Fountainheadinvesting

Fountainhead Investing

Menu
Menu

Category: Industry

Categories
Shipping Stocks

Zim Integrated Is A Cyclical Dependent On Freight Rates

ZIM Integrated (ZIM) $23 (Shipping) 

Highly Cyclical dependent on freight rates. 

The short-term pop may continue for a while, I’m not investing in it because it’s too cyclical and difficult to predict freight rates, which are again tied to the global economy. 

This year is very good based on increased freight rates and the return of the dividend. Dividends return after higher freight rates, higher shipping volume, and lower fuel costs. 

Management said it now expects $2.6 billion to $3 billion in adjusted earnings before interest, taxes, depreciation and amortization for 2024, up from a previous range of $1.15 billion to $1.55 billion. 

During the second quarter, ZIM (ZIM) swung to a profit of $373 million, or $3.08 a share, from a loss of $213 million, or a loss of $1.79 a share, a year earlier. 

ZIM’s (ZIM) board declared a cash dividend of approximately $112 million, or $0.93 a share, payable on Sept. 5. 

In terms of downside risks, as aforementioned, ZIM’s underlying business is highly cyclical and responds sensitively to shipping rates. To wit, the rates were mostly in the range of $2,000 to $4,000 a year ago per 40-foot container. These rates have climbed substantially since then and peaked in the $8,000 to $10,000 range recently. 

There haven’t been enough improvements in 2-3 year forecasts which are still negative for sales and earnings, so definitely not a long term investment.  

Categories
Power and Utilities Stocks

AES Corp Is A Decent Utility  

AES Corp (AES) $16.85 (Utility, decent dividend yield) Can buy on declines or accumulate don’t expect more than 7%-8% per year, though datacenter operations could be a nice surprise. 

Flat for a long time – 10 years the stock returned just 12%, it is down 12% in the past year. Revenues and operating earnings also went nowhere during the same time, selling some legacy coal, and switching to renewable energy, 

Earnings growth for the next three years is estimated at 8%, revenue at 4%. 

The 4% dividend yield is interesting 

​​BBB debt rated – middle of the pack, most utility dividend investors would prefer at least BBB+. 

Core player in the renewable sector, with a growing 25-30 GW portfolio of solar power until 2027 – The trend towards renewable energy helps them. 

Expected demand from Datacenters- Some of the company’s major customers include Amazon, Microsoft and Google, major IT businesses, all of whom have Co2-neutral commitments to their operations by 2030 or earlier – and the company’s backlog is over 40% with customers that are large tech companies. 

  • Transitioning from coal and gas-fired power plants to renewables and storage and still has impairment losses due to the coal exit.  
  • Low margins – not efficient, compared to its competitor Brookfield Renewables, AES has a lower dividend yield and a lower EBITDA margin.  
  • These are still high debt levels. $26.5B net debt equals more than two times the current market cap, about eight times the adjusted 2023 EBITDA, and about 26 times the 2023 free cash flow. Three peers BEP, AY and TEC have lower debt ration – some at slightly higher rates but this will improve once rates go down. 
Categories
Industrials Stocks

Caterpillar: A Well-diversified Market Leader 

Industrial cyclical – Caterpillar (CAT), Value stock Hold, can buy on declines. 

Has been a good value stock, returning 17% in the past year and 180% in the past 5 and 219% in the past 10, which is good for a cyclical barely growing revenues at 3% a year on average with peaks and troughs. Revenue and earnings estimates are also for low single digits for the next 3-4 years. 

Positives 

Increasing Service revenue stream will improve profit margins. They want to acquire more service companies and focus on this. 

They did manage to increase prices this year, not an easy task unless your product is superior in this industry – good brand recognition. 

Well diversified – lot of end user markets and customers from construction to O&G, and transportation. 

They will also get more revenue from AI – data center buildouts. 

Negatives 

  • Economic Headwinds: Global challenges like Europe’s manufacturing recession and China’s weak housing market could impact CAT’s performance, plus the US’ chances of a recession have now increased above 30% following a softer jobs market. 
  • Cyclical Nature: Despite diversification, its core industries are still cyclical, exposing CAT to economic downturns. 
  • Valuation Risks: The current stock price reflects much of its potential, potentially limiting the upside if we do not get a rebound in cyclical growth. 
Categories
Industrials Stocks

Deere – An Interesting Value Stock 

Deere and Co (DE) $345 Industrial cyclical, Value Stock. Hold for now. 

Deere underperformed CAT this year losing 20% but was OK in the last 5 and 10 with 135% and 308% share price growth. 

