To The Moon

• Investors were greatly relieved after Norfolk Southern reported a solid earnings report as they moved on from last year’s derailment.
• Leidos Holdings reported a solid quarter and raised guidance, but the stock sold off, adding to our position.
• Xylem reported a mixed quarter, as we expected a higher EPS number as management integrated the recent acquisition.
• Quanta Services was priced for perfection going into the earnings report, and the EPS came in a bit light, but the company has a strong backlog.
• Amazon’s miss on the revenue dampened the reacceleration in the AWS segment, and the tepid guidance did not do the stock any favors.

Norfolk Southern Corporation (NSC): Norfolk Southern Corporation (NSC) ‘s stock value surged nearly 7% following the Q2 2024 earnings report. The company’s earnings and revenues for Q2 2024 exceeded analyst estimates on the EPS front, while revenue aligned with expectations. NSC reported earnings per share (EPS) of $3.06, surpassing the analyst estimate of $2.86. Revenue for the quarter was reported at $3.04 billion, which was in line with expectations. We had low expectations for Norfolk Southern going into this earnings print as we expected higher expenses from the derailment incident last year. Based on that premise, we expected the railroad company to earn $2.80 per share from a revenue base of $3.03 billion.

The company reported revenue growth of 2%, with the Merchandise segment up 4%, volume up 5%, and the Coal segment down 3%. Operating income came in at $1.1 billion, up 96% after one-time expenses associated with the East Ohio derailment passed. Norfolk Southern’s operating ratio improved from 80.7 to 62.7, and a lower ratio shows operational improvement. The net income is up 3% to $694 million, representing a 22.8% net income margin, up 20 basis points from last year. Management gave a tepid outlook as they lowered their revenue growth from 3% to 1%, which can be seen as an indication of the economy slowing down from the high interest rates.

The positive earnings report reflects Norfolk Southern’s continued growth and operational efficiency as the company moves on from last year's derailment. The investors cheered the report, as it was a welcome relief that the company reported decent earnings as it moved forward from the East Palestine incident. Management will have to execute and generate synergies of its recent acquisition under the watchful eye of the activist investor Ancora, who won a couple of Board seats but not the majority. We like our current position in the stock, and we think the stock is a HOLD for now.

Leidos Holdings Inc. (LDOS): Leidos Holdings Inc. reported Q2 2024 earnings with a total revenue of $4.13 billion (beating estimates by $40 million), marking a 7.7% increase year over year. The company’s operating income for the quarter was $475 million. The earnings per share (EPS) were reported at $2.63, surpassing the forecasted EPS of $2.27. Leidos Holdings reported strong headline numbers as they blew away our high expectations. We estimated earnings per share to be $2.32 from a revenue base of $4.07 billion. The company reported increased demand across all revenue segments, but the standout segment was healthcare, which experienced growth of 22.1%.

Operating income was up 43.5% to $475 million, representing a margin of 11.5%, up from 8.6%. The net income margin improved to 7.8% from 5.5% as management continues to execute at a high level. The company’s backlog is up to $36.5 billion, up from $34.2 billion, including $2.67 billion in new contracts from the U.S. Defense Department, U.S. Airforce, and NASA. Leidos generated $351 million in free cash flow, up from $124 million; this tripled the cash returned to shareholders to $165 million. Management raised its 2024 full-year guidance on the revenue side by $100 million and improved margins.

The stock tanked 4% on the news. It seems like a sell-the-news event for investors, as the stock has run up 59% in the past year. We added to our position in the name to make it a core position in our portfolio.

Xylem Inc. (XYL): Xylem Inc. reported total revenue of $2.17 billion for Q2 2024, a 1.36% increase over the analyst estimate of $2.14 billion. The company’s earnings per share (EPS) for Q2 2024 were $1.09, surpassing the analyst estimate of $1.05. We had higher expectations for the company as we expected some EPS acceleration as management produced synergies from the Evoqua acquisition, but revenue came more or less in line. Based on this, we estimated the company would generate $2.18 billion and have an earnings per share of $1.10. The company reported revenue growth of 26% as orders were up 12%. The Water Solutions & Services segment was up 45%, while Water Infrastructure was up 23%; the segment that was a disappointment was the Measurement & Control Solutions segment, which was down 18%.

