Is Kroger (KR) a Smart Bet Amid Largest Retail Merger Ever?

The Kroger Co. (KR), a leading food and drug retailer, seeks to close its $24.60 billion deal to acquire Albertsons Companies. As previously reported, Kroger and Albertsons entered a definitive agreement to merge in October last year, aiming to expand customer reach and enhance proximity to deliver fresh and affordable food to nearly 85 million households with a premier omnichannel experience.

“As a combined entity, we will be better positioned to advance Kroger’s successful go-to-market strategy by providing an incredible seamless shopping experience, expanding Our Brands portfolio, and delivering personalized value and savings. We believe this transaction will lead to faster and more profitable growth and generate greater returns for our shareholders,” said Rodney McMullen, Chairman and CEO of Kroger.

The new update in this deal is that Kroger disclosed the company had “certified substantial compliance” with the Federal Trade Commission (FTC) as of November 15. This move means that the antitrust regulator FTC would decide whether to approve or fight one of the largest retail mergers ever by December 15.

“We continue to work cooperatively with the FTC in its review of the transaction,” McMullen told Wall Street analysts during a conference call on Thursday, November 30. “This step keeps us on track to close our proposed merger with Albertsons in early 2024,” he added.

Now, let’s discuss some of the factors that could influence KR’s performance in the near term:

Update on “Leading with Fresh and Accelerating with Digital” Strategy

Kroger updated investors on how its “Leading with Fresh and Accelerating with Digital” strategy positions it for long-term sustainable growth. The company accelerated the Fresh Produce Initiative with a total of 2,053 stores currently certified.

On October 2, KR launched Kroger® Mercado, a Hispanic-inspired brand added to the Our Brands’ portfolio with products exclusively sold at Kroger Family of Stores. Kroger® Mercado’s expansive assortment offers more than 50 products, including items like fresh meat, snacks, sides, desserts, beverages, and more.

Also, in September, the grocery retailer announced its commitment to making more local products available to its customers following its proposed merger with Albertsons. After the close, the combined company will increase the number of local products in its stores by 10%, equating to at least 30 new local products in each store.

The company made significant progress in accelerating its digital strategy. During the third quarter, Kroger’s delivery sales grew by 20% compared to last year’s quarter, driven by the strength of Kroger Boost and Customer Fulfillment Centers. Also, it increased digitally engaged households by 13% from a year ago.

Digitally engaged householders are extremely valuable to KR’s model as they are loyal, spend approximately three times more, and accelerate growth in alternative profit businesses.

Upbeat Last Reported Financials

For the third quarter ended on November 4, 2023, KR reported sales of $33.96 billion, surpassing analysts’ estimate of $33.90 billion. Its gross margin was 22% of sales for the quarter. The FIFO gross margin, excluding fuel, grew three basis points compared to the same period of 2022. Its operating profit increased 8.4% year-over-year to $912 million.

The grocery retailer’s net earnings before income tax expense were $851 million, an increase of 61.8% from the prior year’s quarter. Also, adjusted net earnings attributable to KR rose 8.6% year-over-year to $698 million. The company posted an adjusted EPS of $0.95, compared to the consensus estimate of $0.92, and up 8% year-over-year.

KR achieved a strong adjusted free cash flow, leading to a net total debt to adjusted EBITDA ratio of 1.40 on a rolling four-quarter basis.  As of November 5, 2023, Kroger’s cash totaled $254 million, compared to $241 million as of November 4, 2022. The company’s current liabilities reduced to $16.79 billion, compared to 17.74 billion as of November 4, 2022.

Regarding its outstanding financial performance, KR’s Chairman and CEO, Rodney McMullen, commented, “Kroger’s third quarter results highlight the strength and diversity of our business model in a challenged operating environment, as strong fuel performance and growth in our alternative profit businesses supported continued adjusted net earnings per diluted share growth.”

“As consumer spending tightens, we are focused on providing customers with exceptional value. By maintaining our long-term commitment to lower prices, personalized promotions and rewards, we are growing households and increasing loyalty, positioning Kroger for sustainable future growth,” he added.

Solid Historical Growth

KR’s revenue and EBITDA grew at respective CAGRs of 3.5% and 9.6% over the past five years. Its EBIT increased at a CAGR of 13.9% over the same period. Additionally, the company’s normalized net income rose at a CAGR of 17.9% over the same timeframe.

Furthermore, the company’s total assets and levered cash flow improved at CAGRs of 6% and 14.7% over the same period, respectively.

