2023 Q1 Earnings Review Part I: Biotechnology, Consumer Cyclical, Consumer Defensive, and Financial Services
- Nike Inc reported top and bottom line beats as investors analyzed the reopening appetite of consumers in China.
- BioNTech beat earnings expectations as COVID-19 becomes endemic, forcing the company to cut its FY2023 outlook.
- Dollarama Inc aligned with expectations, but revenue acceleration forced management to raise its outlook.
- Conagra Brands reported a better-than-expected quarter as they beat on earnings and revenue as management continues to execute well.
- Despite a regional banking crisis J.P. Morgan demonstrated why they are the best bank in the world with the best Banking CEO.
Earnings season for 2023 Q1 starts off with our stock positions in the BioTechnology, Consumer Cyclical, Consumer Defensive, and Financial Services sectors. The companies that represent these sectors are Nike Inc. (NKE), BioNTech SE (BNTX), Dollarama Inc. (TSE: DOL), Conagra Brands (CAG), and JPMorgan Chase & Co. (JPM). These companies are still contending with a tightening economic environment, inflation, and a new regional banking crisis that had four banks failing (or being taken over) in mid-March. Our stock positions continue to showcase that strength through their earning beats as numbers came in better than feared. Overall, we anticipate for 2023Q1 earnings season to be difficult for companies as earnings for the S&P 500 come down.
Nike Inc. (NKE): The shoemaker and athleisure brand reported an earnings and revenue beat as the decline in China was not as bad as expected. Nike reported $0.79/share (beat WallStreet estimates by $0.25) on revenue of $12.39 billion (beat WallStreet estimates by $910 million). The company reported a blowout headline that exceeded our fund estimates. We estimated that Nike would earn $0.69/share on revenue of $11.6 billion. The company said revenue growth of 14% as the dollar eased up, and most of that growth came from Digital sales and Direct to Consumer (DTC), which had growth of 20% and 17%, respectively. Despite the inventory bloat, wholesale had year-over-year revenue growth of 12%.
Geographically, Nike had double-digit growth across all regions except China, which had a decline of 8%. China was expected to decline worse; the number came in better than feared. The company's gross margins contcompany's 3.3% to 43.3% due to inventory markdowns and inflationary pressures. Selling and administrative expenses increased significantly due to advertising and marketing, reflected in the net margin declining to 9.7% from 11%. Looking at shareholder returns, Nike returned $2.03 billion to shareholders in dividends and share buybacks. The company ended the quarter with $6.96 billion, down 20% from the year prior, as it invested in its supply chain to improve its DTC throughput.
Nike's stock was up on the news rNike's as investors seemed to have breathed a sigh of relief as China numbers came in better than feared. We will be looking to market-wide selloff to add to our stock position.
BioNTech SE (BNTX): The Biotechnology company which formulated the COVID-19 vaccine along with Pfizer beat on earnings and revenue to close out its FY2022. BioNTech SE reported earnings of €9.26/share (beat WallStreet estimates by €1.57) on revenue of €4.28 billion (beat WallStreet estimates by €420 million). The company's headline numbers came ahead of our estimates of €9.10 in earnings on revenue of €4.1 billion. These numbers are way lower than what the company earned last year when the demand for COVID-19 vaccines was high. The company reported a revenue decline of 22.6% since demand has decreased as the population is inoculated.
BioNTech SE had a high gross profit margin due to the cost of goods sold coming in at €183.5 million, down from €583.2 million, because the vaccines sold were already produced. Research and development expenses doubled to €589.6 million as the company intensified its oncology drug pipeline for phase 3 trials which is the last stage to getting the drug approved. BioNTech SE spent €1.5 billion on research and development for the fiscal year as the company pivots from the COVID-19 vaccine. The company's net profit reached €2.28 billion, which was lower because of weak revenue and higher R&D expenses.
Management gave a subdued FY2023 outlook; the company expects to generate €5 billion in total revenue for the fiscal year. The company expects to grow its R&D expenditure by 60% to €2.6 billion as it bolsters its oncology, malaria, shingles, and HSV-2. The stock sold off close to 4% on the news, primarily because of the FY2023 guidance from management. Investors are now re-rated the store as COVID-19 becomes more manageable and endemic. We will continue to hold the stock to see how the company's pivot to its cancer pipeline plays out. The company has chcompany'stics of being a takeover target for Pfizer, Vertex, and Amgen.
