To The Moon

2023Q1 Earnings Review Part VII: Basic Materials, Real Estate Investment Trusts (REITs) & Technology

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• $Realty Income(O)$ still reporting solid results despite all the distress in the REIT sector with high interest rates.

• $Albemarle(ALB)$ Corporation had a mixed quarter and the outlook being lowered by management reflects the upcoming economic uncertainty

• $Vulcan Materials(VMC)$ is starting to show the benefits of the fiscal bills which were passed by Congress over the last two years.

• $Avnet(AVT)$ . still remains our favorite mid-cap company in the stock market and will likely benefit from the AI secular tailwinds.

• $Apple(AAPL)$ reported a better than fear as management continues to execute well in a tough macroeconomic environment and we like the massive buyback program.

1. $Realty Income(O)$

Realty Income Corporation is a REIT that owns and leases over 12,200 commercial properties to tenants across different industries and geographies. After the market close, the company announced its first quarter 2023 operating results on May 3, 2023, and held a conference call on May 4, 2023, at 11:30 a.m. PT to discuss the highlights and outlook.
- The company’s FFO for the quarter was $1.04/share (beating Wall Street estimates by $0.03) while integrating VEREIT, Inc., which merged with Realty Income on April 1, 2023. The company’s revenue for the quarter was $944.4 million, which was above the analysts’ consensus estimate of $883.1 million. Substantial rent collections, portfolio performance, and acquisition activity increased revenue.
Realty Income reported revenue growth of 17% but the fund from operating margin contracted by 200 basis points to 72.5%. The company’s portfolio occupancy rate at the end of the quarter was 99%, which was higher by 40 basis points compared to a year ago. The company’s same-store rent grew by 0.2% year over year. The company invested $1.7 billion in high-quality properties in the quarter and disposed of 24 properties for $64 million, generating a gain on sales of $19 million. Management raised $3.4 billion in capital through debt and equity for additional property acquisitions. The company declared its 633rd consecutive monthly dividend in April 2023 and raised its dividend by 0.2% from the previous month. The company has increased its dividend 120 times since its public listing.
The company had $3.1 billion of liquidity at the end of the quarter, consisting of cash and cash equivalents of $164.6 million and $2.9 billion of availability under its revolving credit facility after deducting $157.5 million in commercial paper borrowings. The company’s net debt to annualized pro-forma adjusted EBITDAre ratio was 5.4x. Management raised its FY2023 guidance on its net income and FFO as they expect to extract some synergies from its acquisition. The stock had a muted reaction which was somewhat expected; the stock has competition from 3-month treasury bills offering a risk-free rate of 5.24%(as of June 1, 2023). This is a time to accumulate the stock because it provides good dividend incomes and diversifies the portfolio. The fund has been adding to its stock position because it adds to our defensive positions during economic contraction.

2. $Albemarle(ALB)$

Albemarle Corporation (ALB) is a leading lithium producer and other specialty chemicals. After the market closed, the company reported its first-quarter 2023 earnings on May 4, 2023. Revenue doubled to $2.58 billion (missed Wall Street estimates by 160 million), driven by strong demand for lithium products for electric vehicle batteries. The company reported an EPS of $10.32 (beating Wall Street estimates by $3.26), up 334% year over year. The company’s EPS number was impressive, but revenue was disappointing because it expected to report a higher revenue for the quarter. Based on that view, we expected Albermarle to earn $7.16/share on revenue of $2.71 billion, but we think supply chain constraints and the strong U.S. dollar were headwinds for revenue.

Margins expanded significantly thanks to the tremendous secular growth the company is enjoying. The operating margin expanded from 27.6% a year ago to 42.7%, while the net margin went up from 24.9% to 49.5%. Management is delivering strong execution and building its moat in the lithium production business. Cash flow from operations was $721 million, up from $206 million in the same quarter last year. The free cash flow generated during the quarter was $305.4 million, up from a cash burn of $25.5 million. Albermarle ended the quarter with $1.59 billion, up $463 million. The company lowered its 2023 guidance for revenue, adjusted EBITDA, and adjusted EPS, citing lower lithium prices and higher costs.

The company’s stock price rose by 1.6% on May 4, 2023, reflecting the positive earnings surprise and the long-term growth prospects of the lithium business. We think management is trying to manage expectations and not over-promise on the growth trajectory as the electrification of vehicles keeps on making progress. If the stock pulled back to $200/share, we would be buyers of the stock.