Full-Year 2023 Guidance

For the rest of the year, the grocery retailer updated its full-year guidance to reflect the impact of near-term economic pressures and food-at-home disinflation. KR expects full-year identical sales without fuel to be in the range of 0.6% to 1.0%, with underlying growth of 2.1%-2.5% after adjusting for the effect of Express Scripts.

KR’s adjusted FIFO operating profit is expected to be $4.9-$5 billion. The company expects its adjusted free cash flow to be in the range of $2.50 to $2.70 billion.

“At the same time, we are confident in our ability to navigate these near-term headwinds and we are raising the lower end of our full-year adjusted net earnings per diluted share guidance range,” said KR’s CFO Gary Millerchip.

Kroger projects its adjusted net earnings per share to be between $4.50 and $4.60, including an estimated benefit from the 53rd week of nearly $0.15.

Favorable Analyst Estimates

Analysts expect KR’s revenue for the fourth quarter to grow 6.3% year-over-year to $37.01 billion. The consensus EPS estimate of $1.14 for the ongoing quarter indicates a 14.8% year-over-year increase. Moreover, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

For the current fiscal year 2024, Street expects Kroger’s revenue and EPS to grow 1% and 7.7% year-over-year to $149.78 billion and $4.56, respectively.

Impressive Capital Allocation Strategy

KR expects to continue to generate solid free cash flow and remains committed to investing in the business to boost long-term net earnings growth and maintain its current investment-grade debt rating. The company also expects to continue paying its quarterly dividend and increase it over time, subject to board approval.

Kroger paid a dividend of $0.29 per common share in the third quarter, up 11.5% from the dividend declared for the third quarter of 2022. The company pays an annual dividend of $1.16, which translates to a yield of 2.60% at the current share price. Its four-year average dividend yield is 1.97%.

Moreover, the company’s dividend payouts have increased at a CAGR of 17.4% over the past three years. Kroger has raised its dividends for 16 consecutive years.

Discounted Valuation

In terms of forward non-GAAP P/E, KR is currently trading at 9.77x, 44% lower than the industry average of 17.44x. The stock’s forward EV/Sales of 0.33x is 79.8% lower than the industry average of 1.66x. Likewise, its forward EV/EBITDA of 6.36x is 41.8% lower than the industry average of 10.93x.

In addition, the stock’s forward Price/Sales and Price/Cash Flow multiples of 0.21 and 5.11 are favorably lower than the respective industry averages of 1.14 and 13.22.

Bottom Line

Kroger recently reported third-quarter fiscal 2023 results, wherein the top and bottom lines beat analysts’ estimates. The company’s solid third-quarter results reflect the strength and diversity of its business model in a challenging operating environment.

Further, the consistent progress in its “Leading with Fresh and Accelerating with Digital” strategy positions the retailer for robust long-term growth. KR is confident in its ability to navigate near-term headwinds and has raised the lower end of its full-year adjusted EPS guidance range. It also remains committed to delivering attractive and sustainable returns to shareholders.

Moreover, KR approaches the finish line on acquiring grocery chain Albertsons, as the $24.60 billion deal hits the major milestone with Kroger disclosing the company had “certified substantial compliance” with the FTC. By law, this triggers a 30-day timeline in which the anti-trust regulator must accept the deal or sue to block it by December 15.

The potential Kroger-Albertsons merger will accelerate KR’s go-to-market strategy and position the combined company as a premier omnichannel food retailer, delivering quality, value, convenience, and choice to customers. Also, it will strengthen Kroger’s value creation model to boost profitability and enhance shareholder returns.

As KR nears its proposed merger with Albertsons, it could present an attractive investment opportunity.

Top 4 Christmas Stocks to Buy in 2023

As the festive season ushers in, thoughts gravitate toward the traditions of exchanging gifts, feasting with family, and warming up by the fireside, all while the holiday shopping spree kick-starts with much vivacity.

The holiday period invariably translates to a considerable economic surge for retailers and related sectors, starting with "Black Friday" – a day marked in retail history for transfiguring from the “red” of losses into the “black” of profits. This year's consumer expenditure reached an unprecedented high, with $9.8 billion splurged on Black Friday deals and an outstanding $12.4 billion on Cyber Monday.

A record-breaking 200.4 million consumers shopped during the five-day holiday weekend, extending from Thanksgiving Day through Cyber Monday, outpacing last year's peak of 196.7 million. As per the National Retail Federation (NRF), the average spend was $321.41 on holiday-related purchases throughout the Thanksgiving weekend. Toys, electronics, and gift cards emerged as the most coveted items.

