Latest Homebuilder Earnings Say We’re On The Right Path With This Holding
We've got reason to stay long-term bullish on a key portfolio holding following the latest homebuilding numbers.
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*DR Horton’s earnings, outlook add more support for our Builders FirstSource position
*Domino’s margins say our April exit from McDonald’s shares was the right call
*Amazon shares yet another record Prime Day
Quarterly results and guidance this morning from Taiwan Semiconductor TSM was an important report, but it wasn’t the only one we’re paying attention to this morning.
DR Horton
Homebuilder D.R. Horton DHI also reported this morning, sharing the number of homes closed during the June quarter rose 5% year over year to 24,155. Management’s guidance for 90,00 to 90,500 homes to be closed for the 12 months ending with the current quarter implies September quarter home closings rising 4% to 7% compared to the year-ago quarter. This builds on the recent positive action for our position in Builders FirstSource BLDR, one that has been on the move as the market’s expectation for rate cuts this year has crept up.
We acknowledge that the market could once again be out over its skis with its thoughts for three rate cuts, but over the next 12 to 18 months, we do see the Fed returning monetary policy to a more neutral stance compared to the current “restrictive” level cited by central bankers. That keeps us long-term bullish with our BLDR position.
Still, we could see the stock market jostle around further if upcoming Fed head speakers today and tomorrow push back on the number of potential rate cuts this year. Our thinking is that they did not miss the upward climb in year-over-year core PPI data for the last few months. That and the potential for a volatile earnings season that could see the market trade day to day based on the latest high-profile earnings report means we’ll continue to pick our spots when it comes to putting cash to work.
Domino’s Pizza Feels a Pinch
Domino's Pizza DPZ fell short of estimates for quarterly same-store sales, as inflation worries discouraged U.S. consumers, particularly in the lower-income group, from eating out or ordering in. The company also shared that its margins were impacted by higher costs, including “increased labor costs as a result of higher wage rates.”
This is one of the indications we’re getting for California’s April 1, 2024 mandated hourly wage increase. Roughly 9% of Domino’s locations are in California, which means that companies with even greater exposure are likely to feel the margin pinch. Chipotle CMG has 12% to 13% of its total location count in California and roughly 40% for Jack in the Box JACK.
When we exited the portfolio’s position in McDonald’s MCD shares in mid-April, we shared our concerns about the margin impact of California’s minimum wage increase for fast food workers. The above comments from Domino’s and the fact that McDonald’s has about 9% of its domestic footprint in California, tell us that was the right move to make. It also means we’ll continue to stand on the sidelines when it comes to fast food companies, at least until their margin expectations are reset in the coming weeks. We’ll also continue to monitor the consumer and the return to eating at home that is benefitting our shares of Costco COST, Amazon AMZN and PepsiCo PEP.
Amazon Shares Another Record Prime Day
Amazon today announced that Prime Day 2024 was its biggest Prime Day shopping event ever, with record sales and more items sold during the two-day event than in any previous Prime Day event. Despite the fanfare, Amazon was rather tight-lipped, which means we’ll be on the lookout for updated comments from Adobe ADBE Analytics to see if the shopping event topped its $14 billion forecast. In 2023, shoppers spent $12.7 billion online across retailers over the two-day event.
For the first day of the two-day event, Adobe found that U.S. consumers spent a record $7.2 billion, up from $6.4 billion during the first day of Prime Day 2023. Adobe also noted the Buy Now Pay Later (BNPL) option clocked 17.1% growth year on year, driving $540 million in sales for the first day of Prime Day 2024. While we don’t want to read too much into that, it does support the notion that consumers are increasingly cautious and selective.
We continue to see Amazon benefitting from consumer selectiveness, but we have to remember Prime Day accounts for around 1% or so of the company’s quarterly revenue.
At the time of publication, TheStreet Pro Portfolio was long BLDR, COST, AMZN and PEP.
