TickerTalk Headlines for June 15th
In this newsletter:
Top 2 Cheap Dividend Growers to Buy Now and Ride Into Retirement
The RV industry has had its share of ups and downs, spurred to record heights by the COVID-10 pandemic and social distancing only to contract by 50% in its wake. Today’s takeaway is that the RV industry is returning to growth and is expected to accelerate over the next six quarters. As murky as the outlook for inflation and interest rates can be, it is generally accepted that the FOMC will start cutting rates this year or early next and reinvigorate the economy. Lower rates equate to lower payments, and lower payments will be a trigger for this and all discretionary markets.
The latest data from the RVIAA is promising. The forecasts for 2024 delivery growth were trimmed but still robust, forecasting a low-to-mid-teens growth pace accelerating to faster levels next year. Today’s opportunity is that industry leaders Thor Industries (NYSE: THO) and Winnebago’s (NYSE: WGO) stock prices have corrected to a one-year low because of the weakened outlook, setting up their markets to rebound in the 2nd half and sustain upward price momentum into 2025.
Among the critical details for investors include their respective low valuations and reliable yields. Neither can be labeled a high yield, but both are above the broad market average, trading near their lows and are reliable. These are dividend-growing companies with payout ratios below 40% and the ability to continue increasing their payouts long into the future. Balance sheet highlights include strong cash positions, low debt, and increasing equity. Both operate with less than 1.25x total leverage and have the cash flow to sustain it while paying dividends and buying back shares. Investors looking for cheap stocks to buy and hold for income could do worse.
Thor Industries Trims Guidance: Reiterates Outlook for Long-Term Growth
Thor Industries had a solid FQ3, outperforming on the top and bottom lines as the business contraction slowed. The issue for the market was the guidance, which was trimmed. Even so, the new range is sufficient to sustain operational quality and capital returns until growth returns. That is expected as soon as the first fiscal quarter of 2025, which coincides with the calendar first quarter of 2024. Operational quality is the key. The company aims to maintain margin and spending discipline rather than chase less profitable growth and risk diluting the brand.
Winnebago will report its Q3 results in early July and likely report similar strengths. The analysts have lowered their targets significantly since last quarter and set the bar low. The consensus reported by MarketBeat.com forecasts a 10% YOY contraction that is more than double the contraction posted by Thor Industries.
The Sell-Side Supports THO and WGO Stocks Prices
The analysts trimmed targets for Thor Industries after the Q3 release and will likely do the same for Winnebago, but their support is unwavering. The stocks are rated at Moderate Buy and viewed (in the case of THO) as fairly valued near the current levels. This sentiment may weigh the action and cap gains this summer, but a bearish reversal or downtrend is unlikely. Winnebago is trading well below the low end of the analyst range, suggesting it is a value even with sluggish 2024 sales and price target reductions.
The price action in these stocks is choppy but has been trending higher for two years. The volatility is driven by the interest rate outlook as much as anything else, resulting in numerous buying opportunities. Among the buyers are the institutions that hold nearly 100% of both companies. Their activity has been mixed over the last few quarters, but no red flags have been present.
Assuming the institutions don’t start shedding them, these stocks should bottom soon and begin the next rebound. The risk is the Fed. The longer the Fed waits to make the first interest rate cut, the longer the rebound will take to gain traction, and the greater the risk these stocks will move lower.
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3 High-Yield Dividend Stocks for Income Now and Growth Later
The latest readings on inflation show some cooling, and stocks seem to like it. However, it's important to be clear about why investors feel bullish. Inflation growth of around 3.3% won't prompt the Federal Reserve to lower interest rates, but it won't cause them to hike rates either.
So, if the next directional move for interest rates is lower, this is a good time to buy stocks. That's particularly true of stocks that are trading at a discount. Sadly, investor psychology can make it difficult for some investors to buy quality stocks when they're on sale.
But that's the key to long-term investing. And it's particularly true for stocks that pay a high-yielding dividend. Buying shares at a low price today gives you current income that you can use to manage inflation or reinvest for more shares. Then, when rates go down, the prices of these stocks will move higher to give you growth along with that dividend income.
Higher Oil Prices: Chevron's Inevitable Gain
Energy stocks, particularly oil stocks, were supposed to benefit from lower interest rates this year, which would boost demand. That hasn't been the case, and that's reflected in the price of Chevron Corp. (NYSE: CVX) stock, which is up just 3.4% in 2024 and is still down about 2.9% in the last 12 months.
However, at the risk of sounding like a broken clock, the long-term oil price will be higher. OPEC+ is maintaining output cuts while the Biden administration continues to release oil from our country's strategic oil reserve to keep prices down. That's a supply-demand imbalance that will have to be worked out in favor of higher oil prices.
And when interest rates move lower in late 2024 or early 2025, oil demand will increase. In that situation, CVX stock displays the qualities of a stock you'll want to own.
The company's merger with Hess Corp. (NYSE: HES) will likely be completed this year and give it much more leverage over oil prices. And today, investors get an attractive dividend with a 4.2% yield. Plus, the Chevron analyst forecasts on MarketBeat suggest growth of over 20% for CVX stock in the next 12 months.
