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Image Shown: A look at the 2022 GM HUMMER EV pickup truck that is due to launch by the end of this year. Image Source: General Motors Company – Fourth Quarter of 2020 IR Earnings Presentation

By Callum Turcan

In alphabetical order by ticker: DIS, GM, PEP, TWTR, UA

Earnings season is roaring along, and we cover the reports of five more companies across different sectors in this article. The coronavirus (‘COVID-19’) pandemic continues to loom large, though we are encouraged by reports from Moderna Inc (MRNA) that its existing COVID-19 vaccine approved for emergency use is at least somewhat effective at treating variants of the virus according to initial clinical trials (a lot more work needs to be done on the subject). Global health authorities are working to put an end to the public health crisis, though COVID-19 virus variants have created additional obstacles on that front. However, we still expect the COVID-19 pandemic will be brought under control sooner than many expect as global vaccine distribution efforts become more widespread and efficient.

Disney (DIS)

We continue to be huge fans of The Walt Disney Company (DIS) and include DIS as an idea in the Best Ideas Newsletter portfolio. Shares of DIS have rocketed higher over the past few months as the company’s video streaming service growth strategy smashed past internal expectations (we covered this situation here). Management increased Disney’s medium-term subscriber growth forecasts back in December 2020 by a substantial margin, largely due to the company simply blowing past its internal expectations during the past year. The company is aggressively stepping up its investments in original content to support that growth trajectory, a strategy that included a major corporate reorganization (which we covered here).

On February 11, Disney reported first quarter earnings for fiscal 2021 (period ended January 2, 2021) that beat both consensus top- and bottom-line estimates. Disney reported a surprise net profit on a GAAP basis last fiscal quarter (albeit a small one) in the face of tremendous headwinds from the COVID-19 pandemic, and the year-over-year decline in its GAAP revenues was less than feared. Its theme parks and resorts are either closed or operating at a reduced capacity, its movie business has been completely upended as movie theater attendance is way down worldwide, and major sporting events and other live events have been postponed, cancelled, or shortened. The COVID-19 pandemic hit Disney hard, though things are starting to turn around and the company’s outlook is bright, in our view.

Last fiscal quarter, the firm’s ‘Disney Parks, Experiences and Products’ business operating segment reported a 53% year-over-year decline in its revenues. However, the company’s ‘Disney Media and Entertainment Distribution’ business operating segment reported only a 5% year-over-year decline in its sales as the segment’s ‘Direct-to-Consumer’ division (includes Disney’s video streaming businesses) posted a 73% year-over-year increase in revenues. Additionally, the operating loss at Disney’s Direct-to-Consumer division (keeping in mind the firm is making enormous investments in original programming) shrunk substantially year-over-year last fiscal quarter.

Three of Disney’s core video streaming services; Hulu (which Disney owns 67% of), Disney+ (which Disney owns outright), and EPSN+ (Disney owns 80% of ESPN and 75% of BAMTech which operates Disney’s direct-to-consumer sports business), all put up stellar paid subscriber growth last fiscal quarter. Hulu grew its total paid subscriber base by 30% year-over-year (Hulu offers multiple streaming packages), Disney+ grew its paid subscriber base by over 350% year-over-year, and ESPN+ grew its paid subscriber base by over 80% year-over-year in the fiscal first quarter.

Sequentially, Hulu added 2.8 million net paid subscribers, Disney+ added 21.2 million net paid subscribers, and EPSN+ added 1.8 million net paid subscribers during the first quarter of fiscal 2021. The company is in the process of launching new video streaming services (particularly for international markets) such as its Star and Star+ offerings, while expanding the availability of its existing services to new geographical markets. We are very impressed with the growth in Disney’s paid video streaming subscriber base during the past year, and the market appears to feel the same way (seen through the increasing stock price of DIS of late).

In the medium term, the goal is to scale up these video streaming businesses by investing heavily in original programming and expansion efforts, with these operations likely to run an operating loss for a couple more fiscal years (management has communicated that is expected to be the case). However, in the long run, these services will become massive cash-flow machines as original content spending levels out and Disney benefits from economies of scale.

Recurring revenue streams provide significant cash flow visibility, highlighting the high-quality nature of these assets when successful, though this is an incredibly competitive space which is why differentiation via material original programming investments is essential. Disney has a stellar portfolio of existing content and historically has done a tremendous job creating new popular content (The Mandalorian, its flagship TV show for its nascent Disney+ service that utilizes the firm’s Star Wars intellectual property,is one of many examples).

