To The Moon

2022Q4 Earnings Review Part III: Real Estate Investment Trusts (REITs), Financial Services, Consumer Defensives & Basic Materials

• The logistics REIT, Prologis beat on funds from operations and revenue as the company integrates its new acquisition.
• Great West Life Co. continued its consistent growth as assets under management increased along with a dividend increase.
• Pepsico Inc. wrapped up a great fiscal year with a revenue and earnings beat with a strong FY2023 outlook.
• Barrick Gold Corporation reported a mixed quarter on poor production numbers but expects FY2023 to rebound.
• Albemarle Corporation reported a blowout quarter as they solidify their position in this secular growth cycle of EVs.

Prologis Inc. (PLD): Prologis ended its fiscal 2022 with top and bottom line beats on some rent increases and merger integration. The logistics REIT reported funds from operations (FFO) of $1.24/share (beat WallStreet estimates by $0.03) and revenue of $1.75 billion (beat WallStreet estimates by $290 million). Prologis handily beat our fund estimates of $1.22/share for funds from operations on revenue of $1.7 billion. Prologis reported revenue growth of 36.7% reflecting the company’s acquisition of Duke Realty and net effective rent change of 50.6% on renewed leases. The company maintained its high average occupancy of 98% and high retention rate of 82.4%.

Operating income before real estate sales came in at $602.8 million up from $477 million and the company made $210 million in profits from real estate sales. Net income for Prologis came in at $585.7 million down from $1.25 billion due to higher gains from real estate sales. Management noted that they have $4 billion in liquidity and investment capacity. In addition to that, Management gave an upbeat outlook for FY2023 given the impending recessionary headwinds. Management forecasted FFO growth of 9.5% and average occupancy between 96.5% and 97.5%. The company plans to spend $3.6 billion on capital projects and investments. Investors reacted well to the earnings news as the stock went up over 2% and we like the growth and defensive qualities of the stock. Management does however have to have expenses under control after the merger is fully integrated.

Great West Lifeco Inc. (GWO.TO): The Canadian-based financial services company which is a new stock position in our portfolio reported earnings of CAD$0.96/share on revenue of CAD$44.17 billion. We started a position in this stock because this holding diversifies our financial exposure along with its strong pricing power. The company reported a revenue decline of 7.3% but total earnings were up from CAD$765 million to CAD$1.03 billion. The earnings gain was thanks to Great West’s North American business while Europe faired well with 20% growth for a continued plagued with a harsh macroeconomic environment.

Looking at return on equity, Great West reported 13.6% ROE down 40 basis points from the same period a year ago. This is because equity market returns were sluggish in 2022 as global markets sold off. The company integrated acquisitions in Q4 2022 and the company achieved CAD$160 million in cost savings from the Mass Mutual Retirement business acquisition. Great West finished with assets under management of CAD$2.5 billion up 9% and management raised its dividend by 16% to CAD$0.52/share. Overall, a solid quarter for the life insurance company that has a cheap valuation of 10x earnings with a dividend yield of over 5%. This is a typical stock that fairs well in an economic environment that is going to be slowing down or facing a mild recession.

Pepsico Inc. (PEP): The beverage and snack owner reported a top and bottom line beat as the company continued to deliver for investors. Pepsico reported earnings per share of $1.67 (beat WallStreet estimates by $0.02) on revenue of $28 billion (beat WallStreet estimates by $1.18 billion). We expected the EPS number to come in higher than expected as we thought management would implement further cost-cutting measures given the inflationary environment. Based on this assumption, we estimated the company would earn $1.73/share on revenue of $26.9 billion. Pepsico reported revenue growth of 10.9% which was driven by strong organic revenue from Emerging Markets.

