A look at North American equities heading in both directions
On the rise
Vancouver-based Ritchie Bros Auctioneers (RBA-T) rose 1.5 per cent on Wednesday on news Ancora Group Holdings, a key shareholder in U.S. auto retailer IAA (IAA-N), has accumulated a new 0.5-per-cent stake in the company and is calling a major opponent of Ritchie’s US$6-billion deal to buy IAA “misinformed.”
In a presentation seen by Reuters, activist investor Ancora supported Ritchie chief Ann Fandozzi and took aim at hedge fund Luxor Capital Group, a vocal opponent of the deal.
Luxor has said the acquisition would distract Ritchie, which auctions used heavy equipment and trucks, from its core business and hurt shareholders.
In its presentation, Ancora, which owns 1.92 per cent of IAA as well as the new 0.5-per-cent stake in Ritchie, called Luxor’s analysis “misinformed” and said its interests were “seemingly misaligned”. Ancora noted that Luxor’s Ritchie stake doubled over the past three months while “short interest in IAA was increasing in parallel.”
A spokesperson for Luxor said the firm reviewed the “wildly inaccurate and incorrect statements of other shareholders” and added it wants to “focus on what matters here – preserving value for other long-term shareholders of RBA (Ritchie) like ourselves.”
Brookfield Asset Management Ltd. (BAM-T) was higher by 2.8 per cent on Wednesday despite reporting a dip in fourth-quarter profit as challenging economic conditions roiled markets, but still boosted its earnings from fees and raised money at a rapid pace in 2022.
Fourth-quarter results reported Wednesday were the first for Brookfield’s asset manager since it was spun off from Brookfield Corp. (BN-T) as a standalone entity in December.
Brookfield Asset Management’s fourth-quarter profit was down 9.5 per cent to US$504-million, including US$84-million earned after the spin-off. Profit attributable to the 25-per-cent stake of the asset manager that was sold to public shareholders was US$19-million from the date of the spin-off, on December 9, until the end of the year.
Full-year profit was up 3 per cent to US$1.92-billion.
Fee-related earnings increased nearly 8 per cent in the fourth quarter to US$576-million, and distributable earnings – which adjust for items such as taxes and share-based compensation – rose 5.5 per cent to US$569-million.
Brookfield Corp., which will report fourth-quarter earnings on Thursday, owns the remaining 75 per cent interest in Brookfield Asset Management.
In a letter to shareholders, Brookfield chief executive officer Bruce Flatt and the asset manager’s president, Connor Teskey, said they expect Brookfield Asset Management to grow rapidly in spite of tough market conditions stemming from high inflation, rapid interest rate increases and geopolitical tensions.
- James Bradshaw
See also: The ACBs of the BAM spinoff
Argo Group International Holdings. (ARGO-N) surged almost 4 per cent after financial services firm Brookfield Reinsurance Ltd. (BNRE-T) said on Wednesday it would acquire the insurer in a deal valued at US$1.1-billion.
Argo shareholders will be eligible for a US$30 cash payment when the deal closes, representing a premium of about 7 per cent to the stock’s last close, Brookfield Reinsurance said.
The merger is expected to complete in the second half of 2023, Brookfield said.
Uber Technologies Inc. (UBER-N) said on Wednesday it would focus on delivering profits this year, after rounding off 2022 with blowout earnings as a surge in demand for airport and office rides helped the company rebound from pandemic lows.
Uber’s shares gained 5.5 per cent after the company reported a surprise fourth-quarter profit and Chief Executive Dara Khosrowshahi said the company was now focused on achieving profitability on a GAAP basis this year.
“The pandemic’s impact on our Mobility business is now well and truly behind us,” Mr. Khosrowshahi said.
Uber forecast adjusted EBITDA, a profitability metric that excludes some costs, between US$660-million and US$700-million for the first quarter, well above the average analyst estimate of US$593.06-million, according to Refinitiv data.
“They absolutely knocked it out of the park... Profitable growth in this environment is very important,” said Tejas Dessai, an analyst at Global X ETFs, which includes Uber in some of its funds.
The rideshare market is benefiting from a return to normal and a rise in car ownership costs, which is pushing many to opt for cab rides. At the same time, more drivers are signing up as they look for new sources of income.
Uber, which operates in over 70 countries and 10,000 cities, said new rideshare products such as pre-booking, shared rides, car rentals and car-sharing was also boosting revenue.
Mr. Khosrowshahi said active drivers on the platform reached an all-time high in the fourth quarter and continued to grow in January, putting behind worries of a shortage of drivers signing up as demand jumped.
