🪄 Don't Tase Me, Bro!

Happy Sunday to everyone on The Street.

Over the past two weeks, we asked: “Would you like it if we created a shorter version of the Street Sheet that was sent out every weekday?” The second batch of responses is in and here are the results:

• 🟩🟩🟩🟩🟩🟩 👍 Yes (72.03%)

• 🟨🟨⬜️⬜️⬜️⬜️ 👎 No (27.97%)

Plus, some feedback:

• “The late day idea sounds good to me. Thanks ”

• “If you did so, I would not expect the weekend version to be duplicative of what you wrote about each weekday”

• “The key is to keep it very short, very crisp, and very focused”

• “Afternoon is a good idea.”

Phenomenally helpful, I want to say a quick thank you to the hundreds of you that cast a vote. The consensus seems to be that the weekday edition would be well-received if we keep it short, digestible, non-duplicative, and send it in the afternoon. This is doable and something I will now whiteboard with my team. The product-building aspect of this business is one of my favorite parts, for what it’s worth. Thank you, though. Sincerely. Will have more to share on this soon.

Speaking of product development, one of the tools I use with my team to design graphics, presentations, and more is Canva. Tae Kim from Barron’s had a great piece this past week, which highlighted how the design software maker could be the next IPO. Look at these snippets from Kim:

• Canva “just added 10 million users in the last 30 days.”

• “The company now has over 125 million monthly users and over 13 million paying subscribers.”

• “Annualized revenue has reached $1.4 billion as of March 1---up more than 40% over the last 12 months. The company has been profitable for six years and maintains a large cash balance.” 

• The cost is lower than its rivals. A Canva subscription for a team of five is priced at about $150 per year, while Adobe charges more than $1,000 per year for one Creative Cloud suite license.

Cliff Obrecht, co-founder and COO (who married Melanie Perkins, the CEO, in 2021) said “It’s not the right market to go out right now,” however, he also said Canva shareholders needed a liquidity event. Going to be watching this one closely so wanted to throw it on your radars too. Be well until next Sunday and send me what you’re reading.

- Brooks

Review

US stocks finished higher Friday despite more banking uncertainty overseas. Amidst the ongoing financial stability concerns, credit default swaps for Deutsche Bank, which represent a form of insurance for bondholders in the event of default, shot up significantly.

As central banks charge forward with rate hikes in their battle against inflation, investors remain wary of the stress they are imposing on the banking sector. On a related note, gold breached $2,000 per ounce, with the flight to safe-haven assets and a potential pause in rate hikes acting as wind to its sails. The precious metal is up roughly 10% for the month, though still notably off its all-time high of $2,075 reached in early August 2020.

In earnings news, Tommy Bahama's parent, Oxford Industries, reported revenue and per-share and earnings above analyst expectations at $382.5 million and $2.28 million, respectively. However, the company also provided lackluster guidance for the current quarter, sending its shares sharply lower.

On the economic front, durable goods orders, which measure purchases received for long-lasting manufactured goods, dropped 1% month-over-month. The figure came in below market forecasts of a 0.6% increase and marked the second-consecutive decline after the 5% drop in January.

In company-specific news, shares of Activision Blizzard surged after the UK’s Competition and Markets Authority stated that it no longer believes the company’s merger with Microsoft would result in a significant reduction in competition. Nevertheless, the regulatory body still maintains that the deal raises concerns in the cloud-gaming market. The investigation is on course for completion by the end of April.

All three major averages posted a winning week. The Dow Jones Industrial Average advanced 0.4%, while the S&P 500 and Nasdaq gained 1.4% and 1.6%, respectively.

Preview

Tomorrow, the Dallas Fed will release its Manufacturing Index. This gauge of general manufacturing activity in Texas has contracted for ten consecutive months.

Tuesday, investors will get an update on the size of the trade deficit for February, which widened to $91.5 billion in January. Additionally, the home price index for January will be released. In December, this index fell 0.9% which marked the sixth consecutive month of decreasing home prices.

On Wednesday, investors will get an update on pending home sales for February. Home sales unexpectedly surged 8.1% last month, so investors will be eager to see if this momentum continues. There will also be a revision to the 30-year mortgage rate, which currently sits at 6.48%.

On Thursday, the final numbers for the GDP growth rate will be released in addition to the number of first-time jobless claims. In Q4 2022, the US expanded at an annualized rate of 2.7% which was slightly below expectations.

On Friday, Wall Street will get insight into how consumers are faring with the release of the personal income and spending reports. In January, personal income rose 0.6% while spending jumped 1.8%. Core PCE prices will also be released, which rose 0.6% month-over-month in January. This inflation metric excludes food and energy.

Earnings Spotlight

Carnival Corporation (CCL) will kick off the earnings week with an update on the state of the cruise industry. Last quarter, the budget cruise line posted revenue of $3.84 billion, a dramatic 198% increase from the year prior. However, the company is still burning cash and posted a $1.6 billion net loss.

