2022Q4 Earnings Review Part IX: Consumer Defensive, Energy, Technology, Real Estate Investment Trusts (REITs)
- Pioneer Natural Resources Company reported a mixed quarter along with a strong dividend payout.
- Nvidia Corporation reported a recovery quarter as gaming recovered, the company is going to be a beneficiary of the AI arms race.
- Keurig Dr. Pepper Inc. reported a mixed quarter and management gave a modest FY2023 outlook.
- VICI Properties Inc. beat on funds from operations and revenue as the company adds to its property portfolio.
- Innovative Industrial Properties reported a strong quarter as management rebalances its property portfolio.
Pioneer Natural Resources Company (PXD): The oil exploration and production company beat on earnings but missed on revenue due to lower commodity prices. Pioneer Natural Resources earned $5.91/share (beat WallStreet estimates by $0.15) on revenue of $5.1 billion (missed WallStreet estimates by $490 million). Pioneer’s headline numbers were mixed in comparison to our fund estimates where we expected the company to earn $5.85/share on revenue of $5.48 billion. Oil daily volume was down from 393k barrels to 350k barrels but gas was up from 166k cubic feet to 162k cubic feet. The mixed daily volume numbers along with lower gas and oil prices were a headwind for the company’s revenue number.
Pioneer’s operating income came in at $1.87 billion up from $991 million and this represents an operating margin of 36.6%. The margin has expanded from 23% which is impressive execution by management. The company’s net income nearly doubled to $1.48 billion from $763 million. Pioneer generated $1.68 billion in free cash flow up from $53 million which is impressive and allows the company to declare a variable dividend of $5.58/share (which is a dividend yield of 10.8%). Management gave a solid outlook for Q1 FY2023 on some good production numbers and healthy capital expenditures. The company is looking to invest up to $200 million in oil exploration projects.
Overall this was a mixed quarter for the company but we like the total shareholder returns the company gives with its variable dividend. There is going to be a structural demand for oil & gas for several decades to come and management seems to believe in that idea as well. The company is considering buying oil explorer Range Resources which would help consolidate the shale industry and give Pioneer access to Appalachian natural gas. We like management’s moves and we are going to be buyers of the stock at these prices.
Nvidia Corporation (NVDA): The semiconductor company reported an earnings and revenue beat although it was a subdued quarter because of gaming. Nvidia reported earnings per share of $0.88 (beat WallStreet estimates by $0.08) on revenue of $6.05 billion (beat WallStreet estimates by $30 million). We had low expectations for the company going into the quarter given the weakness in gaming and we estimated the company would earn $0.69/share on revenue of $6.15 billion. The EPS number was very impressive it shows strong cost discipline from management. Nvidia reported a revenue decline of 21% primarily driven by Gaming being down 46% along with Professional Visualization down 65%. Data Center and Automotive did show growth of 11% and 135% (rebound quarter).
Nvidia reported strong margins as gross margins came in at 66.1% (higher than our fund estimate of 59.7%). Management showed good cost discipline as net and operating income was up 49% and 45% respectively. The company generated $1.74 billion in free cash flow up from $2.76 billion as the company works off its gaming chip inventory. The company has a cash hoard of $13.3 billion on its balance sheet. The cash hoard will help the company’s innovation projects as they try to keep its pole position in artificial intelligence. The company launched its AI-as-a-service product collaboration with Oracle called Nvidia DGXAI which can be used with Google, Microsoft Azure, Oracle Cloud, and many others. The company is paying out its regular dividend of $0.04/share which is minimal because the company is investing heavily in innovation.
Nvidia produced a great quarter given what we expected, management really strung together a great quarter. The stock being up 14% was not only on earnings but on its AI products and its declaration as the number 1 artificial intelligence company in the semiconductor space. The stock trades at a lofty valuation of 133x but it is worth it given its lead in the AI arms race. This company is a core holding in our portfolio and we would be looking to add to our position on any weakness.
