We have just come to the end of reporting season and the fund managers of our major portfolio holdings gave us their insights into the latest results of our key holdings.
Amazon
Amazon’s result did not quite live up to investors’ lofty expectations. Over the last 5 quarters, Amazon has been on a steady trajectory of improving its e-commerce business margins, in both its US business and international businesses. Whilst strong profitability was delivered in the second quarter for the e-commerce business, margins did not continue at the same rate of expansion that the company has previously delivered. In our view, the continued push to profitability in the e-commerce business remains intact, however investor positioning and sentiment were anticipating another significant beat. On the more pleasing side, AWS delivered a very strong result, with revenue growing at 18.7% year-over-year, with operating margins of 35.5%. Management continued to speak very positively about the demand for AWS, driven in part by the adoption of Amazon’s AI offerings. We continue to believe there is upside for the stock as the company continues to work towards stronger profitability.
Block, Inc
Block, Inc. reported solid Q2 FY24 results with both growth and profitability coming in ahead of expectations again. It grew gross profit at 20% with a 34% EBITDA margin. The effort to reinvigorate Block’s core growth drivers and find efficiencies continues under Jack Dorsey’s refocused leadership. Management raised its full-year outlook again. Gross profit of $8.89 billion – growth of 18%, up from 17% (and 15% originally). Adjusted EBITDA of $2.90 billion – a margin of 33%, up from 31% (and 30% originally).
Brookfield
Brookfield released its Q2 earnings in August, which saw underlying earnings grow 10% year on year (before gains on sale of assets or carry). Brookfield is an investment holding company whereby >70% of Brookfield’s value is in its listed affiliates (Brookfield Asset Management, Infrastructure, Renewables and Business Partners). These companies saw earnings and distributions grow mid-single digits. Brookfield’s largest business, its asset management arm hit a milestone with >$500bn of fee earning assets under management. The unlisted assets are predominantly made up of property and insurance. The insurance business was the main growth driver, up 80%. This was driven by the inclusion of the AEL acquisition and insurance is now an annual $1bn profit generating business. The property cash flows continue to be soft but are stabilising. The company generated $1.1bn of cash flows during the quarter and will continue to return capital to shareholders and invest in new opportunities to drive further growth in cash flows and shareholder value. Brookfield with a $75bn market cap trades at a 21% discount to its $95bn worth Net Asset Value, thereby continuing to offer an attractive investment for shareholders.
Eurofins
Despite the market’s slightly negative response to this set of numbers, Core Fund Manager, Cooper Investors think it was a promising result. There was a small cut to the dividend which seems to be the main cause of the reaction as the board set the pay-out ratio back to pre-covid levels. The offset to this is the company continues to buy back shares. Free cashflow was a tad light on some working cap moves. These results were the first reported positive revenue and EBITDA growth numbers since the COVID period. This is a major inflection point. Reported EBITDA increased 5% and margins expanded 120bps.
Ex COVID the business continues to grow at around 6% organically, and as the first full year ex COVID the 2024 outlook is for 15% EPS growth. The business is now trading on ~17x this number which is well below historical averages. Eurofins 2027 targets call for $2.4bn of EBITDA which should deliver more than $1bn of free cashflow. On any reasonable multiple we see significant upside over this 3-year period.
F1
Formula One continues to fire on all cylinders with revenue and EBITDA on track to grow on average ~15% and ~30% over the next 2 years respectively. Revenue growth (+36% y/y) was strong in this latest quarter, supportive of the afore mentioned annual growth expectations. Competition on the track continues to drive healthy underlying engagement, with 3.7M race attendees through 14 races, social media followers +32% y/y so far through the season and >4.1bn video views through social media channels. This level of engagement bodes well for upcoming contract renewals, most notably the ongoing US media rights renewal and what we expect to be strong sponsorship activity ahead of the 2025 season.
