Earnings Brief: BOX, CRM, WMT, TOL, HD/LOW
publication date: Aug 26, 2020
author/source: Brian Nelson, CFA
Image Source: Toll Brothers. Iron Oak at Alamo Creek, Danville, CA.
By Brian Nelson, CFA
Let's cover some trends that may emerge out of the COVID-19 pandemic, including accelerated e-commerce proliferation and its impact on brick-and-mortar giants, as well as an increased likelihood of suburban sprawl that may propel some names while leaving others behind.
According to its website, Box (BOX) is “a leading Cloud Content Management platform that enables organizations to accelerate business processes, power workplace collaboration, and protect their most valuable information, all while working with a best-of-breed enterprise IT stack.” The company’s balance sheet isn’t as clean as we would like given its operating lease liabilities, but it does hold more than $270 million in cash and cash equivalents at the end of July 2020.
During its second quarter of fiscal 2020, results released August 26, free cash flow swung from a use of cash (“burn”) to a source of $13.3 million. What we wanted members to take note of is that its GAAP operating margin advanced 17 percentage points on a year-over-year basis, showcasing the tremendous operating leverage in its business model. Looking to all of fiscal 2021, its non-GAAP operating margin is now targeted to be in the range of 12%-13%, up from just 1% a year-ago. We think the company is one for your radar, and we’ll look to keep you up-to-date with the story arc going forward.
We recently raised our fair value estimate of Salesforce.com (CRM), and we may be looking to raise it again after the company reported solid second-quarter 2020 results August 25. CEO Marc Benioff may have said it all in the press release:
It's humbling to have had one of the best quarters in Salesforce's history against the backdrop of multiple crises seriously affecting our communities around the world. Salesforce was founded on our belief in stakeholder capitalism and our core values of trust, customer success, innovation and equality. Our success in the quarter brought all of this together with the power of our Customer 360 platform, the resilience of our business model, putting our customers first and doing our part to take care of all of our stakeholders. We know that together we have an opportunity to emerge from these times even stronger.
Looking ahead to all of fiscal 2021, Salesforce.com expects revenue in the range of $20.7-$20.8 billion, non-GAAP earnings per share in the range of $3.72-$3.74, and operating cash flow growth to come in the range of 12%-13%. We liked the report and loved the outlook, but the company’s 26% share-price rally during the trading session August 26 leaves us on the sidelines for now.
E-commerce proliferation is helping some brick-and-mortar bellwethers. We reported on Target’s (TGT) fantastic second-quarter report here, but Walmart’s (WMT) e-commerce performance was nothing to scoff at, by any stretch. During the big-box retailer’s second quarter report, released August 18, it reported U.S. e-commerce sales expansion of 97%. The company’s U.S. comparable store sales growth of 9.3% was also respectable, driven by consumers purchasing general merchandise and food in consolidated trips during the COVID-19 pandemic. Sam’s Club comp sales growth of 13.3% was also impressive. Walmart’s adjusted operating income in constant-currency increased a whopping 18.6% during the period, but while the quarter was certainly impressive, investors should expect these types of growth rates to moderate in coming periods.
Though it may be too early to tell just yet, we expect a “great migration” to the suburbs from city life. The COVID-19 pandemic has likely shown many young couples and families the benefits of having extra space at home, especially with the kids running around while parents are trying to work.
The work-from-home trend will likely continue to proliferate, too, even after COVID-19, with implications on many of the office REITs (e.g. ARE, CUZ, DEA, GNL, KRC, BDN), and residential/apartment REITs (e.g. EQR, IRT, ACC, CPT, MAA, AIV, UDR). We’re staying far away from these two areas within the REIT space.
Toll Brothers (TOL) operates at the high end of the homebuilding arena, with its average delivered home price approaching $900,000 across its national footprint. The company’s performance was mighty impressive during its fiscal third quarter of 2020, ended July 31. Here is what CEO Douglas Yearley had to say in the press release:
Our third quarter net signed contracts were our highest third quarter ever in both units and dollars, and our contracts per community, at 8.5, were the highest third quarter in fifteen years. This strength has continued into August. We attribute the surge in demand to a number of factors, including historically low interest rates, a continued undersupply of homes, and consumers focused more than ever on the importance of home. With our well-located land holdings in twenty-four states and our strategic focus on expanding our geographic footprint, product lines and price points, we are well-positioned to take advantage of the resurgent housing market.
Though we’re not against including a homebuilder in the newsletter portfolios--the Great Financial Crisis is still a bit too fresh in our memory--we believe that we could see a substantial change in consumer preferences leading to increased suburban sprawl in the coming decade or two. Still, the homebuilding business model tends to be quite lumpy and ultra-cyclical. In any case, ultra-low interest rates for the foreseeable future could mean that more and more people opt to spend up for more space. The COVID-19 pandemic could influence an entire generation.
Home Depot and Lowe’s
The same types of trends that will positively impact Toll Brothers and the homebuilding market will also positively impact the home improvement retailers. Consumers will likely seek to build additions (or otherwise make improvements) to their existing homes and probably receive a nice return on their investment. Home Depot’s (HD) comps advanced more than 23% in the second quarter, more than doubling that of consensus estimates, while Lowe’s (LOW) comparable sales advanced more than 34%; as with its rival, the performance was more than double what the market was expecting. Investors should expect comparable store sales growth to moderate, but the long term remains bright for both. We’ll be taking a close look at their valuation models.
Related: ITB, BZH, LEN, HOV, DHI, PHM, SHW, OC
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Brian Nelson owns shares in SPY and SCHG. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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