Keurig Dr. Pepper Inc. (KDP): Our defensive stock holding, Keurig Dr. Pepper missed on earnings but beat on revenue which was just below our expectations. We expected the company would beat on the top and bottom line and raise its FY2023 outlook. However, the company reported earnings per share of $0.50 (missed WallStreet estimates by $0.01) and revenue of $3.8 billion (beat WallStreet estimates by $20 million). Given prior quarters from Keurig Dr. Pepper has reported we had high estimates for the company as we expected them to earn $0.53/share on revenue of $3.84 billion. The company reported revenue growth of 12.2% driven by strength all around the company’s business units. Coffee Systems, Packaged Beverages, and Beverages Concentrates business segments all reported growth numbers of 12.7%, 9.9%, and 14.7% respectively.
The company’s gross margins expanded from 52.3% to 52.5% as management showcases its excellent execution in a challenging macroeconomic environment. However, the company’s net margin contracted significantly from 24.9% to 11.9% because of a $166 million impairment charge taken during the quarter. Keurig Dr. Pepper generated $2.65 billion in free cash flow up from $2.57 billion which means higher dividend payouts for investors in the future. Management gave a modest 2023 outlook as they expect 6–7% EPS growth which is coupled with 5% net sales growth. This is a solid outlook from the company given how economists forecast 2023 will have a mild recession.
Keurig Dr. Pepper’s stock has been rock solid during the market volatility and it is the principal reason why we have it in our portfolio, it is a solid defensive holding. The stock modestly reacted to the earnings news by going up 1% as investors cheered on the company’s consistency.
VICI Properties Inc. (VICI): The specialized real estate investment trust reported a beat on revenue and funds from operations as it integrated its acquisitions. VICI Properties reported revenue of $769.91 million (beat WallStreet estimates by $176 million) and funds from operations of $0.64/share (beat Wallstreet estimates by $0.05). The company reported that revenue doubled as it acquired the rest of the MGM Grand/Mandalay joint venture from Foundation Gaming for $293.4 million. VICI Properties is looking to invest up to $600 million in property development in Las Vegas and Texas. The company reported a net income of $604 million and management raised its dividend payout for investors by 8.3% to $0.39/share.
In terms of the 2023 outlook, management reported that they will be expecting to generate between $2.12 billion and $2.16 billion in revenue which represents 47% growth. From this revenue, management expects to earn adjusted funds from operations of between $2.10-$2.13/share. We think this is a fair assessment by management and we think they will be able to produce synergies from its acquisitions.
Innovative Industrial Properties Inc. (IIPR): The cannabis-specialized real estate investment trust beat on revenue and funds from operations as the company closed out a turbulent 2022. Innovative Industrial Properties reported funds from operations of $1.95/share (beat WallStreet estimates by $0.06) on revenue of $70.46 million (beat WallStreet estimates by $1.48 million). The company reported impressive headline numbers given how one of the company’s tenants (Kings Garden) is going through bankruptcy proceedings and has rent payments in arrears. Innovative Industrial Properties reported revenue growth of 20% as the company amended its expansion leases in California and Massachusetts for up to $25.4 million.
Management sold property from its portfolio for $23.5 million for a $3.6 million gain as they look to shore up its liquidity capacity. The company has maintained its healthy dividend payout equalling $7.20/share on an annual basis. Management gave good feedback on how 2023 has started off as the company is expanding by buying up properties in Pennsylvania for $15 million. The company is looking to provide up to $19.5 million for real estate projects around the United States. The company also has an agreement in place to sell properties to Cannabis Medical Investment for $16.2 million. Troubled tenant Kings Garden has paid $825,000 as it is in talks to sell some of its assets and pay off its debts. Management noted strong rent collection at 92% of rent collected for the period ending February 28, 2023.
The company has no debt maturities until 2026 and has a healthy property portfolio. The stock reacted well after the news as it went up close to 4% in the after-hours market. We will be staying pat with our stock position and will continue to hold the stock. We think we are still in the early innings of the cannabis boom as it expands across the United States.
Disclosure: Cresco Investments is long Pioneer Natural Resources (PXD), Nvidia Corporation (NVDA), Keurig Dr. Pepper Inc. (KDP), VICI Properties (VICI), and Innovative Industrial Properties Inc. (IIPR).
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/or consult with their financial advisor(s).
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