  • Deere’s focus is specializing in heavy equipment for agriculture, construction, and forestry sectors. 
  • This year is bad – Recent weak guidance and sales declines because of crop prices. The next two years’ forecast is also negative for both earnings and revenues 
  • But overall, in the last 10 years, Deere’s revenue growth has been far superior at 6% earnings in double digits as compared to CAT 
  • With a focus on cost reduction and expense management, Deere will improve but I suspect it could take at least year for some tangible results and its share price and valuation is not that low, we may see a bottom about 10-20% lower. 
Categories
Industrials Stocks

Robin Hood: Too Expensive To Buy Now. 

Robin Hood (HOOD) $17.73 HOLD – Its trading at a premium to its peers, will take another look if the price drops significantly.  

Positives 

Has a decent strong hold with retail trading community, a preferred broker to those who started trading during the pandemic – First Mover advantage. 

Wide offerings in crypto trading and services – crypto is the largest revenue stream. 

Negatives 

Cyclical, commodity, not much difference between brokerages, at one time commission rates used to be a differentiator, then it was ease of online trading, which was a small differentiator for Robin Hood when it took of during the pandemic, now everyone catering to retail seems to be on par. 

  • Interest rates from the customers float drive a big chunk of revenue, and a large recessionary rate cut would likely erase most of that revenue segment. 

Too much exposure to crypto volumes tank when crypto is down 

Valuation 

The stock is trading at a premium to its peers like Interactive Broking IBKR, which doesn’t seem justified. 

Categories
Industrials Stocks

Lumen Tech Could Be A Turnaround Stock. 

Lumen Tech (LUMN) $5.50 Cyclical, 

Stock has appreciated a lot this year, 220%, but 5- year and 10-year stock returns were negative, because as a Fiber Network Telco – it was a cyclical, commodity, capital intensive, high debt, low margin business. Sales have declined in the last 10 years by 21%. 

What is different now – Corning and Microsoft has helped it stave off bankruptcy, its debt load was too high for it to sustain its business, otherwise. 

  • Lumen’s partnership with Corning for fiber network expansion will support business growth and increased free cash flow forecast for 2024; this may lead to debt rating upgrade and improved growth. Markets responded enthusiastically to the news, since Lumen significantly increased its capacity to key cloud data centers. AI has heavy workloads and uses high bandwidth applications since it involves massive amounts of data. 
  • They have a similar customer supply deal with Microsoft. 

I tend to avoid commodity cyclicals because they don’t have sustainable, recurring growth, you have to constantly watch over your shoulder, and in Telecom and Networks capital requirements are usually very high. Plus, in Lumen’s case the stock has jumped for a bottom of $1, so much of the good news is in the price. If you decide to buy on a dip, you may get a solid bump for a year or two, but not a long-term great company. High Risk/High Reward for a year. If they continue to get more deals and AI network expansion continues yes this could be a good deal, but this industry is intensely competitive and price sensitive. 

Categories
Networking Stocks

Arista Networks Beats and Guides Above Expectations (ANET) $345 

Arista Networks (NYSE:ANET) on Tuesday announced a Q2 top – and bottom-line beat, while issuing current quarter revenue guidance that was largely above expectations. 

Arista’s two biggest clients are Microsoft and Meta for datacenter (over 35% of revenue) – now you know where Microsoft’s Capex went yesterday. 

EPS – $2.10 per share V $1.94 expected on an adjusted basis for Q2 on revenue of $1.69B V $1.65B expected.  

The EPS increase is 33% YoY because of strong revenue and better margins.  For the June quarter Arista’s operating margin was 41% and cash flow margin was 59%! Microsoft and Meta are supposed to be strong bargaining giants, right? Doesn’t look like it. 

Guidance is also higher – For Q3, Arista (ANET) sees revenue of $1.72B to $1.75B. V consensus revenue estimate of $1.72B. The Street has been raising long term estimates as well since morning. 

Arista’s (ANET) has been eating Cisco’s lunch for several years now, no easy task beating a giant,  working as partners with hyperscalers for AI. Ms Ullal, as many of you from Silicon Valley would know is absolutely top notch in executing projects of these large sizes and importance.  

“The collective nature of AI training models relies on a lossless, highly available network to seamlessly connect every GPU in the cluster to one another and enable peak performance. Networks also connect trained AI models to end users and other systems in the data center such as storage, allowing the system to become more than the sum of its parts,” Arista (ANET) top boss Jayshree Ullal said in a blog post in May. 

“As a result, data centers are evolving into new AI Centers where the networks become the epicenter of AI management,” Ullal added. 