An unprecedented festive surge is projected this December as retailers anticipate record-breaking consumer expenditure. This period, often correlated with the 'Santa Rally,' generates a stock market surge during the concluding week of December, extending into the New Year. LPL Financial found that since 1950, a Santa Claus rally has occurred around 79% of the time.

These staggering statistics oppose the predictions of some economic analysts who warn of an imminent recession within the U.S. and expect the current equity rally to stumble as the year concludes.

The holiday period shopping traditionally elevates sales for retailers and associated businesses, resulting in potential stock price increases. The year-end rally boosts investors’ portfolios, whereas professional traders often regard it as crucial when calculating their end-of-year bonuses. There is no doubt that the Santa Claus rally this year would be broadly embraced, given the volatilities witnessed.

Investment focus is increasingly geared toward stocks providing substantial opportunities in the immediate future. Some stocks could be more profitable than others if secured before their price rise. Hence, many investors opt for Christmas stocks to capitalize on the bustling holiday shopping season.

Given this backdrop, let us delve into an in-depth analysis of, Inc. (AMZN), Visa Inc. (V), Walmart Inc. (WMT), and Etsy, Inc. (ETSY) now., Inc. (AMZN)

Amazon has established itself as a global behemoth, wielding substantial market dominance fostered by its vast network. As we approach the holiday season, there is strong anticipation that the retail stock will experience a considerable rise.

This prediction comes from AMZN’s record-breaking sales in November, with one billion items sold over 11 days of extended promotional deals. This impressive feat was achieved despite the "biggest ever global strike" orchestrated by Make Amazon Pay, an activist campaign that advocated for improved pay and better working conditions for laborers.

According to AMZN, customers purchased more than 500 million products via independent sellers during the holiday shopping festivities and an exponential growth in Prime membership signups throughout this period was witnessed.

The company has disclosed that shoppers saved nearly 70% more on their purchases than the previous year, with promises of "millions more deals" being made available until December 24.

The company attributes much of its success to a large, loyal customer base, who trust the brand and greatly value its services. AMZN's variety of client benefits during the festive season – expeditious delivery, discounts, enticing deals, streamlined return and refund policies, and rewards, enhance repeat purchases and encourage referrals.

With recent inflationary pressures easing, consumer sentiments are showing signs of improvement, bolstering the potential for increased spending. Combining these factors, December could be a highly profitable month for AMZN.

For the fiscal fourth quarter ending December, its revenue is expected to grow 11.2% year-over-year to $165.85 billion, while EPS is expected to increase significantly year-over-year to $0.76.

Wall Street analysts expect the stock to reach $177 in the next 12 months, indicating a potential upside of about 20%. The price target ranges from a low of $145 to a high of $210.

Visa Inc. (V)

V, a leading fintech corporation, is commanding in the global credit and debit card markets. Acting as an essential intermediary between purchasers and vendors, V conducted over 192 billion transactions in 2022 across 160 nations.

The company's significant role has generated substantial profits for V and its shareholders. For the fourth fiscal quarter of 2023, the firm reported revenues of $8.61 billion, a 10.6% year-over-year increase. Its income amounted to $4.68 billion, with earnings per share at $2.27.

V’s unique business model allows consumers desiring to postpone their holiday expenses with minimum risk and maximum benefit. V profits whenever individuals make higher charges on their cards, with both transaction value and quantity contributing to the income. As V does not offer direct loans to consumers, the impact of defaulting is substantially lower.

Expressing high hopes for the company's future, V's CEO Ryan McInerney stated, "There is tremendous opportunity ahead, and I am as optimistic as ever about Visa’s role in the future of payments.”

However, America faces a mounting credit card debt crisis. As of September 2023, the total card balance reached a record high of $1.08 trillion. Strikingly, the average credit card interest rate touched 27%, representing the highest figure in nearly three decades.

As we enter the holiday season, consumer spending on credit cards is expected to rise. Deloitte reports that the average holiday shopper anticipates expending $1,652 this year, the most considerable amount seen in the past three years. Much of this spending will be charged to cards. In an October survey of 1,036 consumers by, 38% indicated that they anticipated carrying holiday credit card debt into the new year.

Although increased consumer debt translates into more risks for V, the potential spending slowdown also threatens the company as it has fewer tools for growth. Despite the company's valuation not being as high as in the past, this could represent an excellent opportunity for those aiming to take advantage of the inevitable credit card spending surge over the festive season.

