Thriving in Inflationary Times

In recent years, the insurance sector has battled rising inflation, which has driven up repair and replacement costs and impacted profitability. Yet Progressive has adeptly navigated the storm. Since its public debut in 1971, the powerhouse automotive insurer has consistently aimed for a combined ratio of 96%, ensuring it makes $4 in profit for every $100 in premiums received.

While many auto insurers struggled with their worst loss ratios in two decades last year, PGR achieved a combined ratio of 94.5%. This year, they've done even better, with a combined ratio of 91.9% in the first half. This strong performance has translated into impressive stock returns, with shares up more than 70% over the past year and nearly 35% year-to-date.

For the second quarter that ended June 30, 2024, PGR’s net premiums earned increased 19% year-over-year to $17.21 billion. Its net income came in at $1.46 billion, or $2.48 per common share, up 322.3% and 335.1% year-over-year, respectively. The company generated total revenues of $35.38 billion year-to-date, compared to $29.66 billion in 2023.

Street expects PGR’s revenue and EPS for the third quarter (ending September 2024) to increase 21.1% and 25.5% year-over-year to $18.89 billion and $2.65, respectively. Moreover, the company has consistently surpassed consensus EPS estimates in each of the trailing four quarters, including the second quarter.

What sets Progressive apart is its innovative approach to insurance. As one of the pioneers in using telematics, or driver data, to price insurance policies, the company has leveraged technology to stay ahead of its competitors.

Moreover, PGR's non-GAAP PEG ratio is a mere 0.06, indicating that despite its solid growth prospects, the stock is undervalued, making it an attractive option for growth-seeking investors. The company’s strong performance across different market conditions due to its beta of 0.36 further enhances its appeal.

Progressive’s conservative investment strategy, with a focus on shorter-dated debt investments, positions it well to benefit from sustained higher interest rates, making it a strong long-term hold for investors. Morgan Stanley analyst Bob Jian Huang forecasts that the company will capture over 18% of the market by 2028, thanks to its competitive strength and innovative edge.

Progressive vs. Allstate: Which Stock Offers Greater Investment Potential?

While Progressive has adeptly managed rising inflation and repair costs with innovative approaches like telematics, The Allstate Corporation (ALL) has faced its own set of challenges, particularly from natural disasters and high inflation. In 2023, U.S. home insurers experienced their worst underwriting losses this century, with net underwriting losses reaching an eye-watering $15.2 billion. This was largely due to increasing populations in high-risk areas like California and Texas, which exacerbated the impact of natural catastrophes.

To combat these pressures, Allstate has proposed a substantial 34% increase in homeowners’ insurance premiums. This move, pending approval from the California Department of Insurance, aims to mitigate the financial impact of escalating claims and weather-related damages. This isn't unprecedented, as insurance companies, including State Farm, have also sought similar rate hikes based on claims history and market conditions.

Although this move mirrors PGR's strategy of adjusting premiums to maintain profitability amidst rising costs, ALL’s focus has been more on addressing the financial stress from natural disasters rather than leveraging technology for competitive advantage.

Despite these hurdles, ALL shares have surged more than 52% over the past year and 22.3% year-to-date, demonstrating strong performance in a turbulent market.

Financially, the company has delivered solid results that are at par with Progressive’s financial performance. ALL’s consolidated net revenues for the second quarter ended June 30, 2024, increased 12.4% year-over-year to $15.71 billion. The company’s adjusted net income amounted to $429 million and $1.61 per share, compared to an adjusted net loss of $1.16 billion and $4.42 per share in the year-ago quarter, respectively. Furthermore, its property-liability insurance premiums earned rose 11.9% year-over-year to $13.34 billion.

Analysts expect ALL’s revenue for the quarter ending September 30, 2024, to increase 8.4% year-over-year to $15.71 billion. Its EPS for the same period is expected to increase 273.6% year-over-year to $3.03. It surpassed the consensus EPS estimates in three of the trailing four quarters.

Moreover, the company’s strong financial health enables it to consistently deliver value to its shareholders. With 13 years of consecutive dividend growth, ALL pays a $3.68 per share dividend annually, translating to a 2.12% yield on the current share price. Its four-year dividend yield is 2.49%. The company’s dividend payouts have grown at CAGRs of 10.3% and 13.5% over the past three and five years, respectively.