Holding on to the 80% I have left of my ANET for the long term. This company is a winner. I would have loved to add more, hesitating only because even with the new estimates for 2026 earnings at $11 a share at 35x earnings (In 2025-2026, growth slows to mid-twenties) valued it at $385 in two years. 

More optimistic projections are for $12 EPS x 40 = $480 about 40% higher so that’s more interesting. Maybe I’m being conservative, but it would be very difficult to keep up these high margins and then there’s the customer concentration risk. 

Categories
Pharmaceuticals Stocks

Pfizer (NYSE:PFE) Maintaining Pfizer As A Buy On Declines.  

The dividend yield of 5.4% is good and Q2 results beat expectations…. 

Pfizer (NYSE:PFE) topped expectations with its second quarter results and raised its full-year outlook, driven by strength in its oncology portfolio and continued efforts towards realigning its cost base. 

The New York-based pharma giant generated adjusted earnings of $0.60 a share on revenue of $13.28B that grew 2.2% year-over-year. 

This marked Pfizer’s (PFE) first quarter of topline revenue growth, on a year-over-year basis, since the fourth quarter of 2022 when our COVID revenues peaked. Both metrics topped analysts’ projections for the quarter. 

Revenues grew 3% operationally year-over-year despite anticipated decline in revenues from its COVID-19 products, Comirnaty and Paxlovid. Comirnaty vaccine marketed with BIoNTech (BNTX) added $195M in revenue with a ~87% drop while COVID-19 pill Paxlovid generated $251M indicating a ~79% YoY growth. 

Excluding contributions from Comirnaty and Paxlovid, revenues grew 14% operationally to $12.8B, amid a strong performance from blood thinner Eliquis, which Pfizer (PFE) markets with Bristol Myers (BMY). Pfizer (PFE) also achieved exceptional growth in its oncology portfolio, with strong revenue contribution from its legacy-Seagen products. 

The drugmaker raised its full-year 2024 revenue guidance by $1B at the midpoint to a range of $59.5 to $62.5 billion (consensus estimate: $60.58B) and adj. diluted EPS guidance by $0.30 at the midpoint to $2.45 to $2.65 (consensus estimate: $2.37). Including the contribution from Seagen and excluding revenues from Comirnaty and Paxlovid, the firm now expects to achieve full-year 2024 operational revenue growth of 9% to 11% Y/Y. 

The company also said it is on track to deliver at least $4B in net cost savings by the end of 2024 from its previously announced cost realignment program. 

Categories
AI Industrials Stocks

Microsoft Disappoints Markets 

Microsoft (MSFT) shares fell nearly 7% in extended hours trading on Tuesday after the tech giant reported fiscal fourth-quarter results that topped expectations, but Azure growth was weaker-than-expected or simply the expectations were too high. 

For the period ending June 30, Microsoft earned $2.95 per share – above $2.93 guidance as revenue rose 15% year-over-year to come in at $64.7B – above 64.52 guidance 

Included in that was $28.52B from its Intelligent Cloud division, which consists of its Azure cloud unit. Microsoft said Azure revenue grew 29% year-over-year and 30% in constant currency. 

The company previously said it expected Azure to grow between 30% and 31% in constant currency, and some analysts previously said they expected more than 30% growth. 

Guidance for the Sep quarter will come in with the call. 

Categories
Semiconductors Stocks

AMD Bucks The Trend – The Stock Is Up 5% 

  • Advanced Micro Devices press release (NASDAQ:AMD): Q2 Non-GAAP EPS of $0.69 beats by $0.01. 
  •  
  • Revenue of $5.84B (+9.0% Y/Y) beats by $120M. 
  •  
  • Record Data Center segment revenue of $2.8 billion was up 115% year-over-year primarily driven by the steep ramp of AMD Instinct™ GPU shipments, and strong growth in 4th Gen AMD EPYC™ CPU sales. Revenue increased 21% sequentially primarily driven by the strong ramp of AMD Instinct GPU shipments. 
  •  
  • Client segment revenue was $1.5 billion, up 49% year-over-year and 9% sequentially primarily driven by sales of AMD Ryzen™ processors. 
  • Gaming segment revenue was $648 million, down 59% year-over-year and 30% sequentially primarily due to a decrease in semi-custom revenue. 
  •  
  • For the third quarter of 2024, AMD expects revenue to be approximately $6.7 billion vs. $6.61B consensus, plus or minus $300 million. At the mid-point of the revenue range, this represents year-over-year growth of approximately 16% and sequential growth of approximately 15%. Non-GAAP gross margin is expected to be approximately 53.5%.