Analysts expect V’s revenue and EPS for the quarter ending December 2023 to increase 7.7% and 7.3% year-over-year to $8.54 billion and $2.34, respectively. Moreover, Wall Street analysts expect the stock to reach $277.47 in the next 12 months, indicating a potential upside of 8.9%. The price target ranges from a low of $243 to a high of $295.

Walmart Inc. (WMT)

WMT has evolved into a powerful force within the omnichannel market. Strategic acquisitions of companies like Bonobos, Moosejaw, and Parcel and collaborative partnerships with industry heavyweights like Shopify and Goldman Sachs bolstered this transformation. Further expansion efforts, including implementing delivery systems Walmart + and Express Delivery, and investing in Flipkart – a renowned e-commerce platform – are a testament to this ongoing evolution.

The innovative strategies have consolidated WMT's position within the turbulent retail market, enabling it to remain resilient and competitive in an ever-changing industry landscape. WMT ensures its sustainability and competitiveness in this evolving ecosystem by continually adapting and initiating changes.

The retail giant experienced increased customer footfall and elevated spending throughout the third quarter, alongside improvements in operating margin and cash flow. These constructive developments in WMT’s performance indicate ample liquidity to invest in growth and reinforce its dominating market presence.

As WMT approaches the holiday season with substantial customer traffic, it stands poised to generate profitable returns. For the quarter ending January 2024, its revenue is expected to increase 3.9% year-over-year to $169.09 billion, while EPS is anticipated to reach $1.64. Further enhancing its appeal, the company currently offers a dividend yield of 1.49%, making its stock a more attractive option to potential investors.

Wall Street analysts expect the stock to reach $180.79 in the next 12 months, indicating a potential upside of about 18%. The price target ranges from a low of $163 to a high of $210.

Etsy, Inc. (ETSY)

Esteemed as an online destination for unique handcrafted and vintage goods, ETSY is the perfect marketplace for customers searching for original gift ideas, especially during the active winter holiday season. The extensive assortment of products on ETSY – encompassing everything from jewelry and apparel to toys and home décor – caters to its impressive 97.3 million active users through 8.8 million dynamic sellers.

Operating under a distinctive business model that leverages network effects and switching costs generates intrigue. However, sustained growth is crucial in maintaining investor enthusiasm. Despite firmly standing by its unique market position within a vast potential landscape, ETSY's obstacles in augmenting gross merchandise sales (GMS) post-pandemic suggest a potential limitation in product demand.

For the fiscal fourth quarter ending December, its revenue and EPS are expected to increase 1.8% and 17.1% year-over-year to $821.75 million and $1.34, respectively.

With a focus on unique gifts and crafts, ETSY is well-positioned to experience significant stock elevation during the seasonal gifting period, complimented by the ongoing market recuperation and declining inflation trends.

How Much Upside Is Left in NVIDIA (NVDA)?

Semiconductor powerhouse NVIDIA Corporation (NVDA) delivered extraordinary quarterly figures last month, surpassing its revenue guidance and analysts’ projections. The firm’s revenues tripled to $18.12 billion, and net income soared 13.6 times to $9.24 billion. Its non-GAAP EPS of $4.02 comfortably exceeded estimates, registering a 6.9x year-over-year surge.

Due to an early commitment to AI, NVDA has positioned itself as an undisputed market leader in the AI semiconductor industry. It has effectively positioned the company years ahead of its competitors, offering an all-encompassing platform that represents a holistic solution for all AI demands, from chips and processors to intricate software systems.

In its latest earnings cycle, NVDA’s persistent dominance in the AI chips marketplace was notable, demonstrated by Data Center revenues increasing 278.7% year-on-year to $14.51 billion. The company maintained robust non-GAAP gross margins at 75%, resulting in a 380 basis points rise quarter-over-quarter.

Amid mounting competition from rivals boosting their AI capabilities, NVDA owns a remarkable 80% share of the AI chip market. The company's foresight to invest heavily in AI innovation years ahead of others now positions the company to capitalize on the industry’s exponential growth.

Furthermore, NVIDIA continues to spark innovations in the competitive AI scene, as evidenced by the development of GH200, the next iteration of Grace Hopper Superchip. Notably, the Santa Clara-based chipmaker also reported significant growth in the networking business, bolstered by advancements in InfiniBand technology.

Given the exceptional third-quarter performance, there is little surprise over Wall Street's widespread upward revision in the revenue and EPS estimates. Analysts expect NVDA’s EPS for the fiscal year ending January 2025 to reach as high as $19.72 from the $12.30 expected in fiscal 2024 (ending January 2024).