3. $Vulcan Materials(VMC)$

The company is the largest producer of construction aggregates in the United States. We started a stock position in Vulcan Materials Company because it will be one of the winners of the fiscal spending from the Infrastructure passed in late 2021, the Inflation Reduction Act, and the Chips & Science Act. The company has tentacles on various aspects of construction, from infrastructure to commercial projects & providing various products for the US highway system. Vulcan Materials Company earned $0.95/share (beat Wall Street estimates by $0.33) on revenue of $1.65 billion (beat Wall Street estimates by $80 million). The company posted a revenue growth of 7%, and the CEO attributed the growth to strong pricing growth.

The company’s gross profit margin improved to 18.3%, up 80 basis points from a year ago, indicating management’s operational efficiency. Regarding free cash flow, VMC generated $27.7 million, up from $15.2 million, but it has much room to improve to grow its dividend. The company also announced a quarterly cash dividend of $0.37 per share, payable on June 15, 2023, to shareholders of record on June 1, 2023. The company reaffirmed its full-year guidance for 2023, expecting revenues of $5.0-$5.2 billion, adjusted EBITDA of $1.5-$1.6 billion, and earnings per share of $6.20-$6.50. The company’s outlook reflects the fiscal funding flowing to companies.

4. $Avnet(AVT)$

Avnet Inc is a global technology solutions company that provides electronic components and services to various industries. The company reported its third quarter fiscal year 2023 financial results on May 3, 2023, exceeding its guidance for sales and earnings per share. The company’s sales for the quarter were $6.5 billion (beat Wall Street estimates by $190 million), up 0.4% year over year and 3.4% in constant currency. The company’s diluted quarterly earnings per share were $2.00 (beat Wall Street estimates by $0.21), down 7.0% year over year. The company’s regional sales were: Americas $1.9 billion, EMEA $2.1 billion, and Asia Pacific $2.5 billion.

The company’s operating income margin for the quarter was 4.8%, up 58 basis points yearly, and the net income margin was 2.9%, up eight basis points year over year. The company’s Electronic Components segment achieved an operating income margin of 5.0%, up 64 basis points yearly and 34 basis points sequentially, driven by strong demand and operational efficiency. Due to higher costs and lower sales, the company’s Farnell segment had an operating income margin of 9.0%, flat sequentially and down 589 basis points year over year. The company generated $18.3 million of cash flow from operations during the quarter and returned $26.5 million to shareholders in dividends.

The company’s CEO, Phil Gallagher, expressed his satisfaction with the results and praised the team’s dedication and commitment to delivering value to customers and suppliers. The stock reacted well to the news jumping 4% as investors rewarded the good execution of management. Management stayed even-keeled and did not discuss anything to do with artificial intelligence. We think Avnet would benefit from the secular growth winds of AI as many companies build out machine learning tools. Avnet is a core mid-cap stock holding that we want to add to any market selloff. We think it is one of the most undervalued mid-cap stocks trading on the market.

5. $Apple(AAPL)$

Apple Inc. is a technology company that produces products and services like the iPhone, iPad, Mac, Apple Watch, AirPods, Apple TV, HomePod, iCloud, Apple Music, Apple Pay, and more. Analysts estimated the company would earn $1.41 per share on revenue of $92.8 billion. The company reported earnings of $1.52/share on revenue of $94.8 billion, and the headline numbers were better than they were. Apple had a revenue decline of 2%; given the COVID shutdowns in China, we expected a larger revenue decline. Increased sales in emerging markets such as Indonesia, India, Brazil, and Turkey helped to offset the decline in China. Some positive factors contributing to the better-than-feared revenue were the strong demand for the iPhone 14 (launched in September 2022) and continued growth in the services & wearables segments. The Mac & iPad revenue segments reported revenue declines during the quarter.

Some of the challenges that affected the performance of Apple Inc. in Q3 FY2023 included currency fluctuations and macroeconomic uncertainties coming out of Europe. Gross margins held up well, expanding from 43.7% to 44.3%, but net margins contracted by 20 basis points to 25.5% because of increased R&D expenses (up 17% year over year). Looking at free cash flow, Apple generated $55.9 billion, down from $69.8 billion the prior year due to all the operational challenges with its supply chain. Even tho the company had a free cash flow decline, Apple had a net cash increase of $2.2 billion to $27.1 billion. Management announced a fresh $90 billion stock buyback program which will provide price floor support for the stock and is a good indicator that Tim Cook & Co. feel good about Apple’s prospects going into the fiscal year 2024.

The stock reacted well to the earnings news as investors breathed a sigh of relief because the quarter was better than feared. We will continue to hold the stock because Apple is one of the core holdings in the technology sector. The stock is up 45% year to date, and it will likely be the first company to reach the $3 trillion market cap.

Disclosure: Cresco Investments is long Realty Income Corporation (O), Albermarle Corporation (ALB), Vulcan Materials Company (VMC), Avnet Inc. (AVT), and Apple Inc. (AAPL).

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).