Dollarama Inc. (TSE: DOL): The Canadian dollar retail chain reported inline earnings but beat on revenue. Dollarama reported earnings of $0.70/share (in-line with WallSteet estimates) on revenue of $1.3 billion (beat WallStreet estimates by $385 million). The company reported revenue growth of 14.9% (thanks to same-store sales growth of 10.8%). In addition, the company reported an increase in the transaction size as customers looked for bargains due to the inflation of goods and services. Gross margins contracted for Dollarama from 44.4% to 43.3% due to higher freight costs in its supply chain. Operating margins contracted by 70 basis points to 23.5% as selling and general administration expenses increased by 14.3%.
The company's investment in Latin America retailer Dollar City yielded $9.2 million in income up fromcompany'slion. Dollarama has also been investing in its supply chain capabilities as it closed the acquisition of three industrial properties for $87.3 million. Management raised its fiscal year 2023 guidance by increasing its same-store sales to 10.5% from 7.5%. With the same-store sales increase, management increased gross profit margins from 42.9% to 43.6%. Management expects 60–70 net new stores at the end of the fiscal year 2023. Dollarama reported solid numbers despite the stock selling off, and we think it's a good recession stock play.
Conagra Brands (CAG): Consumer packaged food company Conagra Brands reported a strong quarter as they beat on earnings and revenue. The company reported earnings of $0.76/share (beat WallStreet estimates by $0.12) on revenue of $3.09 billion (beat WallStreet estimates by $10 million). The headline numbers that Conagra reported compared to our internal fund estimates it was a mixed earnings picture management gave us. The revenue number came in below our estimates which can be attributed to the strong US Dollar. We estimated that Conagra would earn $0.68/share on revenue of $3.13 billion.
Looking into the quarter in-depth, Conagra reported 6% year-over-year revenue growth, which was accelerated mainly by the International Food Service business line, which helped with net organic sales growth. The higher volume mix helped the company to offset the strong currency headwinds as gross profit was up 20.3% to $839 million. Selling, general & administrative expenses were up 3.2% (lower than expected, which is good cost discipline from management) due to increased marketing spend and compensation. As a result of the cost discipline by management, Conagra's net income margins were up 3.6% to end the quarter at 11.1%.
Conagra generated $436 million in free cash flow for the quConagra's from $388 million in the same period last year. Management raised its FY2023 outlook on earnings per share and operating margins which is a clear sign that cost cuts will be in focus over the next couple of quarters. The stock recorded modest gains on the earning news (up 2%+); Conagra continues to deliver consistent earnings results and is an excellent place to hideout during a market selloff. We like how recession resistant the stock is and will likely add more to our position.
JPMorgan Chase & Co. (JPM): JP Morgan Chase & Co. (JPM) delivered an earnings clinic and provided why they are the best bank in the world run by the best bank CEO. The money center bank reported earnings per share of $4.10 (beat WallStreet estimates by $0.69) on revenue of $38.3 billion (beat WallStreet estimates by $2.53 billion). We thought the regional banking crisis would ding earnings for JP Morgan, and with tightening credit conditions, we were cautious about the bank going into earnings. We estimated JP Morgan would earn $3.37/share on a revenue base of $36.2 billion. The headline numbers were impressive from the bank, so you wouldn't think four institutions failed this quarter. The money center bank reported revenue growth of 24.8% (these are growth rates for technology companies.
Looking into the quarter in detail, the high revenue growth was driven by net interest revenue from the increased interest rates by the Federal Reserve. Net interest revenue was up 49% at $20.8 billion, while noninterest revenue was up 5%. The strongest segments for the bank were Consumer and Community Banking, as net income rose 80% and 58%, respectively. The Asset Management segment was not so bad because of the early 2023 stock rally, but the Corporate Banking segment is still weak despite recovering from a net loss. The bank increased its loan loss provision by $1.1 billion in credit losses while loan growth was flat sequentially. Management is cautious and prudent in showcasing its risk management.
The company ended the quarter with over $3 trillion in assets under management, up 2% from last year. The company returned $4.9 billion to shareholders. However, we do not think JP Morgan will increase its share buyback because of the tightening monetary conditions. Overall, JP Morgan delivered a masterclass quarter and showed they were a beneficiary of the regional banking crisis. The stock was up 7% on the news, which shows why it deserves a premium valuation. We will be looking to add to our stock position on market selloffs.
Disclosure: Cresco Investments is long Nike Inc. (NKE), BioNTech SE (BNTX), Dollarama Inc. (TSE: DOL), Conagra Brands (CAG), and JPMorgan Chase & Co. (JPM).
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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