Tuesday, Micron Technology (MU) and Lululemon (LULU) will both release earnings reports. Notably, Lulu’s belt bag, which has amassed a cult following on TikTok, has just been restocked after six months of being sold out. Investors will be eager to learn more about this product and if its success can be replicated with other items. 

On Wednesday, two major B2B suppliers Cintas Corporation (CTAS) and Paychex (PAYX) will offer insight into their latest quarter. In particular, as a major provider of HR, payroll, and benefits resources, Paychex’s report will highlight how companies are currently managing their workforces.

On Thursday, the EV charging company, Evgo (EVGO), will report earnings and discuss the future of electric vehicles, charging stations, and the clean energy revolution in America.

Don't Cut Back, Get Cash Back

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Take a Bite Out of Inflation with Darden

Making Bank With Breadsticks

Spending big on fancy dinners isn’t at the top of many consumers' priority lists these days. Food inflation is still high and the Fed’s rate hike campaign has caused many to second guess spending on certain items. This doesn’t mean people aren’t treating themselves. It just means they’re being pickier about where they do date nights or family dinners.

For many restaurant stocks, that could spell trouble, unless we’re talking about Darden (DRI). The company owns eight chains, including Olive Garden, LongHorn Steakhouse, Cheddar’s, Capital Grille, and Bahama Breeze. Consumers may forgo its pricey eateries like Capital Grille, but Olive Garden and other affordable outlets should help it weather any decline in sales. After all, where else can you stuff your face with unlimited breadsticks and pasta for a somewhat affordable price?

It doesn’t hurt that Darden has been able to keep price increases below the rate of inflation. It also has household recognition which should serve it well during an economic slowdown. 

“They have some of the strongest brands within the casual dining sector,” Raymond James analyst Brian Vaccaro said in a recent Barron’s interview. “I also think they’re best-in-class operators with significant scale advantages and they maintain a strong balance sheet.”

This past Thursday, Darden reported that same-restaurant sales rose by 11.7% during its fiscal third quarter, which smashed consensus estimates.

Darden Keeps Price Hikes at Bay 

A big part of the reason Darden has been able to thrive is because of its pricing strategy. Many items on the menu are priced below the competition and the rate of relevant inflation. Darden also does a great job with promotions that feature more for less. Again, if we say the phrase “unlimited breadsticks,” what name comes to mind?

At Olive Garden customers can get unlimited pasta through its “Never Ending Pasta Bowl” promotion. Darden raised the price of that deal by $3 in 2022 when compared to 2019 but it is still perceived as a value to its customers. 

With marketing spending coming in at just 1% of sales, instead of 3% prior to the pandemic, the company has been able to maintain profitability at Olive Garden with profit margins of more than 20%. That’s important since close to half of Darden’s sales come from Olive Garden. 

Stock Too Pricey?

Darden’s finely-tuned business model is already evident in shares, even if Wall Street bulls think there’s more room for upside. The stock is up about 10% in 2023 which compares to the S&P 500 which is trading ~3% higher. 

It's also trading at a premium when compared to its rivals. Darden trades at 17.8 times current-year earnings estimates. Dine Brands (DIN), which owns IHOP and Applebee’s, trades at 9.7 times this year’s earnings. Bloomin’ Brands (BLMN), which owns Outback Steakhouse, trades at just 8.5 times earnings. 

Still, bulls argue there’s a reason for the higher premium. The company has strong margins, good balance sheet, and is gaining market share. Gregory Francfort of Guggenheim thinks Darden should be compared to consumer brands like Coca-Cola (KO) and PepsiCo (PEP) instead. Both trade for 20 times earnings or higher. 

“We think that comparing [Darden] to either quality growth consumer companies or the S&P 500 is appropriate because the valuation is lower, with a growth profile over the next several years that should be faster,” wrote Francfort, in a recent note. The analyst thinks shares can hit $170. Now that’s something for investors to nibble on.

Axon May Have More Shots Left

Stock Holding Up in Tough Economy 

Axon Enterprises (AXON), maker of the Taser stun gun, isn’t a one-shot deal. As it grows its product line-up beyond stun guns, its share price has grown as well. The stock is up more than 30% in 2023. That puts it on track to lodge its eighth consecutive year of annual gains. Even last week when major averages tanked over worries about bank closings, Axon was able to post a gain. In the past fifteen years, the stock has only registered two losses.

So what’s behind the strong showing from Axon? A lot of it has to do with expanding into things like body cams, in-vehicle cameras, and cloud software solutions. It also comes amid calls for more police accountability. “What they’ve essentially done is they’ve parlayed a single product, the Taser, into a multiproduct ecosystem family,” Joshua Reilly, senior analyst at Needham, told CNBC in a recent interview.

Taking a Page From Apple? 

