Valuentum Exclusive Analysis for the Discerning Investor

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By Callum Turcan

Let's take a look at several earnings reports across numerous industries in this article as the ongoing coronavirus (‘COVID-19’) pandemic forces the global economy to a crawl. Please note that as these reports primarily cover the first quarter of calendar year 2020, the impact of the pandemic has yet to be truly reflected in corporate earnings. That said, these reports still provide an important glimpse into what to expect going forward and how companies are responding to the pandemic.

By ticker in alphabetical order: BBBY, CPSS, ISRG, LAKE, MRTN, OFLX, SCHW, TSM

Bed Bath & Beyond Inc (BBBY)

Shares of BBBY shot up on April 16 after reporting fourth quarter and full-year results for its fiscal 2019 (period ended February 29, 2020) on April 15 after the market close as it beat consensus estimates on both the top- and bottom-lines. The retailer suspended its plans to spend $600 million on future dividend payments, share buybacks, and debt reduction in fiscal 2020 while drawing down the remaining balance on its revolving credit line ($236 million) and postponing $150 million in expected capital expenditures. All of these maneuvers are being utilized in a bid to preserve cash, enhance liquidity, and put Bed Bath & Beyond in a position to ride out the storm. Bed Bath & Beyond exited fiscal 2019 with ~$1.4 billion in combined cash & cash equivalents, short-term investments, and long-term investments on hand, versus no short-term debt and ~$1.5 billion in long-term debt. The firm noted that:

The Company's first quarter and full-year 2020 results will be unfavorably impacted by the COVID-19 pandemic. The duration and extent of the pandemic is highly uncertain, and Bed Bath & Beyond's results could be impacted in ways that are difficult to predict today.  Due to the level of market uncertainty, the Company will not provide further financial guidance for fiscal 2020 at this time.

Before the pandemic had really begun to take its toll, please note Bed Bath & Beyond reported a 5.6% year-over-year drop in its comparable store sales in the fourth quarter of fiscal 2019. Going forward, the retailer plans to maintain lower inventory levels, invest in its digital infrastructure (including its ‘Buy Online Pick Up In Store’ offering), and spend $250 million on “essential” capital expenditures. While things look bleak, Bed Bath & Beyond does appear to be in a position to have a good chance of surviving the pandemic given its relatively strong liquidity position, but nothing’s for certain especially if the pandemic leads to a major depression.

On a year-over-year basis, Bed Bath & Beyond’s GAAP net sales dropped by 6% in the fourth quarter of its fiscal 2019. The firm continued to run at a GAAP operating loss; however, that loss did get much smaller on a year-over-year basis (shrinking from ~$0.3 billion in the fourth quarter of fiscal 2018 to less than $0.1 billion in the fourth quarter of fiscal 2019). Bed Bath & Beyond generated over $0.3 billion in free cash flow last quarter while spending $0.1 billion on dividends and another $0.1 billion in share repurchases. When the US and other global economies begin to “open back up” will be of tremendous importance to Bed Bath & Beyond given its hefty fixed costs, and e-commerce sales will only do so much for the retailer.

The company recently furloughed the majority of its workforce until at least early May in response to the pandemic, and is pivoting towards e-commerce sales in an attempt to shore up its financials as best it can including turning some of its locations into fulfillment centers. Bed Bath & Beyond also announced it had sold off home décor subsidiary One King Lane for an undisclosed price during the firm’s latest quarterly conference call, and that the sale of its PersonalizationMall.com business to 1-800-Flowers.Com Inc (FLWS) for $252 million hadn’t closed at the end of March as planned. Bed Bath & Beyond’s management team had this to say during the firm’s latest quarterly conference call:

“As previously disclosed, we entered into a definitive agreement to sell our PersonalizationMall.com business to 1-800-Flowers for $252 million. 1-800 was required to close the transaction on March 30th. They breached this obligation to do so. Accordingly, we filed an action to require them to close and intend to vigorously enforce our rights.”

We’ll see what happens, but it’s clear Bed Bath & Beyond wants that cash infusion.

