- Constellation Brands beat on earnings and revenue but management cut FY23 EPS guidance as they spend on their supply chain.
- Conagra Brands delivered a solid quarter with a top and bottom line beat driven by strong organic net sales and higher pricing.
- McDonald’s Corporation reported top and bottom line beats as international markets keep rebounding to pre-pandemic levels.
- Amazon.com missed on earnings but reported an impressive revenue number and AWS growth is faltering slightly.
Constellation Brands (STZ): The alcohol producer reported earnings of $3.01/share (beat WallStreet estimates by $0.12) and revenue of $2.44 billion (beat WallStreet estimates by $60 million). Constellation Brands reported impressive headline numbers with the earnings and revenue beat. The company handily beat our fund estimates by a distance as we expected the alcohol company to earn $2.95/share on $2.41 billion of revenue. Constellation Brands reported revenue growth of 5.2% which is consistent and typical of a consumer defensive play. Management noted its wine business did well but the beer business struggled during the quarter.
Constellation Brands’ operating income came in at $746.7 million down from $839.9 million because of the higher costs from the inflationary environment. However, the company has been able to expand its gross and net margins which show good execution by management. Constellation Brands is integrating its acquisition of Austin Cocktails. Gross margins for Constellation Brands expanded from 48.9% to 50.3% while its net income margins expanded to 19.2% up from 18.8%. Operating cash flow came in solid at $2.28 billion down from $2.44 billion from the prior year as the company incurred higher accrued expenses. Free cash flow came in at $1.6 billion down from $1.8 billion. The company ended the quarter with $1.05 billion in cash on the balance sheet.
From the healthy cashflows, the company paid out $441 million in dividends to shareholders during the quarter. Looking at the outlook, management cut its earnings per share (EPS) guidance from the $11.20-$11.60 range to the $11–11.20 range as they factor in higher supply chain costs. Management did however reaffirm its free cash flow to come in the $1.5-$1.6 billion while operating cash flow is looking to come in between $2.5 to $2.6 billion. The stock reacted negatively to the EPS guidance cut on the outlook down 9.72%. We see this as an opportunity to add to our new stock position.
Conagra Brands (CAG): The consumer packaged goods company reported earnings of $0.81/share (beat WallStreet estimates by $0.15) and revenue of $3.31 billion (beat WallStreet estimates by $30 million). In comparison to our fund estimates, Conagra beat our estimates of $0.72/share on revenue of $3.27 billion. The company reported revenue growth of 8.2% primarily driven by organic net sales of 8.6% and higher pricing of 17%. The strong U.S. dollar had a 0.3% headwind for Conagra’s revenue. The international segment of the company is struggling as revenue declined by 1.3%. The company is being affected by the ongoing conflict in Eastern Europe.
The company’s gross profit increased by 22% to $922 million as gross margins expanded by 316 basis points. Selling, General & Administrative expenses increased by 7.9% to $373 million as net income increased by 38.6 % to $382 million. The company generated a free cash flow of $109.4 million up from $4.6 million a year ago. Management paid down $434.6 million worth of debt and repurchased $150 million worth of stock. In addition to the repurchased stock, Conagra paid out $308.6 million in dividends during the quarter and ended the quarter with $39.7 million in cash on the balance sheet.
Management gave a solid financial outlook as they expect net organic sales growth of between 7–8% and capital expenditure of $425 million. Investors reacted well to the earnings news as the stock went up 3.42% and we think the stock has room to hit $45/share (an upside of $9.86% from the closing price on January 6, 2023) given its defensive qualities. We are likely going to add more to our stock position given the upcoming economic slowdown in 2023 where companies like Conagra Brands shine.
McDonald’s Corporation (MCD): The fast food giant reported better-than-expected earnings and sales to round out FY2022. McDonald's reported earnings per share of $2.59 (beat WallStreet estimates by $0.13) and revenue of $5.93 billion (beat WallStreet estimates by $181.2 million). The company beat our fund estimates of $2.52 and $5.78 billion, a clear sign that the global reopening trade is still in effect for investors. However, the company did report a revenue decline of 1.4% which is understandable given how they have exited Russia and had to shut some operations in Eastern Ukraine. Global same-store sales came in strong at 12%, thanks to the strong rebound from the International segment as governments look past the pandemic by relaxing restrictions.
Operating margins expanded from 39.9% to 43.6% while net margins expanded by 4.8% to 32.1%. This is great execution by management given the environment in 2022 of inflation, the war in Ukraine, and COVID-19 shutdowns in China. McDonald’s had some price increases in its U.S. segment mainly to try to grapple with higher commodity and labor costs (this was a factor in helping margins). Free cash flow came in at $5.5 billion down from $7.1 billion as the company grapples with geopolitical tensions in Eastern Europe. The fast food giant ended the year with $2.59 billion in cash on the balance sheet down from $4.71 billion.
Management gave an upbeat outlook for FY2023 as they look to open new restaurants and leverage its growth in digital sales. Overall, this was a solid quarter from McDonald’s something which I have gotten to expect from the company, especially during times with macroeconomic headwinds. We are buyers of this earnings stock sell-off of 2% because we like the offensive and defensive qualities of the stock.
Amazon.com (AMZN): The e-commerce giant missed earnings as management needs to implement more expense discipline but reported an impressive revenue number. The company reported earnings per share of $0.03 (missed WallStreet estimates by $0.14) and revenue of $149.2 billion (beat WallStreet estimates by $3.43 billion). In comparison to our fund estimates, Amazon missed on earnings but handily beat on revenue which was very impressive. We estimated the company would earn $0.22/share on revenue of $147.8 billion. Amazon reported revenue growth of 9% primarily driven by sales in North America up 13% while International was down 8% (5% was due to the strong U.S. dollar).
Amazon Web Services (AWS) revenue came in at $21.4 billion which missed street estimates but beat our fund estimate of $ 21.2 billion. Although the growth at AWS is waning it is still growing at a high rate of 20% and for Amazon’s size that is really good. The company’s operating income was down 22% as the company has had to grapple with inflation, a slowing Europe, supply chain disruptions, and the war in Ukraine. Amazon’s net income came in at $300 million, all thanks to a $2.3 billion gain in the company’s stake in Rivian. The company’s cash burn increased as free cash flow declined to $(11.6) billion down from $(9.1)billion. Management needs to have some cost discipline in FY2023.
The Q1 2023 outlook from management seemed in-line with investor expectations as they expect to generate between $121–126 billion in revenue. The wide range of revenue numbers shows a cautious start to FY2023. Overall it was a mixed quarter for Amazon.com because of the miss on earnings, management needs to implement some cost discipline in FY2023. Despite AWS slowing down, we still like our stock position and we are looking to dollar cost average adding to our position.
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