Allstate is currently trading at a relatively discounted valuation. The stock's forward EV/Sales multiple stands at 0.87, which is below the industry average of 3.17x and its five-year median of 0.97x. This attractive valuation provides a margin of safety for investors, reducing downside risk while offering substantial upside potential.

Given these factors, Allstate presents a strong investment case. However, when comparing it to Progressive, ALL's more traditional approach may not offer the same innovative edge. While both companies exhibit resilience and growth prospects, PGR's forward-thinking strategies and consistent performance in diverse market conditions position it as the more compelling choice for those seeking robust long-term returns.

The Bubble Has Burst: Selling Off Pandemic-Era Recreational Stocks

Posted on by The INO.com Team

The COVID-19 pandemic significantly changed consumer behavior, particularly in the recreational vehicles (RVs) industry. In the early days of the pandemic, extra cash that found its way into Americans’ bank accounts due to federal government largess and a desire for social distancing drove a surge in sales of RVs, boats, motorcycles, and snowmobiles, propelling them to multi-year records.

However, this initial bubble during the pandemic for RVs—along with boats, motorcycles, and other outdoor vehicles—has burst, leading to a significant market correction as demand normalizes and financial conditions tighten. As the cost of living increased, remote working became more challenging, and interest rates surged, financing for these big-ticket items grew prohibitively expensive.

According to the RV Industry Association, RV shipments witnessed a nearly 40% increase from 2020 to 2021. The RV industry shipped a record of about 600,240 units to dealers in 2021, up 19% from the record set in 2017. RV shipments nosedived post the pandemic surge. The RV industry ended 2023 with 313,174 shipments, down 36.5% compared to 2022.

“The pandemic did spark a lot more of buying action from the consumer but now it’s coming back to more of the 2018, 2019 numbers, rather than the crazy numbers in 2020 through 2022,” said co-owner and general manager of Midway, Chris Grant.

As the pandemic bubble has burst, investors could consider selling off recreational stocks such as Thor Industries, Inc. (THO), Winnebago Industries, Inc. (WGO), and Polaris Inc. (PII). Let’s delve deeper into the stocks’ fundamentals and near-term outlook.

Thor Industries, Inc. (THO)

Thor Industries, Inc. (THO), a leading manufacturer of RVs, experienced a tremendous surge in demand during the pandemic but now faces a market correction. The stock has struggled to maintain its pandemic-era gains, with consumers pulling back on discretionary spending and higher financing costs dampening enthusiasm for RV purchases.

Shares of THO have plunged more than 8% over the past month and approximately 10% over the past six months.

THO’s trailing-12-month gross profit margin of 14.10% is 61.7% lower than the 36.80% industry average. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 4.28% and 2.59% unfavorably compare to the industry averages of 7.59% and 4.70%, respectively.

“In our fiscal third quarter, our independent dealers experienced increased retail activity during the Spring selling season; however, conversion to sales remained difficult in light of the economic pressures on retail buyers. Faced with elevated floor plan interest rates, our independent dealers remain understandably cautious with their ordering patterns; consequently, our independent dealer inventory levels remain suppressed,” said Bob Martin, President and CEO of THOR Industries.

“Given the macroeconomic conditions, we see this cautious approach as healthy for our industry and maintain our confidence in a robust return of our top and bottom line performance once macro pressures subside,” Martin added.

For the quarter that ended April 30, 2024, THO’s net sales decreased 4.4% year-over-year to $2.80 billion. North American Toward RV net sales were down 4.7%. Its gross profit came in at $421.85 million, down 2.5% from the year-ago value. Its net income and earnings per common share were $113.58 million and $2.13, declines of 5.1% and 4.9% year-over-year, respectively.

As of April 30, 2024, the company’s cash and equivalents stood at $371.82 million, compared to $441.23 million as of July 31, 2023. THO’s current liabilities increased to $1.74 billion at the end of the third quarter.

Given the challenging market conditions, the company lowered its full-year 2024 guidance. The prolonged market downturn, which persisted longer than anticipated, continues to impact THO’s independent dealers and consumers, which the company believes will constrain its top and bottom lines for the fourth quarter.

Based on current North American order intake levels through the end of May, the company revised its guidance ranges to reflect a more conservative fiscal year 2024 North American industry wholesale shipment range of 315,000 to 325,000 units, down from the prior range of 330,000 to 340,000 units.