For the fiscal year ending January 2024, NVDA’s revenue is expected to reach $58.86 billion, up 118.2% year-over-year, while for the fiscal year 2025, analysts expect its revenue to reach $89.70 billion. For the fourth quarter, the company expects its revenue to be $20 billion, plus or minus 2%.

NVDA responded to all the widespread speculation regarding its potential to deliver impressive results, prompting analysts to revise their already lofty price targets upward. Goldman Sachs’ analyst Toshiya Hari increased the price target to $625 due to robust demand and an improving chip supply chain.

JPMorgan’s analyst Harlan Sur hiked the target to $650, citing the “massive demand pull” for NVDA’s data center products, while Morgan Stanley’s Joseph Moore forecasts a price target of $603 due to anticipated reduced supply chain lead times next year.

Bank of America and Bernstein analysts upgraded their price expectation to $700 because of the expected rise in AI adoption, which they believe will counterbalance regulatory challenges associated with China. Wall Street analysts expect the stock to reach $661 in the next 12 months, indicating a potential upside of 42%. The price target ranges from a low of $560 to a high of $1,100.

Nevertheless, after earnings and optimistic projections were released, NVDA stock experienced a dip, correlating with a moderate rise in market skepticism. This downward movement can be attributed to concerns about the company’s sustained dominance amid challenges like the potential impact of President Joe Biden’s administration's advancement of a chip export ban to China. Management indicated that this policy decision could have detrimental effects on NVDA.

The U.S. chipmaker faces a risk of a setback worth $5 billion due to the export ban. These orders were placed for 2024 by leading Chinese tech giants, including Alibaba, ByteDance, and Baidu. If the U.S. government fails to issue the necessary delivery licenses, NVDA may have to forgo these lucrative contracts.

Moreover, there are broader concerns about the extent to which speculative investment can continue to propel NVDA stock. With a year-to-date gain of more than 218%, NVDA easily takes the lead as the most aggressive-performing stock in the S&P 500.

Bottom Line

NVDA secured a distinguished position in the $1 trillion club this year following an impressive surge in its revenue guidance, mainly due to the substantial order volume from the burgeoning generative AI industry. This achievement is particularly noteworthy given the company's size.

The substantial rise in the company's valuation is primarily attributed to significant interest in NVIDIA's advanced chip technology, which is currently experiencing increased demand because of a mounting focus on AI and ML capabilities across various sectors.

Despite a slump in its price, the trading volume of NVIDIA's shares skyrocketed to 86 million on November 21, compared to a daily average of 26 million, indicating a heightened interest in the stock.

Investors are unlikely to buy the stock solely for its $0.04 per share quarterly dividend, particularly given that the stock recently surpassed the $500 benchmark and currently trades at over $450 per share. Thus, it can be reasoned that investors acquiring the stock at these elevated levels assume the stock has further upsides left.

Undeniably, NVDA's robust growth is commendable, and management continues to uphold a confident picture of the company's future. However, the firm is not without risk. For instance, questions arise over the impact the AI bubble pop could have on chip prices and, consequently, profit margins.

Moreover, with NVDA's shares trading at 19.5x sales and 38x earnings, any stumble can impact the stock significantly. Considering the current market volatility, associated headwinds, and lackluster price momentum, it may be prudent to wait for a better entry point in the stock.

AVGO Stock: Crisis or Major Chip Investment?

Broadcom Inc. (AVGO), a leading semiconductor and infrastructure software company, recently completed its acquisition of VMware, Inc., a provider of multi-cloud services, for $69 billion. This acquisition, first announced in May last year, formally closed on November 22, 2023. The deal received regulatory clearance from various countries, including the U.S., United Kingdom, and China.

Hock Tan, President and CEO of Broadcom, said, “We are excited to welcome VMware to Broadcom and bring together our engineering-first, innovation-centric teams as we take another important step forward in building the world's leading infrastructure technology company.”

“With a shared focus on customer success, together we are well positioned to enable global enterprises to embrace private and hybrid cloud environments, making them more secure and resilient. Broadcom has a long track record of investing in the businesses we acquire to drive sustainable growth, and that will continue with VMware for the benefit of the stakeholders we serve,” he added.

AVGO’s main focus is to allow enterprise customers to create and modernize their private and hybrid cloud environments. As a result, the company will invest in VMware Cloud Foundation, the software stack that serves as the foundation of private and hybrid clouds.

In addition to Broadcom’s investment in VMware Cloud Foundation, VMware will provide a list of services to modernize and optimize cloud and edge environments like VMware Tanzu to help accelerate the deployment of applications, Application Networking (Load Balancing) and Advanced Security services, and VMware Software-Defined Edge for Telco and enterprise edges.