Consumer Portfolio Services Inc (CPSS)

CPSS is a specialty financing company that caters to the automotive industry, reported first quarter 2020 earnings on April 15 after the market close which saw shares of CPSS leap higher on April 16, keeping in mind the firm’s stock price has gotten hammered since March 2020 due to the pandemic. The firm beat consensus top-line estimates and appeared to beat consensus bottom-line estimates as well (though consensus estimates and Consumer Portfolio Services’ GAAP EPS performance may not be comparable). For refence, the company bills itself as such:

Consumer Portfolio Services, Inc. is an independent specialty finance company that provides indirect automobile financing to individuals with past credit problems, low incomes or limited credit histories. We purchase retail installment sales contracts primarily from franchised automobile dealerships secured by late model used vehicles and, to a lesser extent, new vehicles. We fund these contract purchases on a long-term basis primarily through the securitization markets and service the contracts over their lives.

As of the end of March 31, the company had not reported a material change in its 31+ day delinquencies rate given that these were still the early days of the pandemic; however, the firm did record a significantly larger ‘allowance for finance credit losses as % of [finance] receivables’ which shot up from 3.59% in the first quarter of 2019 to 14.73% in the first quarter of 2020. The company’s ‘aggregate allowance as % of [finance] receivables’ grew from 5.40% to 17.54% during this period, highlighting the expected stress Consumer Portfolio Services is factoring into its outlook. At the end of March, the company had $660 million in net finance receivables on the books (its ‘allowance for finance credit losses’ balance rose roughly ten-fold versus the fourth quarter of 2019 levels).

This is largely why shares of CPSS have sold off so aggressively since the middle of March, and why its outlook looks bleak. That being said, given that shares of CPSS jumped higher on April 16, it appears investors view the firm’s outlook as less serve than initially perceived (albeit off of already low expectations). Management had this to say in the press release:

“Our first quarter of 2020 began with optimism which carried through the quarter as we reached our highest volume of new receivables originated since the second quarter of 2016 and improved year over year quarterly pretax earnings for the first time since the fourth quarter of 2015… Unfortunately, as the quarter closed the world began to realize the impact and potential harm from the pandemic. We shifted our focus to the safety and well being of our employees while ensuring that we can service our customers and dealers during the challenging times to come.”

The company did get a little bit of reprieve from the recently passed Coronavirus Aid, Relief and Economic Security or CARES Act:

One component of the CARES Act provides the Company with an opportunity to carry back net operating losses (“NOLs”) arising from 2018, 2019 and 2020 to the prior five tax years. The Company has such NOLs reflected on its balance sheet as a portion of deferred tax assets.  The Company has previously valued its NOLs at the federal corporate income tax rate of 21%. However, the provisions of the CARES Act provide for NOL carryback claims to be calculated based on a rate of 35%, which was the federal corporate tax rate in effect for the carryback years. Consequently, effective March 31, 2020, the Company has revalued the benefit from its NOLs to reflect a 35% tax rate. The result of the revaluation of NOLs and other tax adjustments is a net tax benefit of $8.8 million, which is reflected in income taxes for the quarter ended March 31, 2020.

While things will get brutal going forward as global economic activity (including in the US, grinds to a halt), Consumer Portfolio Services is hoping that fiscal and monetary stimulus measures will allow the firm to pull through. The firm exited March 2020 with $142 million in total cash and cash equivalents on hand (most of which was restricted) and incurred just under $68 million in operating expenses during the first quarter.

Intuitive Surgical Inc (ISRG)

The innovative medical-device company reported first-quarter 2020 earnings after the market close on April 16 that beat both consensus top- and bottom-line estimates. Around the world, da Vinci procedures grew by roughly 10% on a year-over-year basis, and please note Intuitive Surgical’s da Vinci system is the firm’s robotically-assisted surgery offering. Additionally, Intuitive Surgical shipped 237 of the da Vinci systems during the first quarter of 2020, up 1% from year-ago levels. However, as the pandemic has forced hospital and healthcare systems at-large all over the world to delay elective surgeries to help out the infected, Intuitive Surgical’s outlook looks bleak in the short-term. From its earnings press release (emphasis added):

For the first two and a half months of the first quarter of 2020, procedure performance was trending at the higher end of our expectations.However… the Company experienced a significant decline in procedure volume and postponements of system placements in the latter half of March in the U.S. and Western Europe, as healthcare systems in those areas diverted resources to meet the increasing demands of managing COVID-19. The Company has experienced and believes that the impact of the COVID-19 pandemic on the Company's business differs by geography. Due to the uncertain scope and duration of the pandemic, and uncertain timing of global recovery and economic normalization, we cannot, at this time, reliably estimate the future impact on our operations and financial results.