For the full year, THOR Industries expects consolidated net sales in the range of $9.8 billion to $10.1 billion, compared to the previous guidance of $10.0 billion to $10.5 billion. Its gross profit margin is expected to be 13.75%-14%, down from previously guided 14%-14.5%. Also, the company’s earnings per share are anticipated to range from $4.50 to $4.75 (previously $5-$5.50).

Analysts also appear highly bearish about the company’s prospects. Street expects THO’s revenue and EPS for the fiscal year (ending July 2024) to decrease 10% and 32.4% year-over-year to $10.01 billion and $4.70, respectively.

Winnebago Industries, Inc. (WGO)

c, another prominent player in the RV market, has faced headwinds as demand wanes. The company enjoyed a boom during the height of the pandemic, but the current economic uncertainty and rising interest rates have led to decreased sales and stock performance.

WGO’s stock has slumped nearly 15% over the past six months and more than 19% year-to-date.

After all, WGO’s trailing-12-month gross profit margin and EBITDA margin of 15.93% and 8.59% are lower than the respective industry averages of 36.80% and 11.18%. Similarly, the stock’s trailing-12-month net income margin of 3.70% is 21.4% lower than the industry average of 4.70%.

In the second quarter that ended February 24, 2024, WGO’s net revenues declined 18.8% year-over-year to $703.60 million, driven by lower unit sales related to market conditions and unfavorable product mix. Its gross profit decreased 28.3% year-over-year to $105.30 million. Its operating income was $35.40 million, down 53.9% from the previous year’s quarter.

Furthermore, the company reported a net loss of $12.70 million, or $0.43 per common share, compared to a net income of $52.80 million, or $1.52 per common share, respectively. Its adjusted EBITDA decreased 83.7% from the year-ago value to $13.90 million.

During the quarter, wholesale shipments were constrained as dealers closely managed inventory levels amid a high interest rate environment and seasonal demand trends. As of February 24, 2024, the backlog from the Motorhome RV segment was $452.20 million (2,582 units), down 48.2% from the prior year.

As of February 24, 2024, the company’s total outstanding debt was $694.80 million. Winnebago Industries completed a $350 million offering of convertible senior notes for refinancing 2025 maturities in the second quarter. Its cash and cash equivalents were reduced to $265.70 million, compared to $309.90 as of August 26, 2023.

Analysts expect WGO’s revenue for the third quarter (ended May 2024) to decrease 10.6% year-over-year to $805.49 million. The consensus EPS estimate of $1.34 for the same quarter reflects a 36.9% year-over-year decline. Additionally, the company missed consensus revenue estimates in three of the trailing four quarters, which is disappointing.

For the fiscal year ending August 2024, the company’s revenue and EPS are expected to decline 10.1% and 35.2% year-over-year to $3.14 billion and $4.97, respectively.

Polaris Inc. (PII)

Polaris Inc. (PII), known for its motorcycles, snowmobiles, and other recreational vehicles, has also felt the pinch. PII’s stock soared as consumers sought outdoor activities during lockdowns. However, the subsequent economic shifts have cooled demand, leading to a decline in stock value. Shares of PII have declined more than 18% year-to-date and around 35% over the past year.

PII’s trailing-12-month gross profit margin of 22.23% is 39.6% lower than the 36.80% industry average. Likewise, the stock’s trailing-12-month EBITDA margin and levered FCF margin of 9.78% and 3.72% are lower than the industry averages of 11.18% and 5.46%, respectively.

PII’s sales decreased 20% year-over-year to $1.74 billion for the first quarter ended April 23, 2024. The company’s sales were negatively impacted by lower volume and net pricing driven by higher promotional activity partially offset by a favorable product mix. North America sales were down 22% year-over-year. Its adjusted gross profit margin declined 29.5% from the year-ago value to $330.70 million.

In addition, adjusted net income and adjusted EPS attributable to PII were $13 million and $0.23, down 89.1% and 88.8% year-over-year, respectively. Its adjusted EBITDA declined 53.8% from the prior year’s period to $110 million. Also, the company’s free cash flow came in at a negative $162.10 million, compared to $35.10 million in the previous year’s quarter.

According to the 2024 business outlook, Polaris expects full-year sales to be down 5 to 7% compared to fiscal 2023. The company anticipates adjusted EPS attributed to Polaris Inc. common shareholders down 10 to 15% versus 2023.

Street expects PII’s revenue and EPS for the second quarter (ending June 2024) to decrease 2.3% and 6.3% year-over-year to $2.17 billion and $2.27, respectively. Further, the company’s revenue and EPS for the fiscal year 2024 are expected to decline 6.2% and 13.7% from the prior year to $8.38 billion and $7.90, respectively.