With COVID-19 vaccine distribution efforts underway worldwide, Disney’s outlook is quite bright as a resumption of “pre-pandemic” activities would go a long way to improving its financial and operational performance. Being able to reopen its theme parks and resorts, and operate those facilities at or near full capacity, would allow its 'Disney Parks, Experiences and Products' segment to stage a major turnaround in its financial performance. As it concerns its Disney Media and Entertainment Distribution segment, we view the paid subscription growth at its video streaming services as having long legs given the top tier nature of Disney’s content library (which will enable the firm to churn out high-quality original programming with mass appeal). We continue to like exposure to Disney in the Best Ideas Newsletter portfolio.

Disney's 16-page Stock Report (pdf) >>

General Motors (GM)

On February 10, General Motors Company (GM) reported fourth-quarter earnings for 2020 that beat both consensus top- and bottom-line estimates. Management noted that General Motors generated $2.6 billion in “adjusted automotive free cash flow” and $4.90 in adjusted non-GAAP diluted EPS last year, impressive performance given the headwinds the global auto industry has been contending with. General Motors’ strong fourth-quarter performance, as it recovered from a myriad of manufacturing hurdles experienced earlier in the year, played an outsized role in enabling the automaker to put up decent full-year performance, all things considered.

The company’s pickup trucks (midsize and full-size) and SUV offerings (large and small) sold quite well across the board last year, particularly in North America. Please note these vehicles tend to carry significantly stronger margins than passenger car sales. Last year, its ‘GM North America’ segment posted $9.1 billion in non-GAAP adjusted EBIT, enabling General Motors to post $9.7 billion in non-GAAP adjusted EBIT on a company-wide basis. In China, General Motors reported $0.5 billion in equity income last year. General Motors sees the US and China as its core geographical markets.

Looking ahead, General Motors plans to launch 30 new electric vehicle (‘EV’) offerings over the next several years. The company noted that it would invest around $27.0 billion towards EVs and autonomous vehicles (‘AV’) from 2020 to 2025 to make that possible. Later this year, the GMC HUMMER EV offering will launch. We are intrigued by the potential revenues the new pickup truck EV offering could generate.

By the middle of this decade, General Motors aims “to sell a million EVs per year in our two largest markets – North America and China, with our joint venture partners” and a crucial part of this strategy involves General Motors bulking up its battery production capabilities. The auto maker has a joint-venture with LG Chem known as Ultium Cells LLC, and that JV just broke ground on a new ~3 million square feet plant in Lordstown, Ohio that will produce millions of battery cells. Longer term, General Motors could in theory become a major battery supplier (while also meeting its own battery needs internally), creating another source of potential revenue and ultimately cash flow growth.

As it concerns its AV ambitions, the General Motors-led Cruise business raised an another $2.0 billion from General Motors, Microsoft Corporation (MSFT), Honda Motor Co (HMC) and institutional investors through a funding round announced in January 2021. Cruise now has a $30.0 billion post-money valuation according to the press release. Additionally, Cruise formed a strategic partnership with Microsoft that involves utilizing the latter’s cloud-computing operations to accelerate the commercialization of the former’s AV offerings. General Motors changed its corporate logo to highlight the company’s strategic pivot.

In our view, General Motors’ long-term cash flow growth outlook has improved considerably during the past few months. However, we caution that the ongoing shortage of “chips” (semiconductor components) worldwide is hampering the global auto industry’s production capabilities. General Motors’ North American operations are facing serious hurdles with the firm forced to implement temporary shutdowns at some of its plants. Management noted General Motors could take a $1.5-$2.0 billion hit to its earnings this year if the chip shortage continues, with Ford Motor Company (F) warning of a $1.0-$2.5 billion hit to earnings this year for similar reasons. These headwinds are impacting almost every industry, with demand for chips outstripping supply in part due to elevated demand for electronics in the wake of the COVID-19 pandemic. We are closely monitoring the issue.

GM's 16-page Stock Report (pdf) >>

PepsiCo (PEP)

On February 11, PepsiCo Inc (PEP) reported fourth-quarter earnings for 2020 that beat both consensus top- and bottom-line estimates. The firm’s non-GAAP organic revenues grew by over 4% year-over-year and its non-GAAP core constant currency EPS grew by 2% year-over-year in 2020, with the uplift from strong underlying demand for its products (as households “stockpiled” consumer staples products in the wake of the pandemic) offset by significant foreign currency headwinds. Last year, PepsiCo’s food/snack unit volumes (excludes the impact of M&A activity and certain other activities) were up 4% and its beverage unit volumes were broadly flat versus 2019 levels.

PepsiCo announced in the earnings press release that it increased its annualized dividend by 5% sequentially (effective for the dividend payment expected this upcoming June). This represents its 49th consecutive year of annual payout growth as the Dividend Aristocrat continues to reward income seeking investors.