Bristol-Myers is a Poor Trade But a Good Investment
The Bristol-Myers Squibb Co. (NYSE: BMY) is being weighed down by significant debt and concerns over patent expirations on some of its best-selling drugs. Both of those have soured traders on the stock, which is down 34% in the last 12 months and 17% in 2024.
Revenue is growing, albeit at a modest pace. However, the company posted a concerning $4.40 loss per share in its first quarter of 2024. That's a reminder that the company is digesting acquisitions it made to expand its pipeline. Unfortunately, that dilution is expected to weigh on earnings for the rest of 2024.
So, it's possible, perhaps likely, that BMY stock still has further to fall. However, with short interest only about 1.4% of the stock's float, selling the stock short is not a guarantee.
The strategic choice is to take a long position. You'll capture a dividend that yields 5.79% and pays out $2.40 per share annually. And when interest rates become more favorable, BMY stock will be positioned for a strong recovery.
The Worst Could be Over For UPS
At a time when e-commerce continues to grow, a company like United Parcel Service Inc. (NYSE: UPS) is a bellwether for the economy. So, when the company missed the top line in its first quarter 2024 earnings report, the market took notice. It doesn't matter that the company is facing rough comps to 2023 and 2022 - lower revenue is lower revenue.
UPS is implementing efforts to streamline costs and raise productivity, but those will take time to show up on the bottom line. In the meantime, the primary issue bedeviling investors is rising labor costs at a time when demand is lower. The consumer has held up stronger than economists expected. However, there are clear signs that consumer spending is slowing, at least on goods.
Another area of concern is debt. UPS has a higher debt load than it did 10 years ago, and servicing that debt is more expensive now, albeit not at historical levels.
For all that, this company still has strong financials that are being hit by cyclical headwinds. Investors can still collect a dividend with a current yield of 4.85%. And the UPS analyst forecasts on MarketBeat give UPS stock a 22.7% upside from its current level.
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Dave & Buster's Stock Offers a Prime Buying Opportunity
Dave & Buster’s Entertainment’s (NASDAQ: PLAY) Q1 report left something to be desired but did not give sufficient reason to sell off the way it did. While sales are sluggish and margins are weakened, mitigating factors include remodeling efforts, investments in efficiency and growth, and solid cash flow that drives shareholder value. Shareholder value is seen in the balance sheet and robust capital return, improving shareholder leverage in leaps and bounds.
Dave & Buster's Entertainment Falls On Weak Results
Dave & Buster’s struggled in Q1, with comps falling more than expected and business investment cutting the margin. The company reported $588.1 million in net revenue for a decline of 1.5% compared to last year, missing the consensus estimate by 450 basis points.
However, the decline is small given the company’s growth over the past two years, which is over 30%. At the current level, Dave & Buster’s business is more than 60% larger than in 2019, while the stock price aligns with comparable levels, suggesting a deep value opportunity. Comps are down 5.6%, offset by adding six new stores, providing leverage as the year progresses.
Margin news is mixed. The company’s margin shrank in all comparisons to leverage the decline in the bottom line. The adjusted $1.12 in earnings is down 22% compared to last year and missed consensus by $0.58, leading the market to fall. However, the contraction is largely due to $10 million in one-off spending to aid the company’s growth.
Dave & Buster’s does not give specific guidance but is expecting to accelerate store openings as the year progresses and is advancing its international expansion. The company signed a new letter of intent for five stores in the Philippines, bringing the pipeline total to seven countries and thirty-eight stores, four of which are expected to open within the next twelve months. Regardless, execs affirmed their resolve to hit $1 billion in annual EBITDA within the next few years.
Dave & Buster’s Had a Cash-Flow Negative Quarter
Dave & Buster’s had a negative cash flow quarter due to its investments. However, the cash flow was positive when adjusting for the $10 million in labor and marketing costs associated with the new store roll-out. Even so, the impact on the balance sheet was minimal, allowing the company to sustain its fortress-like quality and aggressively repurchase shares.
The company isn’t paying a dividend, but buybacks in Q1 totaled $50 million, worth 2.4% of the count and aided a 14.1% reduction in the average quarterly count. Because cash flow is solid, the company is on track to grow, margin improvement is expected, and the repurchase authorization has $150 remaining, investors should expect aggressive repurchasing to continue and possibly spike now that shares have been discounted.
Undervalued Dave & Buster’s Has a Double-Digit Upside Potential
Analysts' reaction to the news is tepid. The few revisions tracked by MarketBeat include lowered price targets but no downgrades. The takeaway is that the stock is pegged at a firm Moderate Buy and deeply undervalued relative to the consensus. The consensus estimate implies a 45% upside but is falling; the low target is among the freshly set and the more important figure to watch. It implies a 25% upside for this discretionary stock.
The technical action in Dave & Buster’s stock is range-bound. The market has moved sideways within the range since mid-2019 and is now heading to test support at the mid-point. The mid-point provided significant resistance between 2021 and 2023 but was broken late last year. In this scenario, the market should continue to support the stock near this level, which will lead to a rebound later in the year, but there is a risk of a deeper pullback. If support fails to hold at $33, shares of PLAY could fall to the low-end range, where they would present an even deeper value for investors.
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