Wall Street analysts believe AVGO’s stock will increase following the VMware acquisition.

On December 4, Oppenheimer analyst Rick Schafer presented a positive outlook for Broadcom by maintaining an Outperform rating and revising his price target to $1,100.

Also, on November 24, KeyBanc Capital Markets analyst John Vinh raised his price target on AVGO by 20% from $1,000 to $1,200. Also, the analyst maintained his “Strong Buy” rating on the stock. In a note to clients, Vinh expects the acquisition to be immediately accretive to the company’s earnings and gross margin.

John Vinh commented that KeyBanc is “constructive on the acquisition because it is highly complementary to Broadcom’s infrastructure and semiconductor franchises.”

Further, according to Evercore ASI analyst Matthew Prisco, Broadcom’s software sales will increase to nearly 40% of its total revenue in the first year after the acquisition closes. Prisco rated AVGO’s stock as Outperform with a price target of $1,050.

Shares of AVGO have gained more than 15% over the past six months and nearly 66% year-to-date. Also, the stock has surged approximately 74% over the past year.

Now, let’s discuss some of the factors that could impact AVGO’s performance in the near term:

Solid Financial Performance in the Last Reported Quarter

For the third quarter that ended July 30, 2023, AVGO reported net revenue of $8.88 billion, beating analysts’ estimate of $8.86 billion. This compared to net revenue of $8.46 billion in the same quarter of 2022. Its non-GAAP gross margin grew 3.7% year-over-year to $6.67 billion.

Broadcom’s non-GAAP operating income came in at $5.54 billion, an increase of 6.5% from the prior year’s quarter. Its adjusted EBITDA rose 7.9% from the year-ago value to $5.80 billion. The company’s non-GAAP net income rose 8.4% year-over-year to $4.60 billion. It posted non-GAAP net income per share of $10.54, compared to the consensus estimate of $10.43.

Furthermore, net cash provided by operating activities increased 6.7% year-over-year to $4.72 billion. AVGO’s free cash flow stood at $4.60 billion, up 6.7% from the same period last year.

Upbeat Fiscal 2023 Fourth-Quarter Guidance

“Broadcom’s third quarter results were driven by demand for next generation networking technologies as hyperscale customers scale out and network their AI clusters within data centers,” said CEO Hock Tan. “Our fourth quarter outlook projects year-over-year growth, reflecting continued leadership in networking for generative AI.”

After solid third-quarter earnings and confidence in continued business progress, AVGO expressed an optimistic view on the fiscal 2023 fourth quarter ended October 29, 2023. The company expects its fourth-quarter revenue to be nearly $9.27 billion, an increase of around 4% from the previous year’s period. AVGO’s adjusted EBITDA is expected to be approximately 65% of projected revenue.

“We generated $4.6 billion in free cash flow in the third quarter, and expect cash flows to remain solid for Q4,” said Kirsten Spears, CFO of Broadcom.

Impressive Historical Growth

Over the past three years, AVGO’s revenue and EBITDA grew at CAGRs of 15.2% and 24.7%, respectively. The company’s EBIT improved at a CAGR of 61.4% over the same period. Moreover, its net income and EPS increased at CAGRs of 77.6% and 83.2% over the same timeframe, respectively.

Also, the company’s levered free cash flow grew at a 6.9% CAGR over the same period.

Positive Recent Developments

On November 30, AVGO introduced the industry’s first switch with an on-chip neutral network, NetGNT (Networking General-purpose Neutral-network Traffic-analyzer), in its new, software-programmable Trident 5-X12 chip. The new Trident 5-X12 will double bandwidth, reduce power by 25%, and add a neutral network to enable next-generation telemetry, security, and traffic engineering.

 On October 17, Broadcom announced the availability of Qumran3D, the next-gen of the StrataDNX family of single-chip routers. Qumran3D will accelerate the transition to merchant silicon routers by considerably reducing carrier and cloud operator TCO with unprecedented scale.

This new single-chip router will raise the bar for carrier and cloud operator solutions by delivering high-performance, low-power, and security-rich networking. It will meet growing bandwidth and security demands faced by service providers amid increased AI, mobile edge, and other high data deployments.

Also, on September 26, AVGO’s division, Symantec, partnered with Google Cloud to embed generative AI into the Symantec Security platform in a phased rollout that will provide customers a technical edge for detecting, understanding, and remediating sophisticated cyberattacks.