“We have clearly separated from our competitors on driver preference. This has driven meaningful category position gains globally, particularly in the U.S, where our position is at a nearly six-year high,” Mr. Khosrowshahi said.
Smaller rival Lyft (LYFT-Q) is scheduled to report results on Thursday. Its shares also rose following Uber’s results.
Uber’s revenue rose 49 per cent to US$8.61-billion in the fourth quarter, beating the estimate of US$8.49-billion. Rideshare revenue surged 82 per cent.
The company earned 29 US cents per share, while analysts had estimated a loss of 18 US cents.
The New York Times Co. (NYT-N) was up 12 per cent after it beat Wall Street estimates for quarterly earnings on Wednesday as more people signed up for its digital subscription bundles, offsetting a slowdown in ad sales and helping the newspaper unveil a US$250-million share buyback.
The Times has in the past few years embarked on a bundling push, combining its core news reports with digital content ranging from podcasts to cooking recipes and games in hopes of getting more revenue from readers.
That plan helped it add 240,000 digital-only subscribers in the fourth quarter, compared with 180,000 in the third quarter.
For the year, the newspaper added more than a million subscribers, the second most since 2020 when the pandemic dominated headlines. It has a goal of 15 million subscribers by 2027.
“With each passing quarter, we saw more proof that there is strong demand for a bundle of our news and lifestyle products,” Chief Executive Meredith Kopit Levien said.
Activist investor ValueAct Capital Management, which has a 7-per-cent stake in the company, has pressed the publisher to aggressively offer its all-access digital bundle that includes product review website Wirecutter and sports news site The Athletic.
In the December quarter, the New York Times’ revenue was US$667.5-million, beating the US$646.4-million estimated by analysts, according to Refinitiv. Adjusted profit of 59 US cents per share was also above estimates of 43 US cents.
Its digital advertising revenue was flat in the quarter and the company expects the measure to decrease by “low-single digits” in the first quarter, mirroring the weakness seen at other ad-reliant companies such as Snap Inc.
The buyback announced on Wednesday is for the New York Times’ Class A shares, and the company said it aims to return 50 per cent of free cash flow to shareholders in the form of dividends and share repurchases over the next three to five years
Yum Brands Inc. (YUM-N) turned positive in afternoon trading after it beat Street estimates for quarterly sales and profit on Wednesday, as more cash-strapped consumers flocked to its Taco Bell restaurant chain for pocket-friendly meals and snacks amid still high inflation.
Taco Bell has lured more customers with its cheap menu offerings such as the $2 burritos, while demand has remained steady for its higher-priced crowd-favorite items such as quesadillas and Crunchy Wraps.
Analysts have said Taco Bell is well-positioned to further drive sales and margins through add-on items, combo meals and more premium offerings such as the $5 grilled cheese burrito, even as the Mexican-inspired chain ramps up cheaper food options.
Taco Bell also brought back its Mexican Pizza as a permanent menu item in September, after pulling it off in 2020, which helped fuel an 11-per-cent jump in same-store sales at the chain, crushing analysts’ estimate for a 6.8-per-cent rise.
While Yum’s Pizza Hut brand also launched new menu items in the quarter to draw in more customers, the chain’s same-store sales growth of 1 per cent missed expectations, largely owing to weakness in China and its exit from Russia.
Yum, which also owns the KFC restaurant chain, took a 2-point hit to profits from the move to exit Russia.
Total same-store sales at Yum rose 6 per cent in the fourth quarter, while analysts were expecting a 4.57-per-cent increase, according to Refinitiv IBES data.
Excluding one-time items, Yum Brands earned US$1.31 per share for the three months ended Dec. 31, beating estimates of US$1.26.
The Louisville, Kentucky-based company also increased its quarterly dividend to about 60 US cents per share.
On the decline
Shares of Intact Financial Corp. (IFC-T) were lower by 3.1 per cent in response to the release of fourth-quarter results after the bell on Tuesday that largely exceeded the Street’s expectations.
The Toronto-based property and casualty insurance company reported operating earnings per share of $3.34, driven by higher-than-anticipated underwriting income, net investment income and distribution/other income. The Street had expected $3.03.
