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Earnings Brief: SAM, MAT, TOT, HON, AXP

publication date: Jul 27, 2020
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author/source: Callum Turcan and Brian Nelson, CFA

Image Source: Boston Beer. CEO Dave Burwick noted in Boston Beer’s second-quarter press release: “The growth of the Truly brand, led by Truly Hard Lemonade, has accelerated and continues to grow beyond our expectations. Since early January, Truly has grown its velocity and its market share sequentially while other national, regional and local hard seltzer brands have entered the category. Truly is the only hard seltzer, not introduced earlier this year, to grow its share during 2020.” We’re impressed, but still taking a cautious view on SAM’s shares.

By Callum Turcan and Brian Nelson, CFA

Boston Beer Shares Truly Go Parabolic

On July 23, Boston Beer (SAM) reported second-quarter results that blew away the consensus analyst forecasts. Net revenue advanced 42%, while net income more than doubled during the period thanks in part to shipment expansion of nearly 40%. Though the company is experiencing reduced keg demand as a result of the COVID-19 pandemic, Boston Beer noted that it expects full-year 2020 shipments and depletions growth to be between 27%-35% (Truly Hard Seltzer and Twisted Tea brands are selling well), and its gross margin to come in the range of 46%-48%. As noted in early April, “US Beer Sales Reportedly Surge During the Pandemic…” we were expecting a big quarter from beer producers, but not one nearly as big as Boston Beer’s. We are watching the company closely, especially the success of its Truly brand, but shares have run up too far too fast for our taste. We would expect a better entry point in the future as consumer behavior reverts in part to pre-COVID-19 patterns in the months ahead. The company may still exceed its full-year non-GAAP earnings per diluted share guidance range of $11.70-$12.70, however.

The Best Days Are Behind Mattel

Once a sprawling franchise supported by the Barbie brand, Mattel (MAT) is now reeling from the aftermath of Disney’s (DIS) Frozen success. The company can mount a comeback, but it’s going to take years, especially as the younger generation migrates away from physical toys. Kids today are being raised on iPhones and iPads and Nintendo (NTDOY, NTDOF) Wii U. Slamming Hot Wheels against each other and saving the latest and greatest Barbie doll as a collector’s item may be a thing of the past, much like 1980s baseball cards. The company’s second-quarter sales, released July 23, fell 15% on a reported basis, as it registered an operating loss of $46 million. Extensive retail closures will continue to haunt the company. We maintain our view that the best days are behind Mattel.

Total’s Outlook Has Improved

Though Total's (TOT) outlook has improved significantly during the past few months (with Brent futures now above $40 per barrel), the futures curve indicates investors expect global oil prices to stay below $50 per barrel for some time (Brent December 2021 futures are trading near ~$46-47 per barrel as of this writing). Given current pressures facing the downstream market (weak refining margins, subdued demand for various refined petroleum and petrochemical products) and the lackluster outlook for the upstream market (due to expectations that raw energy resources pricing will remain weak for an extended period going forward), Total's ability to keep making good on its hefty dividend obligations will become an incredibly difficult task. Its net debt load greatly limits its financial flexibility, and Total may have no choice but to follow Royal Dutch Shell (RDS.A) (RDS.B) and cut its payout as well.

Honeywell Still a Top Industrial

It’s hard to imagine that in the past there was a debate about whether Honeywell (HON) or General Electric (GE) is a better industrial idea, but boy how the picture has changed. Without a doubt, Honeywell has shown to be the better-managed entity, and frankly, we think this will be the case for the foreseeable future. The company’s Aerospace, Building Technologies, and Performance Materials/Technologies segments faced material revenue declines, but its Safety and Productivity Solutions division held up rather well and even showcased margin expansion during the second quarter, report released July 24. Honeywell generated $1.3 billion in free cash flow during the quarter, and from where we stand, it has effectively managed costs and shored up its balance sheet to withstand the pause in demand caused by COVID-19. Though price will determine whether we add Honeywell to the newsletter portfolios, we expect the firm to gain share and meet the needs of its customer base as humanity emerges from the other side of the ongoing pandemic.

American Express Notes Gradual Improvements in Consumer Spending

Hands down, we prefer Visa (V) and Mastercard (MA) over Discover (DFS) and American Express (AXP), but the latter’s second-quarter report, released July 24, was rather encouraging. Though revenue and net income declined as expected in the period, the firm noted that “spending volumes, which declined to their lowest point this quarter in April, gradually improved in May and June, with small businesses being the most resilient.” This was music to our ears and speaks to the resilience of many small businesses out there, as the Fed/Treasury keeps them afloat with various programs, including the Paycheck Protection Program. Though the economy is far from healthy at the moment, the data points keep coming in that things are getting better, not worse. We’re not taking our eyes off of COVID-19 data, however.

Beverages - Alcoholic: BF.B, BUD, DEO, SAM, STZ, TAP

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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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