Looking ahead, PepsiCo forecasts that it will post a mid-single-digit increase in its non-GAAP organic revenues, a high single-digit increase in its non-GAAP core constant currency EPS, and that it will benefit from a foreign currency tailwind in 2021 (adding 100 basis points to its reported net revenue and core EPS growth rate this year at current rates). The company expects to return ~$5.9 billion to its shareholders this year including ~$5.8 billion in dividend payments and ~$0.1 billion in share buybacks. PepsiCo noted that it recently completed its stock buyback program and does not intend to repurchase additional shares for the remainder of the year. As of this writing, shares of PEP are trading in the upper bound of our fair value estimate range and yield ~3.0%.

PEP's 16-page Stock Report (pdf) >>

     PEP's Dividend Report (pdf) >>

Twitter (TWTR)

Social media and digital advertising contender Twitter Inc (TWTR) smashed past consensus top- and bottom-line estimates when the company reported fourth quarter earnings for 2020 on February 9. Its advertising revenues advanced 31% year-over-year last quarter as its monetizable daily active usage (‘mDAU’) grew by 27% year-over-year, though we caution that Twitter experienced sharp operating expense growth as it aggressively expanded its headcount. For all of 2020, Twitter posted over 7% year-over-year GAAP revenue growth and a 93% year-over-year decline in its GAAP operating income.

The company remained moderately free cash flow positive last year (generating just over $0.1 billion in free cash flow) and spent over $0.2 billion buying back its stock (funded in part by its pristine balance sheet). It exited 2020 with ~$4.0 billion in net cash (inclusive of short-term debt and convertible debt), though Twitter also had significant operating lease liabilities on the books as well to be aware of. Looking ahead, Twitter plans to continue expanding its headcount in 2021 which will see its operating expenses grow by 25% or more this year, though its revenue growth outlook is improving as its mDAU is moving in the right direction.

Shares of TWTR are trading north of the top end of our fair value estimate range as of this writing. The digital advertising market remains incredibly resilient, though we prefer Facebook Inc (FB) and include Facebook as a top-weighted idea in the Best Ideas Newsletter portfolio. Shares of FB are trading well below their fair value estimate ($413 per share of FB) as of this writing, and we see Facebook housing immense capital appreciation potential. Members interested in our thoughts on Facebook’s latest earnings report are encouraged to check out this article here.

TWTR's 16-page Stock Report (pdf) >>

Under Armour (UA)

Athletic and athleisure apparel company Under Armour Inc (UA) reported fourth-quarter earnings for 2020 on February 10 that beat both consensus top- and bottom-line estimates. As with most firms that before the pandemic relied heavily on their physical selling presence, Under Armour continued to face significant headwinds last quarter. Its GAAP revenues were down 3% year-over-year as its wholesale revenues declined, though growth at its direct-to-consumer and e-commerce businesses helped narrow the decline last quarter. Under Armour’s apparel and footwear revenue were down single-digits year-over-year last quarter though its accessory sales were up 32% year-over-year.

Looking ahead, Under Armour expects its business to stage a rebound. Management forecasts the firm will post high single-digit revenue growth this year versus 2020 levels, aided by high single-digit growth in North America and double-digit growth at its international operations. The company also expects to realize moderate gross margin improvements this year through supply chain improvements and pricing strength. However, this will be partially offset by headwinds from the sale of its high margin MyFitnessPal (a digital health and fitness firm) for ~$0.35 billion to Francisco Partners, an investment firm (the deal was completed in December 2020).

Under Armour still has a meaningful digital presence that includes its MapMyRide and MapMyRun operations. Shares of UA have been on a steep upward climb during the past several months as the firm’s outlook indicates the worst could be behind it, though we caution serious short-term headwinds remain as it concerns government-mandated quarantine efforts to keep the COVID-19 pandemic contained.

Concluding Thoughts

A common theme across earnings reports is that (most) of the companies in this article view their outlooks favorably, though serious short-term headwinds remain in some instances. Video streaming services continue to be in high demand, major automakers are stepping up their EV investments, demand for consumer staples products remains healthy, the digital advertising market is resilient, and retailers are leaning heavily on their omni-channel selling capabilities to ride out the storm caused by the COVID-19 pandemic.

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Related: DIS, GM, PEP, TWTR, UA, MSFT, HMC, F, FB, VDC, SOCL, MRNA

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Callum Turcan does not own shares in any of the securities mentioned above. The Walt Disney Company (DIS) and Facebook Inc (FB) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio. Microsoft Corporation (MSFT) is included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Vanguard Consumer Staples Index Fund (VDC) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.