This is becoming a common theme (i.e. everything was going well during the first couple of months of 2020 then everything changed and reverted course), but Intuitive Surgical did report a nice earnings report, and its stock price still bounced higher during after-hours trading on April 16. Considering Intuitive Surgical maintains a nice net cash balance ($5.9 billion in ‘cash, cash equivalents, and investments’ at the end of March 2020 with no debt) and wasn’t carrying any debt on the books at the end of its first quarter, which we really appreciate, the firm is well-positioned to ride out the storm. Demand for elective surgeries and its da Vinci system should pick up once the pandemic passes; however, it will be a while before we have a vaccine.

Given Intuitive Surgical’s after-hours trading activity (i.e. shares moving higher), it appears investors are taking the longer term view and are rewarding the company for its nice growth trajectory and rock-solid financial position. Here’s what management had to say during Intuitive Surgical’s latest quarterly conference call (emphasis added):

“We are analyzing customer procedure deferrals in response to COVID. Patients undergoing da Vinci procedures do so in response to an underlying disease. While these procedures maybe delayed in the short-term without treatment of some sort, the disease in its impairment persist and often worsens. Said simply, the vast majority of these patients will ultimately see treatment. We are analyzing both the clinical drivers of return to treatment and customer plans and processes to recover.

The categories of benign disease and cancer are not entirely predictive of the urgency of surgical intervention. Clearly, aggressive cancers require treatment and are delayed at significant risk to patients. Likewise, some benign conditions require timely intervention as well. We are working internally and with customers to understand their needs to restart surgery for those patients whose condition requires action.”

Intuitive Surgical should be able to emerge on the other side of this pandemic with its financials intact and furthermore, be in a position to ramp up its operations to meet the needs of its customer’s patients.

Lakeland Industries Inc (LAKE)

The maker of protective clothing and gear has seen its stock price perform quite well so far this year given the need for its offerings during these troubling times. The company reported fourth quarter and full-year earnings for fiscal 2020 (period ended January 31, 2020) on April 15 after the market close which beat consensus estimates on both the top- and bottom-lines. However, shares of LAKE sold off a bit on April 16 as investors had likely been pricing in expectations for stronger performance, and the risks posed by the downturn in the oil & gas industry which represents a major customer base for Lakeland Industries. Management had this to say in the press release (emphasis added):

“Lakeland has experienced significant interest globally in its products in the wake of the coronavirus outbreak. Before we service our customers or the COVID-19 market, our first course of action was to ensure the safety of our global team. We are pleased to report, thus far, that our workforce is healthy and continues to abide by all relevant safety guidelines. I'd like to congratulate our employees, who have risen to the occasion, kept our workplaces, their communities and families safe while contributing to our efforts to increase production…

Coronavirus-related demand has added approximately $1.0 million to our fiscal 2020 fourth quarter sales during the last three weeks of the period. The majority of these orders were fulfilled with products already in inventory. In anticipation of prolonged, heightened demand, we commenced manufacturing capacity expansion efforts toward the end of the fourth quarter…

The outlook for Lakeland is favorable at the present time given our many market drivers, market diversification, and resilient manufacturing capability but these are unprecedented times and we must be prepared for any eventuality. This includes the potential impact of the temporary closure of many manufacturing facilities, the uncertainty of the oil sector, a market from which we derive approximately 20% of our sales, and the possibility of a recession. Our focus will remain on our organic growth initiatives, inventory management, and the generation as well as preservation of cash.”

Lakeland Industries exited fiscal 2020 with ~$15 million in cash and cash equivalents on hand versus ~$1 million in short-term debt and no long-term debt, putting the firm in a prime position to meet rising demand for its products from non-energy (particularly oil-related) industry consumers. While the pandemic has painted a dour outlook for many/most companies out there, and often forced companies to pull their own outlook, Lakeland Industries caters to a space where demand remains quite strong. The firm reported ~13% year-over-year sales growth in the fourth quarter of its fiscal 2020 on what appears to be a GAAP basis.