The company’s operating margin expanded significantly from 6.9% to 11.7%, and Xylem’s net income for Q2 2024 was $194 million, with a net income margin of 8.9%, marking an increase of 360 basis points. Adjusted net income was reported at $266 million, or $1.09 per share, excluding impacts of restructuring and other special items. Year-to-date, free cash flow was significantly higher at $230 million, up from a cash burn of $94 million. The company has returned $193 million in dividends and buybacks to shareholders, up from $148 million, and has a good cash buffer of $815 million, up 15.1% from a year ago. Following these results, Xylem has raised its full-year revenue guidance to $8.55 billion, indicating an approximate 16% increase on a reported basis. The full-year 2024 adjusted EBITDA margin is expected to be around 20.5%, up from the previous guidance of 20.0%.

Despite missing our high expectations, the company reported a good quarter, but investors punished the stock, sending it down 5%, and we added to our position in it.

Quanta Services Inc. (PWR): Quanta Services Inc. (PWR) reported Q2 2024 earnings with revenue of $5.6 billion (beating Wall Street estimates by $90 million) and net income of $188.2 million. Earnings per share (EPS) were reported at $1.26 per diluted share, with an adjusted EPS of $1.90 (in line with Wall Street estimates). We expected Quanta to have a higher EPS, and the company had increased costs. The stock is a new position on the investment thesis that artificial intelligence will demand a lot of power, and Quanta is involved in the power infrastructure business. We estimated the company to earn $1.96 per share from a revenue base of $5.57 billion. The company reported revenue growth of 10.8%, as the Renewable Energy Infrastructure segment was up 46.4%, while the Underground Utility Infrastructure Solutions segment had a revenue decline of 11%.

Operating income was up 10% to $307.23 million, representing a margin of 5.49%, down from 5.53%. The slight margin problem was from the change in the value of consideration liabilities. The company’s adjusted EBITDA was $523.2 million, or 9.4% of revenues. The net income margin expanded by 13 basis points to 3.43%. Cash flow from operations was reported at $391.3 million, with free cash flow of $258.6 million. A total backlog of $31.3 billion was reported, indicating strong future demand. Quanta Services Inc. completed the acquisition of CEI for approximately $1.5 billion. Full-year 2024 guidance has been increased for revenues, adjusted EBITDA, and adjusted EPS due to the CEI acquisition. Some challenges faced included a drag from specific renewable projects impacting margins and shifts in utility capital expenditures.

The company’s Canadian business has been underperforming, although improvements are expected in the second half of the year. Regulatory environment concerns and regulators' commitment to capital increases could impact future utility CapEx. The company’s stock went down 3% and has accelerated further losses, which we have added to our stock position.

Amazon.com Inc. (AMZN): Amazon’s Q2 2024 earnings have been released, and they continue the company’s growth trajectory. The earnings report indicates a solid Amazon Web Services (AWS) performance, contributing significantly to the company’s revenue. Amazon’s Prime service continues to attract and retain customers, contributing positively to the overall sales figures. The technology giant reported $1.26 per share (beating Wall Street estimates by $0.23) from a revenue base of $148 billion (missing Wall Street estimates by $760 million). We expected the e-commerce technology giant to report a high revenue as we estimated $1.12 per share earnings from a revenue base of $149.12 billion. Amazon reported revenue growth of 10% as the strong U.S. dollar ate into some of the international revenue.

Amazon Web Services revenue growth was 19%, as the segment showed reacceleration from increased AI activity. During the earnings call, Amazon CEO Andy Jassy expressed a bullish outlook on the role of AI in the company’s future. The company's operating income was nearly doubled, coming in at $14.7 billion, as Andy Jassy shows his good cost control measures. The operating cash flow was up 75% to $108 billion, and the free cash flow generated was $53 billion. These substantial cash flow numbers show that Amazon has the capacity to employ some heavy capex spending for its AI capabilities. The company reported a $400 million gain from its Rivian stake, up from $200 million a year ago.

Regarding the outlook, management expects revenue growth of between 8% and 11%, but some investors saw that as soft given the wide range of revenues. This resulted in the stock selling off coupled with a market sell-off; the stock was down close to 9%, and we added to our stock position since this is a core holding in our portfolio.

Disclosure: Cresco Investments is long Norfolk Southern Corporation (NSC), Leidos Holdings Inc. (LDOS), Xylem Inc. (XYL), Quanta Services Inc. (PWR) and Amazon.com Inc. (AMZN).

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).