2023 Q1 Earnings Review Part IV: Basic Materials, Industrials & Real Estate Investment Trusts (REITs)
- Raytheon Technologies Corporation beat on revenue and earnings, and we are using the weakness in the stock to add to our position.
- United Parcel Service had a bad quarter as management lowered its FY23 guidance because of tightening economic conditions.
- A.O. Smith reported a solid quarter, and management continues to execute well.
- VICI Properties Inc. continues to grow with its savvy strategic acquisitions.
- Barrick Gold Corporation reported a better than feared, but management needs to execute better to improve margins.
Raytheon Technologies Corporation (RTX)
Raytheon Technologies Corporation (RTX) reported Q1 2023 sales of $17.2 billion (beat WallStreet estimates by $220 million), up 10 percent over the prior year, and adjusted EPS of $1.22 (beat WallStreet estimates by $0.09), up 6 percent versus the prior year. RTX beat our fund estimates of $1.18 per share on revenue of $17.1 billion as we anticipated EPS to suffer on increased costs & supply chain constraints. The substantial revenue was thanks to the demand for aerospace and defense systems, a sentiment echoed by the CEO. Net income margins expanded by 126 basis points to 8.28%. RTX had a record backlog of $180 billion at the end of Q1 2023, including $71 billion for defense and $109 billion for commercial.
RTX’s Collins Aerospace and Pratt & Whitney were the standout segments during the quarter, thanks to commercial aerospace and military demand. These segments had 16% and 15% revenue growth, respectively, while Missiles & Defense and Intelligence & Space had 4% and flat revenue growth, respectively. The company had a cash burn of $1.4 billion, down from the $37 million generated in free cash flow in the same period last year. RTX reaffirmed its outlook for 2023, with sales between $72 and $73 billion, adjusted EPS of $4.90 — $5.05, free cash flow of approximately $4.8 billion, and share repurchase of $3.0 billion.
RTX achieved approximately $50 million of incremental RTX gross cost synergies in Q1 2023 and expects to achieve approximately $600 million for the year. RTX announced its plan to realign its business units into three segments: Aerospace Systems, Defense Systems, and Intelligence & Space. Raytheon had a great quarter thanks to the demand in aerospace and defense systems, but the stock sold off, and we will be looking to add to our position below $95/share.
United Parcel Service Inc. (UPS)
UPS announced its first-quarter 2023 earnings on April 25, 2023. The company reported consolidated revenues of $22.9 billion(missed WallStreet estimates by $80 million), a 6% decrease from the first quarter of 2022. The company also reported a consolidated operating profit of $2.5 billion, down 21.8% year-over-year, and an adjusted consolidated operating profit of $2.6 billion, down 22.8% year-over-year. The company’s diluted earnings per share were $2.19, down 27.9% year-over-year, and adjusted diluted earnings per share were $2.20 (missed WallStreet estimates by $0.01), down 28% year-over-year. UPS’s headline numbers disappointed as we anticipated they would earn $2.30/share on revenue of $23.2 billion.
The company attributed the revenue and profit declines to lower volume in the U.S. domestic and international segments and market rate and volume declines in the supply chain solutions segment. The company updated its 2023 financial guidance and expects consolidated revenue of around $97 billion. Management lowered its guidance from $98.3 billion and reiterated its $3 billion share buyback. UPS generated $1.8 billion in free cash flow, down from $3.9 billion. Shareholders received $2.1 billion through dividends and share repurchases. The stock plunged 10% on the weak outlook for 2023, and the slowing economy will not help the company. We are confident that the management team will steady the ship at UPS. We have used the stock selloff to add to our position.
A. O. Smith Corporation (AOS)
A. O. Smith Corporation (AOS) reported strong results for the first quarter of 2023, beating analysts’ expectations on both earnings and revenue. The company reported earnings per share (EPS) of $0.94 (beat WallStreet estimates by $0.16) while sales were $966 million ($44 million ahead of WallStreet estimates), down 1.2% year over year. The company revised its 2023 outlook and expects adjusted EPS to be $3.75-$3.85, up from the previous range of $3.65-$3.75.
The company’s North American segment saw a 3% increase in sales to $752.7 million, driven by higher demand for commercial and residential water heaters and lower steel costs. The company’s Rest of the World segment saw a 14% decrease in sales to $219.1 million, mainly due to lower consumer demand in China amid the COVID-19 pandemic. However, sales in India rose 28% due to strong demand for water heaters and treatment products. The company had a $12.5 million charge related to selling its Turkey business, and we think management is making a good move given the economic headwinds in the country.
A. O. Smith Corporation generated $109.2 million in free cash flow, making management increase its share buyback program by $100 million. Investors reacted well to the news, and we would like to add more to our stock position. The company is an infrastructure investment stock play for the emerging market; as its building structures improve, it will undoubtedly need the products AOS provides. The company is a consistent dividend grower yielding close to 2%, and management can still extract more synergies from its Giant Factories purchase in 2021.
VICI Properties Inc. (VICI)
VICI Properties Inc. (NYSE: VICI) is an experiential real estate investment trust that owns and operates gaming, hospitality, entertainment, and leisure destinations across the U.S. and Canada. For Q1 of 2023, VICI reported funds from operations of $0.53/share (missed WallStreet estimates by $0.08), and revenues doubled to $877.6 million (beat WallStreet estimates by $31 million). The REIT completed its First International acquisition in Canada for C$271.9 million and the acquisition of the remaining 49.9% stake in the MGM Grand/Mandalay Bay joint venture. VICI Properties is still in a strong liquidity position of $3.6 billion to take advantage of the real estate when the economy slows down.
Net income attributable to common stockholders doubled to $518.7 million, and AFFO attributable to common stockholders increased 73% year-over-year to $528.6 million. Management reaffirmed guidance for 2023, and they can extract synergies from its two acquisitions. Given the sell-off in the REIT, we like how well VICI Properties has held up, and we are looking to add more to our stock position.
Barrick Gold Corporation (GOLD)
GOLD is the ticker symbol for Barrick Gold Corporation, a gold and copper producer with operations in 13 countries. GOLD reported its Q1 2023 results on May 3, 2023, with a net income of $538 million and earnings per share of $0.14 (beat Wall Street estimates by $0.02). GOLD produced 1.10 million ounces of gold and 93 million pounds of copper in Q1 2023 at an all-in-sustaining cost of $929 per ounce and $2.14 per pound, respectively. This mining productivity yielded $2.64 billion (beat WallStreet estimates by $70 million) in revenue, representing a decline of 7% due to lower production numbers. The headline numbers were disappointing compared to our fund estimates of $0.22/share in earnings on revenue of $2.68 billion.
The gross profit contracted from 39% to 26.6% due to higher labor costs and supply chain constraints. GOLD advanced its growth projects, such as the Pueblo Viejo expansion in the Dominican Republic and the Turquoise Ridge third shaft in Nevada. GOLD improved its environmental, social, and governance performance, with a reduction in greenhouse gas emissions intensity by 9% and an increase in water recycling by 6%. The company generated $88 million in free cash flow, up from a cash burn of $393 million ending with a cash balance of $4.38 billion (down 14% from a year ago). The company’s stock still remains a hold for us, and we would like to add more to diversify our portfolio.
Disclosure: Cresco Investments is long Raytheon Technologies Corporation (RTX), United Parcel Service Inc. (UPS), A.O. Smith Corporation (AOS), VICI Properties Inc. (VICI) and Barrick Gold Corporation (GOLD).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and consult with their financial advisor(s).
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