Marten Transport Ltd (MRTN)

The truck freight and intermodal transportation company reported first-quarter 2020 results after the market close on April 16 which beat both consensus top- and bottom-line estimates. Shares jumped after hours on the report as its (apparently on a GAAP basis) ‘operating revenues’ rose by 10% year-over-year and its GAAP ‘operating income’ climbed by almost 2%. Rising ‘insurance and claims’ and wage expenses ate into its top-line growth, but the market appeared to like what it saw. Marten Transport offers refrigerated trucking services which can distribute food, beverages, and consumer prepackage goods, a service that’s in high demand right now given the rise of home food delivery demand. The firm exited March 2020 with $36 million in cash and cash equivalents on hand and no debt on the books, which we appreciate. Marten Transport’s CEO, Randolph Marten, had this to say in the report:

“I genuinely appreciate our talented drivers, maintenance personnel and our employees across all functions and regions whose bright, hard work consistently drives our strong operating results. Our disciplined execution of our unique multifaceted business model across our diverse and growing customer base, including our ability to quickly make data-driven decisions and adjustments utilizing our in-house operating technology, has and will continue to be one of our key strengths as we proactively navigate through these most volatile, disruptive times.

We added 101 Dedicated and 73 Truckload tractors during the first quarter on top of our growth of 329 Dedicated and 101 Truckload tractors throughout 2019, all while further tightening our stringent hiring standards for experienced drivers. We embrace our responsibility to keep our valued employees safe and healthy as they each contribute to our transporting and distributing the food, beverages and other consumer goods essential to millions of people in North America.”

Companies that are well-positioned to ride out the storm generally need to have these two things: 1) net cash positions and strong free-cash-flow generating propositions and 2) provide a service that generates a lot of revenue (relatively speaking) that’s in high demand during the pandemic. Marten Transport has those two things, and the market has rewarded the firm for that reason, seen through its strong stock price performance of late and during the past year.

Omega Flex Inc (OFLX)

The maker of specialty and other metal piping products reported first-quarter 2020 earnings after the market close on April 16. Consensus estimates weren’t readily available, and its share price was initially flat after hours. The firm’s (apparently GAAP based) net sales were down ~6% year-over-year while its (apparently GAAP based) net income was down ~1% year-over-year, in part due to the negative impact the pandemic is having on its operational and financial performance. Management had this to say in the brief press release:

The COVID-19 pandemic has had an impact on our March 31, 2020 operations and financial results. The business continues to operate with two shifts and no layoffs despite a slight softening in our business during the first quarter of 2020. We have seen an increase in the adoption of MediTrac® flexible medical gas piping systems, used for medical gases (including oxygen) in new or renovated health care facilities. The impact of the COVID-19 pandemic in the second quarter and beyond will depend on government plans to combat the contagion while attempting to restore the economy, which are highly uncertain and unpredictable at this time.

The company appears to be in a position to meet some of the needs of the medical industry during these challenging times. As is the case with numerous other companies, Omega Flex isn’t sure what to expect going forward.

Charles Schwab Corporation (SCHW)

The company reported first-quarter 2020 earnings on April 15 before the market open which initially saw shares drift lower even though its top-line beat consensus estimates and its bottom-line matched consensus estimates. Weakening net interest margins (‘NIMs’) weighed on the firm’s performance, with its net interest revenue declining by 6% year-over-year, keeping in mind that this figure was propped up by “significantly higher levels of client cash sweep balances.” Please note pressures on Charles Schwab’s NIMs will likely continue going forward.

The company reported a 10% year-over-year increase in its ‘asset management and administration fees’ while trading revenue, due to intense competition in the space, was down 13% last quarter. Expenses rose by 8% year-over-year in the first quarter as Charles Schwab dealt with the pandemic and due to acquisition-related costs. That included a one-time $1,000 payment to “to all non-officer employees” to help cope with the ongoing pandemic. Charles Schwab’s CFO, Peter Crawford, concluded within the press release that:

“Regardless of the environment, our priorities for balance sheet management remain intact, including supporting our ongoing growth while also maintaining appropriate levels of liquidity and capital. With first quarter market volatility driving a significant influx of client cash, our balance sheet expanded by $77 billion during the quarter to $371 billion at March 31st. Consistent with optimizing liquidity management during heightened volatility, we issued 5- and 10-year senior notes totaling $1.1 billion during March.

The company’s preliminary Tier 1 Leverage Ratio was 6.9% as of month-end March, consistent with our operating objective of 6.75%-7.00%. Our 14% return on equity to start 2020 was hampered in part by an increase in Stockholders’ equity driven by mark-to-market gains in investment securities. Overall, we’re facing the storm from a position of strength and expect to remain on offense – driving long-term value by protecting our business momentum, as well as thoughtfully managing the investments in our business necessary to sustain and enhance our all-weather model.”

In hindsight, it was a good idea for Charles Schwab to tap credit markets in March given ongoing turbulence in the space. We caution that going forward, weakening NIMs and operating expense pressures will make it tough sledding.