“Our partnership with Google Cloud is part of that continuing journey to put the most innovative security solutions possible into user hands. Our engineers have simplified the process in ways that will enable customers to be much more productive and effective. This is just the beginning of a great collaboration that will help to kickstart the benefits of AI throughout the broader security ecosystem,” said Adam Bromwich, CTO and Head of Engineering, Symantec Enterprise Division, Broadcom.

Broadcom’s Commitment To AI

On October 10, AVGO showcased its vision for AI acceleration and democratization at the 2023 Open Compute Project Global Summit. The company’s commitment to unleashing the AI potential at scale is achieved through a combination of ubiquitous AI connectivity, innovative silicon, and open standards.

This also reflects Broadcom’s commitment to its standardization work toward an open hardware ecosystem for AI workloads.

“Today, AI is pushing technology to its boundaries. Broadcom is focused on innovating to interconnect the key components of an open AI platform within the data center. Our goal is to partner with hyperscalers and enterprise OEMs to build leading-edge AI products and solutions,” said Charlie Kawwas, Ph. D., President, Semiconductor Solutions Group, Broadcom.

AGVO will witness growing demand for its products from companies developing AI capabilities. As per a report by Bloomberg Intelligence (BI), the generative AI market is expected to reach $1.30 trillion over the next ten years from a market size of just $40 billion in 2022, expanding at a CAGR of 42%.

Favorable Analyst Estimates

Analysts expect AVGO’s revenue for the fourth quarter (ended October 2023) to grow 3.9% year-over-year to $9.28 billion. The consensus EPS estimate of $10.96 for the same period indicates a 4.9% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects AVGO’s revenue and EPS to grow 7.8% and 11.7% year-over-year to $35.80 billion and $42.03, respectively. In addition, the company’s revenue and EPS for the fiscal year 2024 are expected to increase 22.7% and 46.2% from the previous year to $52.33 billion and $45.49, respectively.

Attractive Dividend

AVGO pays an annual dividend of $18.40, which translates to a yield of 1.98% at the current share price. Its four-year average dividend yield is 3.04%. Also, the company’s dividend payouts have increased at a CAGR of 21.3% over the past five years. Broadcom has raised its dividends for 12 consecutive years.

Robust Profitability

AVGO’s trailing-12-month gross profit margin of 74.27% is 52.6% higher than the 48.67% industry average. The stock’s trailing-12-month EBIT margin of 45.7% is 874.3% higher than the 4.69% industry average. Likewise, its trailing-12-month net income margin of 39.25% is significantly higher than the 2.20% industry average.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 64.57%, 16.63%, and 19.44% are considerably higher than the industry averages of 1.01%, 2.60%, and 0.26%, respectively. Its trailing-12-month levered FCF margin of 38.97% is 375.16% higher than the industry average of 8.20%.

Bottom Line

Broadcom surpassed analyst estimates on the top and bottom lines in the last reported quarter. The company’s outstanding third-quarter performance was driven by robust demand for next generation networking technologies.

In addition, AVGO’s long-term outlook appears promising, propelled by continued leadership in networking for generative AI, strategic investments, and partnerships. Recently, the chipmaker completed its acquisition of VMware, enabling it to accelerate its adoption of cloud technologies. AVGO’s stock has surged more than 65% year-to-date on the back of the VMware deal closing and AI wave.

Given its solid financials, high profitability, and rosy growth prospects, it could be wise to invest in AVGO now.

Is Vail Resorts (MTN) a Massive Earnings Buy During the Holiday Season?

The popularity of snow sports like skiing and snowboarding has significantly increased in recent years. This trend is poised to continue following last year's record-breaking snowfall and several expansions at multiple resorts this holiday season. With the advent of the winter, ski resorts across the state are churning out snow and preparing for the forthcoming 2023-24 holiday season.

Vail Resorts, Inc. (MTN), owning and operating 41 high-end resorts worldwide, has forged a robust foothold in the ski industry bolstered by its strategic locations and superior guest offerings. MTN demonstrates its substantial corporate strength with a market cap of $8.44 billion, thereby solidifying its stature within the buoyant business landscape.

The company is set to unveil the financial results for its fiscal first quarter 2024, which ended on October 31, 2023, after market close on Thursday, December 7, 2023. Analysts expect MTN’s revenue to decline 2.4% year-over-year to $272.89 million, while its EPS is projected to remain in the red at $4.63, plunging 36.2% year-over-year.

