By Brian Nelson, CFA
Deere & Company (DE) is a tried-and-true industrial giant. The company’s dealer network offers it a strong competitive advantage, and while the company’s business ebbs and flows with the general economic environment, the firm has been able to drive impressive product pricing increases of late. During the firm’s first-quarter fiscal 2023 results (ending April 29, 2023), released May 19, Deere’s worldwide net sales advanced an impressive 30%, while net income per share leapt to $9.65 per share from $6.81 per share in the same period a year ago. Deere’s pricing power continues to be on display. In its ‘Production & Precision Agriculture’ division, sales jumped more than 50% in the quarter, while operating profit more than doubled thanks to an impressive ~7 percentage point increase in the segment’s operating margin. ‘Small Agriculture & Turf’ sales increased 16% in the period on a year-over-year basis, while operating profit leapt more than 60% thanks to a near-6% increase in the division’s operating margin. Deere’s shares have fallen ~15% to start 2023, and they are starting to look interesting, with a respectable dividend yield to boot. Investors should be cognizant that Deere’s results will always be cyclical, and the pace of product price increases won’t be sustained forever.
Walmart Inc. (WMT) is back. On May 18, the company reported strong results for the first quarter of fiscal 2024 for the period ending April 30, 2023. Walmart’s revenue advanced 7.6% in the quarter, while operating income jumped 17.3%. Inflationary pressures seem to be easing across the board, as the big box retailer’s consolidated operating expenses fell 58 basis points as a percentage of sales in the period. We think the Fed is winning the fight against inflation, and this dynamic should act as an ongoing tailwind, more generally, for the broader equity markets, in our opinion. Walmart’s cash flow trends also improved substantially in the quarter from the year-ago period, with operating cash flow growing to $4.6 billion (an increase of $8.4 billion), while free cash flow turned positive in the quarter, to $0.2 billion. Inventories were a huge drag on Walmart’s operating cash flow generation during the fiscal first quarter of last year, and it looks like the retailing giant has largely worked through the inventory issues, with its gross margin holding up relatively well on a year-over-year basis, too. Walmart’s first-quarter results last year were the ‘canary in the coal mine’ with respect inflationary pressures and inventory issues and may have been the key catalyst behind the market’s tumble last year. The company’s first-quarter fiscal 2024 results, however, suggest this market rally we’ve witnessed thus far in calendar 2023 is the real deal.
Cisco Systems (CSCO) reported solid third-quarter fiscal 2023 results for the period ending April 29, 2023, on May 17. In the quarter, revenue advanced 14% on a year-over-year basis, while non-GAAP earnings per share increased 15%. The company’s operating cash flow of $5.2 billion was an impressive 40%+ higher than that of the same period a year ago. Though orders fell 23% on a year-over-year basis in the quarter, Cisco’s deferred revenue balance came in at $24.3 billion at the end of its fiscal third quarter, up 8.8% from the same period a year ago. During the quarter, Cisco returned $2.9 billion to shareholders in buybacks and dividends, and it noted that $12.2 billion remains on its share buyback program. For the current quarter, Cisco’s fourth quarter of fiscal 2023, revenue is targeted to grow 14%-16% on a year-over-year basis, while non-GAAP earnings per share is expected in the range of $1.05-$1.07, beating consensus expectations at the time. The market didn’t like the weakness in orders in the period, however, and while some caution is in order, we continue to like shares of the networking giant.
Home Depot (HD) reported weaker first-quarter fiscal 2023 results for the period ending April 30, 2023, but we’re not at all concerned about the home improvement retailing giant. The firm has shown that its business model can not only survive the worst of the residential housing market during the Great Financial Crisis, but also that it can adapt to some of the most uncertain times with respect to the COVID-19 pandemic. Home Depot’s comparable store sales fell 4.5% in the quarter, a decline that was driven in part by lumber deflation and a slowdown in discretionary consumer spending across the home improvement arena. However, it’s reasonable to expect that 2023 will be a year of moderation for the home improvement retailing industry, more generally, after years of breakneck expansion, and Home Depot’s outlook speaks to this. For fiscal 2023, revenue and comparable store sales are targeted to fall between 2%-5%, while diluted earnings per share is targeted to decline 7%-13% versus fiscal 2022. We’re not worried about the resilience of Home Depot at all, and we continue to like shares.
Foot Locker (FL) doesn’t register high on our interest list for a number of reasons. For starters, the company is mall-based retail exposure, and we generally don’t like the long-term picture when it comes to malls, more generally. That includes many of the mall REITs, too. Second, the specialty athletic retailer offers a rather narrow line of merchandise (unlike the big box retailers, by comparison), and we think Foot Locker may cede market share to online retailers and big box retailing giants. Though some consumers may still want the in-store experience of trying on new shoes and the like, we think consumers are growing more and more comfortable with ordering online and finding the best price. Foot Locker’s shares dropped nearly 30% during the trading session May 19 after the firm reported terrible first-quarter fiscal 2023 results (ending April 29, 2023) that showed accelerating revenue declines and a huge jump in inventories. Though Foot Locker offers an above-average dividend yield, we’re not interested in the company at all. There are too many other companies that we like more, both on our radar and in the newsletter portfolios.
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Tickerized for FL, NKE, UAA, ADDYY, PUMSY, DECK, VFC, DKS, ASO, HIBB, SKT, SPG, KIM, PECO, BRX, MAC, DE, CAT, WMT, TGT, HD, LOW, CSCO
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. 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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