With core inflation remaining stubbornly high last month, the possibility of another rate hike at the Fed’s next meeting in May has increased. Still-high inflation, persistent rate hikes, and recent turmoil in the financial sector raise the probability of a recession. Amid this, Albertsons Companies, Inc. (ACI) and CarMax, Inc. (KMX), which released their earnings reports this week, sparked the question of whether these stocks are ideal buys. Let’s look into it.
Over the past year, the Federal Reserve has raised interest rates from almost zero to around 5% to mitigate the escalating price pressures. Last summer, inflation reached its highest level in 40 years due to lingering supply chain disruptions and limitations on global commodity prices stemming from Russia's war on Ukraine.
Today, the Labor Department reported that inflation cooled more than expected to 5% year-over-year in March. However, concerns persist regarding the difficulty of fully controlling prices as the core CPI, which economists view as a better indicator of underlying inflation, rises 0.4% from February to March and 5.6% from a year ago.
Marcus Brookes, chief investment officer at Quilter Investors, said, “Core inflation, which excludes volatile food and energy costs, remains stubbornly high, keeping the possibility of further rate hikes on the table.”
Although the faster-than-predicted decline in headline inflation might prompt the Federal Reserve to contemplate suspending its rate hikes, economists and traders are still anticipating an increase at the upcoming meeting in early May. Still-elevated inflation, rising interest rates, and the ongoing banking crisis are raising the odds of a recession.
Meanwhile, the International Monetary Fund (IMF) has presented its most gloomy forecast for global growth in over three decades. It projects that the world's growth would be approximately 3% five years from now, marking the lowest medium-term prediction in an IMF World Economic Outlook report since 1990.
In the same study, the IMF said, "The anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geoeconomic fragmentation.”
This week both ACI and KMX released their quarterly earnings reports. Despite an uncertain macro environment, ACI demonstrated its fundamental strength and has a promising outlook for 2023. However, given the weak financial performance in 2022, KMX appears to be encountering difficulties navigating macroeconomic uncertainties.
Let’s explore the featured stocks in greater depth.
Stock to Buy:
Albertsons Companies, Inc. (ACI)
ACI is a food and drug retailer operating over 2,276 stores across 34 states and the District of Columbia. Its stores offer a variety of products, including grocery, general merchandise, health and beauty care, pharmacy, and fuel. ACI serves its customers through in-store and digital channels under 24 banners.
On March 31, ACI announced that it had collaborated with global financial services technology leader FIS, which represents supplemental health benefits administrators such as Fresh Connect, PayForward, and WEX™ that utilize its technology payment platform.
ACI also announced plans to enter into an agreement with Soda Health, which strives to enhance health fairness by personalizing benefits to individual needs. Customers could now purchase qualified food and health products at ACI’s banner stores using benefit cards connected with FIS and Soda Health.
In terms of forward non-GAAP P/E, ACI is trading at 6.91x, 64.3% lower than the industry average of 19.36x. Likewise, the stock’s forward EV/Sales and Price/Sales of 0.33x and 0.15x compare to the respective industry averages of 1.69x and 1.11x.
ACI’s net sales and other revenue increased 5.1% year-over-year to $18.27 billion in the fourth quarter, which ended February 25, 2023. Its gross margin rose 2% from the prior year’s quarter to $5.08 billion. Also, the company’s adjusted net income increased 5.2% year-over-year to $459.70 million, while its adjusted net income per class A common share rose 5.3% year-over-year to $0.79.
The consensus revenue estimate of $80.40 billion for the fiscal year (ending February 2025) indicates a 1.3% year-over-year improvement. Likewise, the consensus EPS estimate of $2.99 for the same year reflects a 7.6% rise from the prior year. Also, the company surpassed its consensus revenue estimates in all four trailing quarters, which is impressive.
Shares of ACI have gained 7.2% over the past six months to close the last trading session at $20.87.
ACI’s POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a B grade for Value, Sentiment, and Quality. Within the A-rated 39-stock Grocery/Big Box Retailers industry, it has ranked #6 of 39 stocks.
Beyond what we stated above, we also have ACI’s ratings for Stability, Growth, and Momentum. Get all ACI ratings here.
Stock to Avoid:
CarMax, Inc. (KMX)
KMX is a used vehicle retailer that operates through two segments, CarMax Sales Operations and CarMax Auto Finance. Its inventory includes domestic, imported, and luxury vehicles alongside hybrid and electric models. The company also offers extended protection plans, reconditioning, and repair services.
In terms of forward non-GAAP P/E, KMX is trading at 33.70x, 138.1% higher than the industry average of 14.16x. The stock’s forward EV/EBITDA multiple of 31.13 is 229.1% higher than the industry average of 9.46. Also, its forward Price/Cash Flow of 16.78x is 89.2% higher than the industry average of 8.87x.
For the fourth quarter that ended February 28, 2023, KMX’s net sales and operating revenues decreased 25.6% year-over-year to $5.72 billion. Its gross profit declined 14.1% from the year-ago value to $611 million. The company’s net earnings and EPS reduced by 56.8% and 55.1% year-over-year to $69.01 million and $0.44, respectively.
Analysts expect KMX’s revenue to decrease 4.8% year-over-year to $28.26 billion for the fiscal year ending February 2024. The company’s EPS for the ongoing year is expected to decline 29.3% from the prior year to $2.14. Furthermore, the company missed its revenue estimates in three of four trailing quarters, which is disappointing.
The stock has plunged 30% over the past year to close the last trading session at $72.21.
KMX’s poor fundamentals are apparent in its POWR Ratings. The stock has an overall rating of D, equating to Sell in our proprietary rating system.
KMX has an F grade for Growth and Sentiment and a D for Stability and Quality. Within the Auto Dealers & Rentals industry, it is ranked last out of 21 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can see KMX’s ratings for Value and Momentum here.
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ACI shares were trading at $20.72 per share on Wednesday afternoon, down $0.15 (-0.72%). Year-to-date, ACI has gained 0.47%, versus a 7.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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