“We think IFC delivered very good Q4/22 results,” said RBC Dominion Securities analyst Geoffrey Kwan in a research note. “Relative to consensus, while a lower tax rate drove a significant part (but not all) of the higher-than-consensus operating EPS: (1) the 91.5-per-cent combined ratio (inline with consensus) was a strong result, despite pressures in Personal Auto and U.K. Personal Lines; (2) net investment income was significantly higher than consensus and could see positive revisions; and (3) the tax benefit in Q4/22 was not necessarily a one-time item and could benefit future quarters. Relative to our forecast, Q4/22 operating EPS was well ahead of our forecast. While Auto’s headline combined ratio was good, the accident year loss ratio showed there remains work to be done and also in U.K. Personal. However, we think IFC’s track record suggests it can successfully rectify these issues (hence our note title). Big picture, while IFC’s shares may not perform as well in a market recovery scenario, we still view IFC as a core holding, reflecting positive company/industry fundamentals and strong track record of growth and profitability; potential catalyst(s); defensive attributes; and a reasonable valuation.”
TMX Group Ltd. (X-T) slid almost 1 per cent after proposing to split its shares on a five-for-one basis.
The operator of the Toronto Stock Exchange says it believes the split may encourage greater liquidity for its shares.
The company says its board of directors will recommend shareholders approve the split at its next annual and special meeting set for May 2.
It says further details will be disclosed in the management information circular ahead of the meeting.
The split is also subject to approval from Toronto Stock Exchange.
Héroux-Devtek Inc. (HRX-T) fell 10.9 per cent after it reported a profit of $1.8-million in its latest quarter, down from $6.5-million a year earlier as its sales climbed higher.
Héroux-Devtek CEO Martin Brassard says inflation and challenges in the company’s operating environment have increased the cost of deliveries, resulting in lower profitability.
The maker of aircraft landing gear says its profit amounted to five cents per diluted share for the three months ended Dec. 31, down from 19 cents per diluted share a year earlier.
Sales in what was the third quarter of the company’s financial year totalled $140.9-million, up from $131.1-million a year ago.
The company says the increase came as its civil revenue rose to $45.1-million compared with $36.5-million a year earlier, helped higher by increased deliveries for the Boeing 777, Embraer Praetor and Falcon 6X programs.
Defence sales in the quarter totalled $95.8-million, up from $94.6-million a year earlier.
In a research note, Desjardins Securities analyst Benoit Poirier said: “HRX reported weaker-than-expected 3Q FY23 results as the operating environment remains volatile and several factors continue to hamper the consistent generation of throughput—increase in lead times for procurement of raw materials, increasing financing costs and challenging workforce availability. Adjusted EPS of $0.05 came in below consensus of $0.18 and our forecast of C$0.21. Adjusted EBITDA was $14.1-million (vs consensus of $19.6-million and our forecast of $20.4-million), implying a margin of 10.0 per cent (down 500 basis points year-over-year); this was weaker than our forecast and consensus of 13.9 per cent, mainly due to inefficiencies resulting from production system disruptions, inflation and a non-recurring $1.6-million FX loss on conversion of monetary items (1.1 per cent of sales), while government relief measures partly compensated for last year’s COVID-19-related disruptions, resulting in a 1.4-per-cent positive impact on gross profit. The results included government subsidies of $2.1-million (up from $1.0-million in 2Q but down year-over-year from $2.6-million) based on our calculation.”
Activision Blizzard Inc. (ATVI-Q) fell 3.6 per cent after Britain’s antitrust regulator said Microsoft Corp.’s (MSFT-Q) us$69-billion purchase of the Call of Duty maker could harm gamers by weakening the rivalry between Xbox and Sony’s PlayStation.
The Competition and Markets Authority (CMA) said the deal could result in higher prices, fewer choices and less innovation for millions of gamers, as well as stifling competition in the growing cloud gaming market.
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It said Activision’s flagship Call of Duty franchise was important in driving competition between consoles, and Microsoft could benefit by making the game exclusive to Xbox, or only available on PlayStation under materially worse conditions.
The mega deal is being scrutinized in the United Sates and Europe as well as in Britain, where the CMA showed its willingness to take-on big tech in 2021 when it blocked Facebook-owner Meta’s acquisition of Giphy.
In December, the United States moved to block the deal, citing Microsoft’s record of hoarding valuable gaming content. The Federal Trade Commission has set a hearing before a judge for August this year.
The CMA investigation’s chair Martin Coleman said his job was to make sure that British gamers were not caught in the crossfire of global deals that could damage competition and result in higher prices, fewer choices, or less innovation.
“We have provisionally found that this may be the case here,” he said.
Chipotle Mexican Grill Inc. (CMG-N) missed quarterly comparable sales and profit expectations on Tuesday, as customers pulled back on expensive delivery orders and traffic stalled in December.
Shares of the company fell 5 per cent in Wednesday trading.
