Brian Nelson

DOJ Antitrust Lawsuits Targeting Our Top Two Ideas: V and GOOG

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   Image: Alphabet’s and Visa’s shares have performed remarkably well since the beginning of 2023. By Brian Nelson, CFA We received a number of questions regarding the DOJ’s investigation into anticompetitive practices for two of the top ideas in the Best Ideas Newsletter portfolio. Antitrust news with respect to Alphabet’s (GOOG) ad search business and Visa’s (V) debit card business is nothing surprising, but it speaks to the positives and dominance behind their business models, something we like quite a bit. Any outcome of an antitrust lawsuit is uncertain and could result in a settlement and potential other action, including divestitures. That said, as it relates to Alphabet, the potential for divestitures in its business reinforces a sum-of-the-parts value analysis … Read more

Costco’s Shares Remain Pricey

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Image Source: Costco By Brian Nelson, CFA Costco Wholesale (COST) reported fiscal fourth-quarter results on September 26 where revenue came up a bit short relative to forecasts, while the company beat on the bottom line. For the 16-week fourth quarter, Costco reported a net sales increase of 1% compared to the 17-week fourth quarter of last fiscal year. Total company adjusted comparable store sales were 6.9% in the 16-week period, better than the consensus estimate of 6.4%. E-commerce adjusted comparable store sales were 19.5% in the quarter. Net income for the 16-week period was $5.29 per diluted share, compared with $4.86 per diluted share in the 17-week fourth-quarter period of a year ago. Management spoke of its international opportunity on … Read more

An Important Measure of Leverage for Dividend-Growth and Income-Oriented Shareholders, One That Is Dividend-Adjusted

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As more and more investors rely on company dividends for income, dividends, in our view, have become more debt-like commitments in nature, especially from the perspective of dividend-growth or income-oriented shareholders. Years ago, we rolled out a measure of financial leverage that considers both the company’s debt and the present value of its future expected cash dividend obligations, which, in the eyes of die-hard dividend-growth or income-oriented shareholders, may be implicitly assumed to be debt-like commitments in substance. We think this leverage ratio can be used in conjunction with the Dividend Cushion ratio to gain additional insight into the dividend-paying financial health of an entity. Note: There is often great confusion with respect to published measures of financial leverage, and … Read more

GE Vernova Is a Great Clean Energy Idea

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Image: GE Vernova has performed well since it was spun out of GE. By Brian Nelson, CFA Clean energy giant GE Vernova (GEV) recently reported second quarter financial results with total revenue advancing 1% (up 2% organically) thanks to strong performance in services, which grew 7% (up 9% on an organic basis). Total orders came in at $11.8 billion in the quarter, exceeding revenue by 1.4x. Adjusted EBITDA came in at $0.5 billion, with an adjusted EBITDA margin of 6.4%, which was up 320 basis points on an organic basis. Management’s commentary was upbeat in the press release: GE Vernova delivered another strong quarter with EBITDA margin expansion across all segments and substantial cash improvement. Global electrification and decarbonization trends … Read more

Incentives Pressuring Lennar’s Homebuilding Gross Margin

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Image: Lennar’s shares have done quite well the past several years. By Brian Nelson, CFA Lennar (LEN) reported better than expected fiscal third quarter 2024 results on September 19 with revenue and GAAP earnings per share coming in ahead of the Street’s forecast. Total revenue advanced 7.9% in the quarter, while net earnings per diluted share increased 10%, to $4.26, up from $3.87 per diluted share in the same period a year ago. Deliveries increased 16% in the quarter, new orders increased 5%, while its backlog stood at 16,944 homes with a dollar value of $7.7 billion at the end of the period. Lennar’s homebuilding gross margin was 22.5% in the quarter, lower than expectations, however. Management commentary was upbeat … Read more

FedEx Reduces Fiscal 2025 Outlook

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Image: FedEx’s shares have bounced back from the October 2022 lows, but its fiscal 2025 outlook disappointed the Street. By Brian Nelson, CFA FedEx (FDX) reported disappointing fiscal first quarter 2025 results on September 19 with both revenue and non-GAAP earnings per share coming in below the consensus forecast. Adjusted revenue fell to $21.6 billion from $21.7 billion in the year-ago period, while adjusted operating income fell to $1.21 billion from $1.59 billion in the same period last year. Our fair value estimate stands at $284 per share. FedEx’s adjusted operating margin contracted 170 basis points in the quarter on a year-over-year basis, while adjusted net income came in at $0.89 billion, down from $1.16 billion in last year’s quarter. … Read more

Brain Teaser – Reflexive versus Reflective

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Dear members: — Jason Zweig of the Wall Street Journal, wrote in his pioneering text, Your Money and Your Brain, a few fun examples of how sometimes the psychological process of anchoring and adjustment can trip us up. — In one notable example, Zweig wrote about how two psychologists Amos Tversky and Daniel Kahneman had asked volunteers to spin a wheel of fortune numbered from 0 to 100. The contestants didn’t know that the wheel was rigged to produce either a 10 or a 65 for the experiment. — After spinning the wheel, the contestants were then asked whether the percentage of total United Nations membership made up of countries in Africa was higher or lower than the number that came up. … Read more

Korn Ferry’s Margin Performance Impressive in Fiscal First Quarter

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Image: Korn Ferry’s shares have bounced nicely since its bottom in late 2023. By Brian Nelson, CFA Korn Ferry (KFY) recently reported better than expected fiscal first quarter 2025 results with both revenue and non-GAAP earnings per share coming higher than the consensus estimate. Fee revenue fell 3%, but Executive Search fee revenue grew 2%, while fee revenue for Consulting and Digital was flat. Revenue in Professional Search and Recruitment Process Outsourcing (“RPO”) faced pressure. Adjusted diluted earnings per share for its first quarter of fiscal 2025 was $1.18. Management was upbeat in its commentary in the press release: I am pleased with our first quarter results, as we generated $675 million in fee revenue. Earnings and profitability increased year … Read more

Adobe’s Fiscal Fourth Quarter Outlook Comes Up Short of Expectations

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Image: Adobe’s shares traded down on a weaker than expected fiscal fourth quarter outlook. By Brian Nelson, CFA Adobe (ADBE) reported better than expected fiscal third quarter 2024 results on September 12, but the company’s outlook left something to be desired. In the quarter, Adobe grew revenue 11%, while non-GAAP earnings per share came in at $4.65, both above the consensus forecast. Non-GAAP operating income was $2.52 billion, while non-GAAP net income reached $2.08 billion. Operating cash flow was $2.02 billion, up from $1.87 billion in the year-ago quarter, while it exited the period with remaining performance obligations (“RPO”) of $18.14 billion. During the quarter, Adobe bought back 5.2 million shares. Free cash flow in the quarter was $1.96 billion. … Read more

Kroger Raises Identical Sales Growth Outlook

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Image: Kroger’s shares have been choppy during the past couple years. By Brian Nelson, CFA On September 12, Kroger (KR) reported mixed second quarter results with revenue coming up short of the consensus forecast, but non-GAAP earnings per share exceeding what the Street was looking for. Total sales advanced 0.2% in the quarter helped by identical sales without fuel increasing 1.2%, which lapped a 1% increase in identical sales growth during the same quarter a year ago. Adjusted earnings per share in the quarter came in at $0.93, down modestly from the year-ago period. Commentary in the press release was upbeat: Kroger achieved solid results in the second quarter demonstrating the strength and resiliency of our model. We are growing … Read more