Bottom Line

Companies primarily operating in the RV industry face ongoing macroeconomic challenges. While the RV and boat market experienced an unprecedented boom during the COVID-19 pandemic, the subsequent decline in consumer demand and economic factors like higher interest rates and inflation have created a challenging environment for these stocks.

Despite this downturn, some companies, including Brunswick Corporation (BC), managed to navigate these choppy waters. However, other companies, including Thor Industries, Winnebago, and Polaris, have not fared as well. Investors should carefully assess their positions in these companies and consider the potential benefits of reallocating their portfolios in response to the changing market dynamics.

Thus, it seems prudent to consider selling struggling recreational stocks THO, WGO, and PII, which have lost their massive pandemic-era gains.

Visa’s AI Innovations and What They Mean for Investors

Posted on by The INO.com Team

With a global presence in over 200 countries and territories, Visa Inc. (V) is a formidable player in the Financial Services industry. Over the years, the company’s innovative payment solutions have enabled individuals to transact across various devices and payment methods anytime, anywhere.

From mobile payments to contactless transactions, Visa has consistently introduced new technologies that have transformed how we pay and do business. And now, with its latest suite of payment products and services, the credit card behemoth continues to demonstrate its capacity for innovation and growth in the digital payments arena.

Unveiling Visa’s New Products for the Digital Era

Earlier this month, at the annual Visa Payments Forum in San Francisco, the company introduced innovative products and services designed to meet the evolving needs of businesses, merchants, consumers, and financial institutions.

These offerings, set to roll out later this year, include the Visa Flexible Credential, which empowers consumers to switch between payment methods on a single card. Users have unparalleled flexibility, whether debit, credit, “pay-in-four” Buy Now Pay Later options, or rewards points. Currently living in Asia, Visa Flexible Credential is set to debut in the U.S. market later this summer in collaboration with Affirm.

The company is embracing the widespread adoption of mobile devices by introducing innovative “Tap to Everything” features, capitalizing on the versatility of NFC-enabled devices. These new features include ‘Tap to Pay,’ which transforms any device into a point-of-sale terminal; ‘Tap to Confirm’ for easy online shopping authentication; ‘Tap to Add Card’ for enhanced wallet security when adding cards to digital wallets or apps; and ‘Tap to P2P’ for seamless money transfers between family and friends.

V introduced the Visa Payment Passkey Service to combat the rising threat of online payment fraud, which takes security to the next level by replacing passwords with biometric authentication for online transactions. This feature seamlessly integrates with Click to Pay, providing a frictionless checkout experience while enhancing security. Moreover, the company is partnering with issuers worldwide to enable Click to Pay and Visa Payment Passkey Service on new Visa cards, reducing the need to enter card details and passwords manually.

In addition, the credit card provider is also digitizing and streamlining account-to-account (A2A) payments with “Pay by Bank,” offering consumers greater flexibility in how they choose to pay. Through collaborations with Global Real-Time Payments (RTP) networks, Visa is leveraging AI technology to detect and prevent fraud in A2A payments. Already making strides in Latin America and piloting the UK, Visa Protect for A2A Payments has identified 60% of previously undetected fraud and scams, ensuring a safer payment ecosystem for all.

Lastly, the company also introduced Data Tokens, a privacy-centric feature that enables consumers to control data sharing with merchants for personalized offers and revoke access through their banking apps.

Such strategic initiatives signal promising prospects for the ever-changing payments landscape, and Visa’s commitment to continuous improvement is poised to fortify its foothold.

Visa Remains at the Forefront of AI Innovation

Threat actors are increasingly employing sophisticated technologies like automated scripts and botnets to amplify card testing attacks, resulting in substantial operational costs and annual fraud losses of $1.1 billion. To counter this threat, Visa announced updates to its Visa Account Attack Intelligence (VAAI) offering on May 7, introducing the VAAI Score.

This new tool utilizes generative AI components to identify and score enumeration attacks, providing real-time risk scores for each transaction. Initially available to U.S. issuers, the VAAI Score aims to mitigate fraud and operational losses by detecting and preventing enumeration attacks in card-not-present (CNP) transactions.

On March 27, 2024, the company added three new AI-powered risk and fraud prevention solutions to its growing global value-added services business. These additions, forming part of the comprehensive Visa Protect suite, aim to combat fraud in immediate account-to-account and card-not-present (CNP) payments, enhancing security for transactions on and off Visa’s network.