Guzman y Gomez
Guzman y Gomez reported its FY24 result in line with prospectus forecasts with the company delivering Network Sales of A$960m (+26% YoY) and Underlying Group EBITDA (excluding US losses) of A$45.6m (+49% YoY). Including US losses, Underlying Group EBITDA was A$39.1m (+48% YoY). GYG now operates 220 restaurants globally across Australia, Singapore, Japan and the US. GYG’s strong trading momentum has continued into FY25. For the first 7 weeks of FY25, Comp Sales Growth (Australian segment) have been above expectations at 7.4%. The company expects to open 31 restaurants in Australia in FY25 and remains confident in its prospectus forecasts. GYG’s growth is powered by world-class restaurant economics (average annual sales over $6.3 million and >20% restaurant-level margins for drive-thru restaurants), enabling GYG to increase its rollout of new restaurants from c.25 today to 40+ restaurants within 5 years. With c.200 domestic restaurants in operation today, GYG has the opportunity to grow its network to more than 1,000 restaurants in Australia over the next 20+ years (this compares to McDonald’s and KFC each with approx. c.1,000 locations).
https://www.guzmanygomez.com.au/
Intercontinental Exchange
Intercontinental Exchange reported a solid quarter with adjusted net income rising 8% year-on-year. Revenue growth was underpinned by strength in the exchanges segment with derivatives revenues increasing 25% over the year driven by strong trading volumes in Energy and Financial derivatives. The company’s Mortgage Technology business was pressured by the impact of higher interest rates on Mortgage refinancing activity in the United States, although the recent declines in US long-term interest rates bodes well for a recovery in 2025.
Mastercard
Mastercard’s second quarter results were a slight beat driven by growth across its key growth pillars. Consumer payments is Mastercard’s core business, and the result was pleasing especially with double-digit growth in ex-US payments and cross-border payments. Value-added services, a key growth area for Mastercard, delivered another strong quarter of high-teens growth. Whilst the result was a slight beat, the market has exercised caution with respect to the payment networks, given the softer US consumer and uncertainty regarding the settlement of an historical merchant litigation. We remain positive on Mastercard given its quality attributes and exposure to broad digitisation tailwinds.
https://www.mastercard.com/global/en.html
Microsoft
Microsoft delivered a strong fourth fiscal quarter to close out the year, with the only "detractor" being that Azure's strong growth of +30% was at the lower end of the guided +30-31% range. This was attributed to softer non- AI consumption in Europe in June, which Microsoft has factored into its guidance going into 1H25 as a matter of conservatism, but we view it as temporal. Overall, demand trends look healthy, the company continues to skilfully drive operational efficiencies despite the higher costs associated with AI, and we remain positive on the stock as a core position.
Taiwan Semiconductor (TSMC)
TSMC delivered a strong result and guidance for the second quarter of 2024. The company is seeing significant demand from their customers which resulted in them upgrading their revenue guidance for the year from 20-25% to greater than 25%. As a result of this growth, management delivered strong gross margins in the quarter and pointed to continued gross margin expansion next quarter. TSMC’s annual capex expectation is an important data point, which is an indication of semiconductor industry growth. At the result, management lifted the expectation for capex from USD 28-32bn to USD 30-32bn, moving it towards the upper end of the range. Over the next 18 months, we expect the ramp of the 2nm node (i.e., latest iteration of semiconductor technology) at TSMC to be a focus for investors, and the commentary from management on the earnings call was that 2nm is expected to be a bigger technology shift than previous iterations (i.e., the 3 and 5 nm nodes) in its first 2 years, and the ramp is so far progressing ahead of schedule. We continue to see earnings upside for TSMC over the medium term and believe the valuation remains undemanding at approximately 22x forward 12-months earnings.
Zillow
Zillow reported revenue of $572m representing growth of +13.1%, beating consensus by $34 million or +6%. More importantly, EBITDA came in at $134m beating consensus by $35 million or +36%. EBITDA was +45% better than Zillow’s original guidance for the quarter. These are excellent results in one of the worst quarters for housing turnover in the US. Revenue beat because of market share gains driven by the new product rollouts. The recent share buy-backs, coupled with strong insider buying, are now complimented by confirmation that the key elements of Zillow’s business plan are coming together including the accelerated product roll-out, and tight cost controls conferring operating leverage. All of these factors support Zillow’s forecasts for 2025 and provide strong confirmation of forecast earnings projections. There is clear upside to consensus forecasts in 2025 and the CEO transition has been well managed by the board. A rebound in housing volumes as mortgage rates decline would only add to the thesis.
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