Sales of Chipotle’s burritos and bowls have surged through most of the COVID-19 pandemic, but investors are now watching consumer companies for sagging traffic and other signs of slowdown. If customers pare spending, it could be a sign that the United States is headed toward a recession.
Persistently high inflation across product categories has caused even some affluent diners to look for cheaper options such as McDonald’s.
Comparable sales at California-based Chipotle rose 5.6 per cent in the fourth quarter ended Dec. 31, while analysts on average expected a 7.1-per-cent rise, according to Refinitiv IBES.
The chain reported profit of US$8.29 per share, an increase of 48.6 per cent. Analysts on average expected profit of US$8.90.
Visits to Chipotle restaurants fell 10.2 per cent in the fourth quarter, according to data from Placer.ai. McDonald’s visits rose 29.4 per cent in the same period.
Even so, Chipotle continued to enjoy steady demand for its pricier menu items from its relatively wealthier customer base, Chipotle Chief Executive Officer Brian Niccol said during a call with investors.
“We continue to see the higher-income consumer, the individual that earns over $100,000, coming more often,” Mr. Niccol said. “We made the decision not to go chasing people with discounts. That’s not what our brand is.”
Traffic also turned positive at the end of the quarter and continued to grow in January, he said.
Chipotle forecast comparable sales growth in the high-single digits for the current quarter and said it expects to open 255 to 285 new restaurants in 2023.
It did not provide longer-term projections because “we don’t know what’s going to happen in the economy. We think inflation will be reasonably tame,” Hartung said, adding that the company had not yet decided whether to raise menu prices further in 2023.
Revenue rose to US$2.18-billion from US$1.96-billion in the quarter, missing estimates of US$2.23-billion.
Michael Kors owner Capri Holdings Ltd. (CPRI-N) cut its annual profit forecast on Wednesday, hurt by a slowdown in demand for its luxury handbags and apparel in department stores, sending its shares tumbling 23.6 per cent.
High-end fashion companies weathered decades-high inflation better than other industries for most of last year as affluent shoppers dipped into pandemic savings, but persistently increasing prices have now prompted even high-end spenders to stem their splurging on designer labels.
Industry experts have warned that accessible luxury brands like Michael Kors are likely to feel a bigger pinch than higher-priced brands like Hermes and Dior due to their core young customer base having less wealth than the luxury goods industry’s traditional clientele.
Michael Kors revenue from the Americas fell 4.5 per cent to US$777-million in the company’s third quarter ended Dec. 31.
The brand’s revenue from Asia fell nearly 18 per cent as China’s decision to dismantle its zero-COVID policy late last year spurred a surge of infections in the world’s second-largest economy and dulled store traffic.
Capri, which also owns the Jimmy Choo and Versace brands, said it now expects annual sales of US$5.56-billion, down from its prior estimate of US$5.70-billion. It cut its earnings per share forecast to US$6.10 from US$6.85.
The company earned US$1.84 per share, excluding items, in the third quarter, missing analysts’ estimates of US$2.22, according to Refinitiv IBES data.
It also forecast fiscal 2024 earnings per share of US$6.40 on revenue of US$5.8-billion. Analysts expect earnings per share of US$7.24 on revenue of US$6.03-billion.
Under Armour Inc. (UAA-N) fell back from premarket gains after it raised its annual profit forecast on Wednesday as its quarterly results got a boost from resilient consumer spending and deep discounts that reeled in holiday shoppers.
The increased promotions offered during the all-important holiday season encouraged customers to look past recession worries and stock up on Under Armour’s athletic shoes and hoodies. Steep discounts had also helped rival Nike deliver a strong quarter in December.
Still, Under Armour’s attempt to clear excess inventory has pinched its margins. It expects gross margin for the full year to decline at the higher end of its prior forecast of 375 to 425 basis points.
A strong U.S. dollar and higher freight and manufacturing charges pushed down its third-quarter gross margins by 650 basis points to 44.2 per cent.
In December, Under Armour named veteran hotelier Stephanie Linnartz as its top boss, betting on her experience in branding strategy and e-commerce to help revive sales.
E-commerce sales rose 7 per cent in the reported quarter.
The Baltimore, Maryland-based apparel firm posted third-quarter adjusted profit of 16 US cents, beating analysts’ average estimate of 9 US cents, according to Refinitiv IBES data.
It expects adjusted profit of 52 US cents to 56 US cents per share for fiscal 2023, compared with its previous forecast of 44 US cents to 48 US cents.
With files from staff and wires
David Leeder