Visa’s Strategic Expansion Initiatives: Boom or Bust?

Recently, Visa partnered with SKUx, a digital payment solutions provider, to enhance digital payment experiences for select merchants and consumer packaged goods companies. The collaboration aims to address client needs such as customer acquisition, loyalty programs, and consumer care.

Visa clients will gain access to SKUx’s digital payments platform, improving business-to-business and business-to-consumer payment flows. Further, this strategic move underscores V’s commitment to enhancing its services and attracting new customers, ultimately increasing revenue opportunities.

On March 26, Visa reached a landmark settlement with U.S. merchants, more than 90% of which are small businesses. The settlement reduces credit interchange rates and caps those rates into 2030. It also includes updates to several key network rules, giving merchants more choice in how they accept digital payments.

While the settlement is subject to court approval, this move aims to enhance the company’s relationships with merchants and improve the affordability of accepting Visa payments, potentially leading to increased transaction volume.

Also, in January this year, the company acquired Pismo, a global cloud-native issuer processing and core banking platform. This acquisition equips Visa to deliver enhanced core banking and card-issuer processing capabilities to clients across various product types through cloud-native APIs. By leveraging Pismo’s platform, V can extend support and connectivity for emerging payment schemes and real-time payment networks, strengthening its offerings for financial institution clients.

How Are Visa’s Fundamentals?

Despite persistent high interest rates, U.S. consumer spending has remained robust, thanks to Americans’ continued appetite for big-ticket purchases and international travel. In the second quarter that ended March 31, 2024, V’s net revenue increased 9.9% year-over-year to $8.78 billion, surpassing Wall Street’s forecast of $8.62 billion.

Consumer spending remained resilient across all segments during the quarter, driving an 8% year-over-year growth in Visa’s payments volume. Cross-border volume (excluding intra-Europe) surged by 16%, indicating strong demand for international travel. Its processed transactions rose 11% from the prior year to $55.50 billion.

Moreover, the company’s operating income grew marginally from the year-ago value to $5.35 billion. Its non-GAAP net income and non-GAAP earnings per share stood at $5.12 billion and $2.51, up 16.7% and 20.1% year-over-year, respectively.

As of March 31, 2024, Visa had $12.99 billion in cash and cash equivalents, a significant cash pile but comparatively lower than the $16.29 billion on December 31, 2023. Yet, the company was able to return $3.8 billion to shareholders in the second quarter through dividends and share repurchases.

On April 23, 2024, Visa announced a quarterly dividend of $0.52 per share of class A common stock, payable to its shareholders on June 3, 2024. V’s four-year average dividend yield is 0.67%, and its current dividend of $2.08 translates to a 0.75% yield on the current price level.

With a strong payout history, the company’s dividend has grown at CAGRs of 16.8% and 15.9% over the past three and five years, respectively. Moreover, Visa has been growing dividends for 15 consecutive years, which makes it attractive to income-oriented investors.

What’s Ahead for Visa?

Street expects Visa to generate a revenue of $8.93 billion for the third quarter (ending June 2024), indicating a 9.9% increase compared to the same period last year. The company’s earnings per share for the ongoing quarter is expected to grow 11.9% year-over-year to $2.42. Moreover, V surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is promising.

For the fiscal year ending September 2024, analysts anticipate a revenue surge of 10.1% on a year-over-year basis, reaching $35.95 billion. They forecast that earnings per share will reach $9.96, up 13.6% year-over-year. Further, Visa’s revenue and EPS for the fiscal year 2025 are expected to grow 10.4% and 12.4% year-over-year to $39.70 billion and $11.19, respectively.

Bottom Line

As consumers shrugged off worries of a slowing economy to swipe cards on everything from travel to dining out, the credit card provider has delivered solid topline growth and healthy profit margins in its latest quarterly results.

Alongside leveraging partnerships to boost its digital capabilities, Visa has remained steadfast in pursuing substantial investments to complement the same. These initiatives are anticipated to increase transaction volumes and enhance customer retention, with the company projecting low double-digit net revenue growth for fiscal 2024 on an adjusted constant-dollar basis.

Moreover, UBS anticipates a solid 11% to 12% organic net revenue growth for the year, factoring in the currency-neutral basis and the performance observed throughout the year’s first half. Reflecting this positive outlook, the firm has raised its price target on V stock to $325, up from $315, while maintaining a buy rating on the shares.