Pepsico Beverages and Frito Lay segments had operating income up 18% and 9% respectively thanks to pricing increases to offset higher costs. Quaker Foods had an operating profit decline of 3% because of higher commodity costs. Pepsico generated $5.60 billion in free cash flow down from $6.97 billion as the company had a net cash decrease of $607 million ending the fiscal year with $5.1 billion in cash. The company returned $7.67 billion back to shareholders in dividends and share repurchases. Management increased its annual dividend payout by 10% to $1.27/share something that we like as shareholders in the company.

In terms of guidance, management expects earnings per share growth of 8% and organic revenue of 6% in FY2023. Investors cheered on the earnings news as the stock rose close to 3% as the company gave a classic “beat and raise” quarter. We continue to be buyers of the stock even at these prices because of its defensive qualities. The stock does have a premium valuation (27x earnings) because of the pricing power and solid revenue growth.

Barrick Gold Corporation (GOLD): The Canadian-based mining company with operations around the world beat on earnings but missed on revenue. Barrick Gold earned $0.13/share (beat WallStreet estimates by $0.01) on revenue of $2.77 billion (missed WallStreet estimates by $20 million). We expected the company to have a higher EPS number on cost-cutting synergies but this wasn't the case as it came in below our fund estimate. We expected the mining company to earn $0.17/share on revenue of $2.75 billion. The company reported a revenue decline of 16% as it realized a lower gold price per ounce down 3.5% in addition to the lower production numbers.

The company reported an operating loss of $735 million down from a profit of $241 million from the period a year ago. Barrick Gold’s cash flow numbers were not pleasing for investors either as the company had a cash burn of $96 million down from $(34) million a year ago. The company ended the year with $4.44 billion in cash down 15% from a year ago. Management announced a billion-dollar share buyback program along with a $0.10 dividend for investors. A highlight of the company’s report was the gold reserves number which is now up to 6.7 million ounces. Management gave a solid outlook for FY2023 on the assumption that gold and copper would be $1,650/ounce and $3.50/lb (Actual Prices: $1,846.60/ounce for gold and $4.03/lb as of 2/15/2023 on Yahoo Finance).

The company’s stock sold off over 3% plus as investors did not like the mixed results from the company given the run-up in commodities (oil, gold, copper, etc.) in Q4 2022. We like the share buyback program (being paid to wait) we think precious metals and commodities like copper are going to be in high demand. Central banks around the world are buying gold hand over fist as they take money out of the economy while the electrification of the auto industry will keep copper demand high. Barrick Gold is a core holding in our portfolio because of its portfolio diversification attributes and we going to be adding to our stock position.

Albemarle Corporation (ALB): The specialty chemical maker reported a blowout quarter as the company’s lithium continues to grow by leaps and bounds. The company is a new stock position in our fund because think the company will be one of the biggest winners from the electrification of the auto industry. Lithium demand is going to be high for several years to come as the number of batteries used in EVs rises. Albemarle Corporation reported earnings per share of $8.62 (beat WallStreet estimates by $0.25) on revenue of $2.62 billion (beat WallStreet estimates by $20 million). The headline numbers exceeded our fund estimates of earnings of $8.55/share on revenue of $2.58 billion.

Albemarle Corporation’s revenue tripled on higher volume and pricing for lithium as demand rose from the EV buildout. Operating margins expanded significantly from -0.42% to 43.2% as the company looks to expand by investing $180 million into an R&D facility in North Carolina. Management reported a solid FY2023 outlook as they expect to have revenue growth between 55–75%, higher cash from operations, and capital investments between $1.7–1.9 billion. The company has secular growth tailwinds with the whole auto industry going all in on EVs which is going to lead to higher demand for Albemarle Corporation’s products.

As a result of the earnings report, the stock rose close to 5% and we are going to be adding more to our stock position as we see this as a long-term play.

Disclosure: Cresco Investments is long Prologis (PLD), Great West Life Co (GWO.TO), Pepsico Inc (PEP), Barrick Gold Corporation (GOLD), and Albermarle Corporation (ALB).

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).