Needham’s Reilly thinks Axon will not only grow as it expands its product line. He also thinks the stock should benefit from the recent release of its next-gen Taser. The analyst thinks it will spark a new upgrade cycle similar to what happens when Apple (AAPL) rolls out a new iteration of its iPhone. 

“That’s going to help them both replace legacy models of the Taser that are out in the field today, but also expand the opportunity for Taser both domestically and internationally,” the analyst said. 

Axon rolled out the new Taser in January with new safety features including lower voltage, longer range, and the ability to target probes individually. The previous model required users to aim two probes simultaneously at one target. 

“This might be the first version of the Taser where some countries in some regions experiment with officers only carrying a taser — and not a handgun and a taser,” Needham’s Reilly said.

Shares May Have More Room to Run

Beyond the Taser, Reilly is excited about Axon’s body camera, which he says is important to the company’s growth story. With calls for more police transparency, its cams are in high demand. That shows in its sales which have climbed in recent years. Net sales in 2022 were $1.189 billion. Five years ago this figure was $343.8 million. For 2023, Axon expects sales to hit $1.43 billion.

There is a risk to the Axon story. A product cycle slowdown could negatively impact shares. To counter that Axon is working on reducing the dilution from its stock-based compensation and increasing free cash flow. 

Nevertheless, Goldman Sachs is sold. Analyst Michael Ng started coverage of the stock earlier this month with a buy. The analyst thinks the stock has a 20% upside. Now investors have to decide if Axon has what it takes to stun. 

Don't Cut Back, Get Cash Back

The cost of eggs has risen 190.9% since 2020. And with costs continuing to rise, we’re all trying to figure out where we can cut back a little bit.

That’s where Upside comes in. It’s a free app that gets you cash back on everyday items, like groceries, gas, and at restaurants. You get to go about your normal business while Upside earns a little bit of cash back here and there along the way.

Upside users earn 3x more cash back than other apps and rewards programs. On average, frequent users earn $340 a year.

Get an extra 25¢/gal cash back on your first tank of gas. Download the free Upside app and use code: “BHBusiness25”.

Tread Lightly With These Three Stocks

Clorox, C.H. Robinson, and Campbell Soup in the Crosshairs 

A lot of times in this newsletter we highlight stocks and stories that sound interesting and might be worth further consideration. What about the ones that might be worth avoiding? 

A few names that fall into this second category exhibit the following three characteristics: they have a hold or lower rating by Wall Street, 20% of analysts that cover them rate them a sell, and the average analyst price target implies shares can fall in the next 12 months. 

Those that make the list include Clorox (CLX), C.H. Robnison (CHRW), and Campbell Soup (CPB). Let’s take a look at why. 

Still A Lot of Wood to Chop

The first stock may be a household name thanks to products like Clorox bleach, but that doesn’t mean the brand recognition translates to a sure bet. In fact, the average analyst rating is underweight, which simply means Wall Street doesn’t love it right now. What’s more, close to 32% of analysts rate it a sell, predicting shares will fall 9% over the next year. 

Now, with that said, Clorox did beat Wall Street’s projections for adjusted profit during its fiscal fourth quarter. But the company also warned it expects to see a 2% decline in revenue in fiscal 2023. This has weighed on its stock and analysts’ views of the consumer products company. 

“There is still a lot of wood to chop here with the company undergoing a digital transformation while trying to stabilize demand. Feels choppy at best in the near term,” Barclays analysts wrote in a recent research report.

C.H. Robinson Isn’t Trucking Along 

Then there is C.H. Robinson, the transportation stock which has an average rating of hold. Of the analysts that cover it, 25% rate it a sell. The average price target implies the stock could fall 2.4% during the next 12 months. Rail congestion fees, truckload rate cycles, and declining coal volumes are all reasons analysts are more skittish. 

“C.H. Robinson’s primary North American Surface Transportation segment remains significantly exposed to the spread between contract and spot truckload rates as well as the timing of contract negotiations and overall freight market demand,” analyst Brian Ossenbeck of JPMorgan wrote in a note in February when he downgraded the stock. 

Rounding out the three is Campbell Soup, which analysts, on average, rate a hold. The average price target implies shares will fall slightly in the next 12 months. The company did beat analysts’ estimates in the most recent quarter but analysts are worried about its growth outlook after an uptick during the pandemic.

Last Week's Poll Results

Which stock will outperform over the next 12 months?

🟩🟩🟩🟩🟩🟩 Fair Isaac (FICO)

🟨⬜️⬜️⬜️⬜️⬜️ Illinois Tool Works (ITW)

🟨🟨🟨🟨⬜️⬜️ Meta Platforms (META) 

Are you bullish or bearish on GE Healthcare over the next 12 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish 

🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing. The Street Sheet is reader-supported. When you buy through links on our site, we may earn an affiliate commission.