Furthermore, the stock exhibits robust profitability, as evident in its 97.81% trailing-12-month gross profit margin, which is 63.6% higher than the 59.78% industry average. V’s trailing-12-month net income and levered FCF margins of 53.86% and 46.69% are 133.7% and 166.1% higher than the industry averages of 23.05% and 17.55%, respectively. Likewise, its trailing-12-month ROTA of 19.90% compares with the 1.06% industry average.

In terms of price performance, V shares have gained more than 15% over the past nine months and nearly 6% year-to-date. To that end, it could be wise to scoop up the shares of this Dow Jones card giant to garner potential gains.

Can Starbucks (SBUX) Rebound From Earnings Miss?

Posted on by The INO.com Team

Starbucks Corporation (SBUX), the leading coffeehouse chain, reported quarterly revenue and EPS that fell short of analysts’ expectations. Shares of SBUX declined more than 12% in premarket trading Wednesday after the coffee company reported a disappointing quarter. Also, the stock has plunged nearly 18% over the past month and almost 28% over the past six months.

For the second quarter that ended March 31, 2024, SBUX’s net revenues decreased 1.8% year-over-year to $8.56 billion. That missed analysts’ revenue estimate of $9.16 billion.

Global same-store sales decreased by 4% as traffic to its cafes declined 6% in the quarter. Starbucks experienced declining same-store sales and lower traffic across all regions. In North America and the U.S., same-store sales dropped by 3% as traffic fell 7%, marking the second consecutive quarter of challenges in its home market.

Last quarter, executives attributed slow sales to boycotts of the stores related to misperceptions about its stance on Israel.

SBUX’s CEO Laxman Narismhan told analysts on the company’s conference call, “In this environment, many customers have been more exacting about where and how they choose to spend their money.” Narasimhan added that a deteriorating economic outlook in several of its markets had contributed to a significant reduction in customer traffic.

SBUX’ International segment posted same-store sales declines of 6%, with both average ticket and transactions declining. In China, the company's second-largest market, same-store sales fell by 11%, primarily due to an 8% reduction in average ticket.

The coffee giant’s operating income was $1.10 billion, down 17.2% from the prior year’s quarter. Net earnings attributable to SBUX declined 15% year-over-year to $772.40 million. It reported net earnings per share was $0.68, compared to the consensus estimate of $0.80, and down 13.9% year-over-year.

As of March 31, 2024, Starbucks’ cash and cash equivalents stood at $2.76 billion, compared to $3.55 billion as of October 1, 2023. The company’s current assets were $6.47 billion versus $7.30 as of October 1, 2023.

“In a highly challenged environment, this quarter’s results do not reflect the power of our brand, our capabilities or the opportunities ahead,” said Laxman Narasimhan. “It did not meet our expectations, but we understand the specific challenges and opportunities immediately in front of us.”

“We have a clear plan to execute and the entire organization is mobilized around it. We are very confident in our long-term and know that our Triple Shot Reinvention with Two Pumps strategy will deliver on the limitless potential of this brand,” Narasimhan added.

Meanwhile, Rachel Ruggeri, SBUX’s chief financial officer, commented, “While it was a difficult quarter, we learned from our own underperformance and sharpened our focus with a comprehensive roadmap of well thought out actions making the path forward clear.”

“On this path, we remain committed to our disciplined approach to capital allocation as we navigate this complex and dynamic environment,” he added. 

Bleak Fiscal 2024 Outlook

For the fiscal year 2024, SBUX expects revenue growth in the low single digits, compared to the prior guidance of 7% to 10%. The coffee giant also revised its forecasts for global and U.S. same-store sales growth to a range of low single digits to flat from its prior projection of 4% to 6%.

Starbucks’ same-store sales in China are anticipated to decrease by single digits, compared to the previous guidance of a single-digit increase. The company further expects EPS growth to range from flat to low single digits. Previously, it expected its earnings to surge 15% to 20% in 2024.

However, the company projects that sales might improve in the fourth quarter of 2024.

In addition, SBUX’s CEO Narasimhan said that the company now expects supply-chain cost savings of $4 billion over the next four years, revising its previous outlook of $3 billion over three years.

Strategic Initiatives

In February 2024, SBUX and Bank of America Corporation (BAC), the prominent financial institution, announced a new collaboration that offers millions of Bank of America cardholders and Starbucks Rewards® members in the U.S. the ability to earn more benefits by linking accounts.