However, the fiscal 2024 forecast presented by MTN has seemingly piqued investor curiosity. The firm anticipates “meaningful growth” for the period, with a robust Resort EBITDA margin. Net income attributable to MTN is estimated to be between $316 million and $394 million, with Resort Reported EBITDA for fiscal 2024 between $912 million and $968 million.

Moving forward, several dynamic factors are poised to impact MTN's operational performance in the foreseeable future, requiring closer attention and analysis.

MTN agreed to acquire Switzerland's Crans-Montana Mountain Resort, marking its 42nd ski location and extending its global operations. This move is seen as the company's latest effort to increase its international appeal by boasting various outdoor activities complemented by breathtaking alpine views. The Crans-Montana deal signifies MTN's second Swiss ski acquisition within two years, having procured the Andermatt-Sedrun resort in 2022.

The new business deal demonstrates an 84% stake in the resort's lift operations and 80% ownership in a key ski school associated with the site, thus portraying the company's influential global reach and enhancing the allure of Crans-Montana Mountain Resort.

Cementing its dominance, MTN places the transaction value at CHF 118.5 million, signifying substantial potential for growth. Although immediate revenue generation from the acquisition is not expected, projections suggest that Crans-Montana will contribute approximately CHF 5 million EBITDA in its fiscal year ending July 31, 2025, marking its debut full year following the scheduled completion later in fiscal 2024.

MTN projects long-term EBITDA growth from the Alpine resort's incorporation into MTN’s Epic Pass offerings, synergies within the company's broader network, and investments geared toward enhancing guest experiences.

In line with its unwavering commitment to delivering superior guest experiences, the company has announced plans to roll out cutting-edge technology at its U.S.-based resorts for the 2023-24 ski season. The company places significant emphasis on bolstering offerings at its resorts, including the ongoing efforts to expand capacity through initiatives focused on lift facilities, ski terrain, technological advancements, and food and beverage options.

MTN closed its fiscal year on a subdued note. In the fiscal fourth quarter that ended July 31, 2023, its total net revenue stood at $269.77 million, up about 1% year-over-year, with the resort's net revenue reaching $269.67 million. Its loss from operations widened 63.2% year-over-year to $160.10 million.

Net loss attributable to MTN surged to 128.57 million, or $3.35 per share. These statistics are not unexpected, considering the large concentration of MTN's assets in the Northern Hemisphere, which experiences the summer season during the company's fiscal fourth quarter.

Diminished demand for mountain travel destinations and weather-related operational disruptions significantly affected the company's performance. Moreover, the ancillary business's underperformance and inflating costs further contributed to the decline.

Even though its revenue surged by an impressive 14.4% annually for the full year, expanding expenses have negatively impacted bottom-line figures.

As of July 31, 2023, its net debt increased to $2.26 billion, which was 2.7 times trailing-12-months total reported EBITDA. Considering the high-interest rate environment, the obligation of interest payments may significantly strain the company's financial health. With the company's EBITDA persistently trailing downward, managing such immense debt could be as challenging as delivering a hot soup on a unicycle.

MTN’s annualized dividend rate of $8.24 per share translates to a dividend yield of 3.72% on the current share price. Its four-year average yield is 2.07%. Its dividend payments have grown at CAGRs of 32% and 8.2% over the past three and five years, respectively.

Moreover, the stock has lost about 18% over the past three years and is trading below the 100- and 200-day moving averages. The stock could potentially rally amid favorable weather for the ski resort. Nevertheless, looming uncertainties are yet to be mitigated.

Investors may have to weigh their options carefully. Would it be prudent to embrace the risk for a dividend yield of 3.72% when the seemingly "risk-free" one-year US Treasury bonds offer a yield of over 5%?

Bottom Line

The post-pandemic travel surge is expected to maintain momentum through the upcoming holiday season. Driven by an amplified desire for relaxation and leisure activities, more and more American holidaymakers are drawing up travel plans.

Despite this positive trend, consumers and the tourism industry face price pressures as hotel rates climb an additional 0.8% higher in October than in 2022.

Today’s skiing culture exudes luxury, apparent through upscale shopping and gourmet dining experiences at the base of pristine, well-maintained slopes. Resort launches understandably hinge on financial backing and weather conditions beyond our control.

However, not even inflation and shifting climate can hinder the expansion of ski resorts or deter the passionate influx of visitors. Economic stability remains a concern amid rising inflation rates and continued geopolitical unrest. Despite these external factors, the ski property market persists in its resilience.

A look at MTN's financial metrics reveals that the company may struggle to leverage the positive industry trends. Considering these factors, it would be wise to wait for a better entry point in the stock.