Taiwan Semiconductor Manufacturing Company Limited (TSM) [‘TSMC’]

TSMC saw its stock price pop up on April 16 after reporting its first quarter 2020 earnings before the market open as it beat consensus estimates on both the top- and bottom-lines. Management noted the firm benefited from a ramp up in 5G smartphone production. On a TIFRS basis (“International Financial Reporting Standards as endorsed for use in R.O.C.” and members can read more about that here), TSMC reported 42% revenue growth year-over-year and a 2% decline in sales growth versus the fourth quarter of 2019. Its gross margin came in at 51.8% and management is guiding for TSMC’s gross margin to come in at 50.0% - 52.0% in the second quarter of 2020.

Management expects the firm’s revenue to be “flattish” sequentially this quarter as subdued demand for mobile products is expected to be offset by continued 5G growth and sustained demand for high-computing products (‘HPC’) offerings. The firm’s stock price appears to be recovering as things aren’t as bad as investors initially perceived them to be. In the first quarter, TSMC’s operating margin came in above expectations at 41.4% (versus guidance for 37.5% - 39.5%) and going forward, management expects that TSMC will post an operating margin in the 39.0% - 41.0% range this quarter. On a sequential basis, TSMC reported strong sales growth at its Digital Consumer Products (‘DCE’) and Internet of Things (‘IoT’) segment, and decent sales growth at its HPC segment, while sales at its other segments (including its ‘smartphone’ and ‘automotive’ segments) drifted lower, keeping in mind the impact the pandemic is having on global demand for various products and other factors.

However, we caution that reportedly the Chinese firm Huawei Technologies Co Ltd is shifting (at least some of) its production away from TSMC due to US sanctions on the firm, and more specifically, the threat of additional sanctions and restrictions from the US. Reportedly, Huawei is looking at firms located in mainland China including Semiconductor Manufacturing International Corp (SMICY) [‘SMIC’] which is based in Shanghai. The actual amount of production Huawei could shift away from TSMC is debatable, however, as TSMC derives a low-to-mid teen percent of its revenues from Huawei, any lost revenues could be meaningful. Due to TSMC housing far more technologically advanced semiconductor foundries (TSMC is working on mastering the 5 nanometer process while SMIC rolled out the 14 nm process in late-2019), that’s expected to allow from TSMC to keep the majority of its business with Huawei for the time being, depending on how US sanctions and restrictions on Huawei play out.

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We hope our members, their families, friends, and loved ones stay safe out there as we ride out the pandemic together.

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Communications Equipment Industry – CSCO JNPR KN NOK SMCI

Broad Line Semiconductor Industry – AMD AVGO FSLR INTC TXN

Integrated Circuits Industry – ADI MCHP MRVL NVDA SWKS TSM XLNX

Semiconductor Equipment Industry – AMAT CREE IPGP KLAC LRCX MKSI SNPS TER

Air Freight & Logistics Industry – CHRW EXPD FDX ODFL UPS

Medical Devices Industry – EW ISRG MDT VAR WAT ZBH

Health Care Services Industry – DVA EHC HCA UNH UHS

Pharmaceuticals (Big) Industry – ABT ABBV AMGN AZN BMY LLY GSK MRK NVS NVO PFE SNY

Pharmaceuticals (Biotech/Generic) Industry – ALXN AGN BHC BIIB BMRN GILD MYL REGN TEVA VRTX ZTS

Household Products Industry – CHD CLX CL ENR HELE JNJ KMB PG

Dollar Store and Department Store Industries – KSS M JWN BIG DG DLTR PSMT

Specialty Retailers Industry – AAN BBBY BBY GME HD LOW LL ODP SHW TSCO WSM

Food Retailing Industry – CASY COST CVS KR SYY TGT WBA WMT

Related: BBBY, CPSS, FLWS, ISRG, LAKE, MRTN, OFLX, SCHW, SMICY, TSM, XLV

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Callum Turcan does not own shares in any of the securities mentioned above. Johnson & Johnson (JNJ), Dollar General Corporation (DG), the Health Care Select Sector SPDR ETF (XLV), Cisco Systems Inc (CSCO), and Intel Corporation (INTC) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Johnson & Johnson, the Health Care Select Sector SPDR ETF, Cisco Systems Inc, Intel Corporation, and Cracker Barrel Old Country Store Inc (CBRL) are all included in Valuentum’s simulated Dividend Growth 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.