Bank of America cardholders and Starbucks Rewards members can earn an additional 2% cash back on qualifying purchases on top of their existing rewards or card benefits. Additionally, they can earn 1 Star per $2 spent at Starbucks by linking an eligible debit or credit card to their Starbucks Rewards account at BofA.com/starbucks or starbucks.com/bofa.

Ryan Butz, vice president of loyalty strategy and marketing at Starbucks, said, “This partnership is the latest example of how we are continuing to invest in our most loyal customers to deepen engagement and connection by offering benefits and experiences that can’t be found anywhere else.”

Despite near-term macroeconomic headwinds, the Seattle-based coffee company remains focused on its long-term growth and outsized returns to partners, customers, and shareholders.

In November last year, SBUX announced its long-term growth strategy, Triple Shot Reinvention with Two Pumps, to elevate the brand, strengthen and scale digital, identify opportunities within and outside the store for efficiencies, expand globally, and reinvigorate the partner (employee) culture. 

For the quarter that ended March 31, 2024, Starbucks’ U.S. store count stood at 16,600, a 3% increase year-over-year. The company aspires to reach 20,000 over the long term, leveraging the vast channels available to meet the changing customer needs and further elevate the brand.

“Innovation in our store formats, to purpose defined stores like pick-up, drive-thru only, double-sided drive-thru, and delivery-only allows us to better meet our customers where they are at through differentiated experiences,” said Sara Trilling, executive vice president and president of Starbucks North America.

In addition, the brand will be elevated via product innovation. Also, SBUX introduced a new phase in the acceleration of its digital flywheel. The coffee chain wants to strengthen its digital leadership with a strategy aimed at Double global Starbucks Rewards with another 75 million members within the next five years.

Also, SBUX announced new technology collaborations to improve the partner and customer experience. The partnership with Microsoft Corporation (MSFT) will continue through joint efforts in its innovation lab, combining industry-leading generative AI capabilities to advance product development and personalization to the next level.

Further, Starbucks will collaborate with Apple (AAPL) products in its first Green Apron Innovation store to experiment and refine technology to help partners worldwide. The company will also reimage the customer in-store experience with Amazon One and Just Walk Out technology. 

SBUX also announced a plan to expand its global store footprint to 55,000 by 2030, bolstered by further expansion of digital platforms across all licensed partners worldwide. 

The company further announced the implementation of a $3 billion efficiency program – with $2 billion outside the store in cost of goods sold – to reinvest in the business and deliver returns to shareholders through margin expansion and earnings growth.  

Bottom Line

SBUX reported weaker-than-expected revenue and earnings in the second quarter of fiscal 2024, driven by a significant decline in same-store sales. After a disastrous quarter, the coffee giant lowered its outlook for the full-year earnings and revenue; however, it forecasts sales will start improving in the fourth quarter of 2024.

Regarding disappointing financial performance, CEO Laxman Narasimhan said customers had been more cautious about where and how they spend their money during the quarter. The U.S. consumer confidence deteriorated for the third consecutive month in April as consumers continued to fight persistently high prices and elevated interest rates.

Starbucks added that bad weather also closed some U.S. stores briefly in the quarter. China, the company's second-largest market, also witnessed a choppy post-COVID recovery. Further, it is facing an ongoing boycott of its stores for its perceived support of Israel in the war in Gaza.

Despite near-term macro challenges, the coffee giant stays committed to its long-term growth strategy, Triple Shot Reinvention with Two Pumps, which priorities elevating the Starbucks brand, strengthening the company’s digital capabilities, becoming more global by accelerating store expansion, unlocking efficiency by cost savings, and reinvigorating the partner culture.

Starbucks continues to deliver significant value to partners, customers, and shareholders. On March 21, SBUX’s Board of Directors approved a quarterly cash dividend of $0.57 per share of outstanding common stock, payable in cash on May 31, 2024.

SBUX pays an annual dividend of $2.28 per share, which translates to a yield of 3.12% on the current share price. Its four-year average dividend yield is 2%. The company’s dividend payouts have grown at a CAGR of 9.8% over the past five years. Moreover, Starbucks has raised its dividend for 13 consecutive years.

Although the road to recovery might be rocky, investors should watch closely for improvements in SBUX’s same-store sales, gains from ongoing strategic initiatives, and global store expansion. Hence, it could be wise to wait for a better entry in this stock for now.