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A survey of North American equities heading in both directions

On the rise

Shares of Descartes Systems Group Inc. (DSG-T) were higher by 0.6 per cent after the Waterloo, Ont.-based software company released better-than-anticipated third-quarter 2023 financial results late Tuesday, benefitting from a turnaround in organic growth.

It reported revenue of US$144.7-million, up from US$121.5-million a year ago and exceeding the Street’s expectation of US$144.2-million. Adjusted EBITDA jumped 17 per cent year-over-year to US$63.6-million, also topping the consensus forecast of $62-million.

Applauding the release, several equity analysts on the Street raised their forecasts and target prices for Descartes shares.

“Overall organic growth rebounded to 9 per cent at constant currency (stronger than last quarter at 5.2 per cent) and should be viewed positively given DSGX shares have generally underperformed other Canadian software and services names in our coverage year-to-date,” said Raymond James analyst Steven Li. “Valuation (at 11 times calendar 2024 revenues and 23 times calendar 2024 adjusted EBITDA) has held up better than most, so it’s important for DSGX organic growth to remain above pre-pandemic levels to demonstrate the company’s tailwinds are sustainable (data content ever more valuable, supply chain software, visibility management, routing software, etc.).”

SentinelOne (S-N) surged over 16.5 per cent on Wednesday after a strong quarterly revenue forecast signaled its entry into the cybersecurity big leagues, challenging larger rivals like Microsoft (MSFT-Q) and CrowdStrike (CRWD-Q).

The stock hit a more than one-year high and could add nearly US$1-billion in value if gains hold, topping up a rise of about 37 per cent notched for the year so far.

SentinelOne’s consolidated platform for enterprise customers as well as the competitive advantages of its Data Lake product are among the top factors behind its growth and rising customer base, analysts have said.

Its efforts to tap growing demand for security services focused on end-user devices such as laptops and smartphones are also paying off.

“We view SentinelOne as an emerging challenger in the endpoint security space, a prominent part of the cybersecurity stack that has been dominated by larger competitors such as Microsoft and CrowdStrike,” Morningstar analysts said in a note.

SentinelOne has also rolled out products such as the generative AI-powered Purple AI and Singularity platform to help plug vulnerabilities that come with the rising digital presence of businesses.

Delta Air Lines (DAL-N) top executives on Wednesday signaled robust international travel demand going into 2024 as consumers spend more on experiences than on material items.

Speaking at the Morgan Stanley Global Consumer Conference, CEO Ed Bastain said the airline recorded bumper revenue for the Thanksgiving period and expects Christmas to be a very strong close to 2023.

“Across transatlantic, heading into January and February, advanced travel bookings are quite strong and then pick up even further into March,” Mr. Bastian said.

The upbeat comments lifted the shares of the carrier and fueled a gain in its rivals United Airlines (UAL-Q), American Airlines (AAL-Q) and Southwest Airlines (LUV-N).

The Atlanta-based carrier also reaffirmed its forecast for the year and now expects profit in the range of US$6 to US$6.25 per share and total revenue to be up about 20 per cent.

The company expects operating margin forecast of about 11.5 per cent for 2023.

“We are very encouraged that Buy-rated Delta Air Lines has reiterated its full-year EPS guidance,” Citi analyst Stephen Trent said in a note.

McDonald’s Corp. (MCD-N) closed 0.1 per cent higher in volatile trading after saying it is planning to open about 10,000 restaurants globally by 2027 and more than double revenue from its loyalty program, as it invests heavily to automate processes and speed up service at its stores.

The expansion plans it laid out would take its restaurant count to about 50,000 in over 100 countries and mark the fastest period of growth in the company’s history, McDonald’s said ahead of its investor day.

The company also said that it planned to increase the user base of its loyalty program to 250 million customers by 2027, putting it on track to deliver US$45-billion in annual sales.

The program currently has 150 million active users, who generate over US$20-billion in system-wide sales.

McDonald’s has doubled down on its marketing strategies over the past several years, including piloting its “Best Burger” initiative to improve the quality of its burgers.

The initiative - which the company scaled to 70 markets recently - will be deployed to nearly all markets by 2026, it said.

For 2024, McDonald’s expects nearly 2-per-cent growth in system-wide sales, on a constant currency basis, compared with the 1.5-per-cent growth it expects for 2023. Operating margins next year are estimated to be in the mid-to-high 40-per-cent range.

Campbell Soup (CPB-N) surpassed Wall Street expectations for quarterly profit on Wednesday, as higher prices for its snacks and packaged food meals helped counter a slowdown in demand from budget-conscious consumers.

Shares of Campbell, which expects to complete the acquisition of Rao’s owner Sovos Brands by next year, jumped over 7 per cent after it also reaffirmed its full-year 2024 outlook.

“It’s encouraging to see that Campbell is reaffirming guidance... there might have been some concern that Campbell would have lowered guidance this quarter,” said CFRA Research’s Arun Sundaram.

Global staple food makers have consistently raised prices over the past year to counter higher input and labor costs, even as some expenses like those linked to supply chain have now come down from their peaks.

Average selling prices in Campbell’s meals & beverages division rose 2 per cent in the quarter, while prices for its snacks brands - including Goldfish crackers and Cape Cod potato chips - rose 5 per cent.

However, overall volumes dropped 5 per cent as customers chose to switch to cheaper alternatives like private-label brands amid persistent inflation.

“Ready-to-serve and condensed eating (soup) businesses experienced more pressure in the quarter,” said CEO Mark Clouse adding that in the last four weeks, which included the Thanksgiving holiday, Campbell saw improvement in all segments.

Analysts also believe Campbell might have to step up its promotional activity in order to gain market share. In the quarter, marketing and selling expenses increased 10%.

Peers General Mills and Kellanova have also topped quarterly sales and profit estimates, helped by increases in pricing even as demand has wavered in recent months.

Net sales at Campbell dropped 2 per cent to US$2.52-billion, in line with analysts’ expectations, according to LSEG data.

Campbell earned an adjusted profit of 91 US cents per share, beating estimates of 88 US cents.

On the decline

Suncor Energy (SU-T) was lower by 5.5 per cent with a drop in oil prices despite forecasting higher production for 2024 compared with 2023, as the Canadian energy company bets on strong performance from its Fort Hills asset.

The company also said its 2024 capital expenditure is expected to be between $6.3-billion and $6.5-billion, higher than its current-year forecast of $5.4 billion-$5.8 billion.

The Calgary-based company expects upstream production to be between 770,000 and 810,000 barrels per day (bpd) next year, 7 per cent higher compared with its 2023 production estimate.

Fort Hills, an open-pit mine, has struggled with operational challenges since starting production in early 2018.

Last year, Suncor forecast 5 per cent lower gross production and higher operating costs per barrel at Fort Hills over the next three years as a result of long-term improvement plans for the project.

Suncor added on Tuesday that its Fort Hills three-year improvement plan was on target, “with opportunities to further increase value.”

Fort Hills’ cash operating costs for the next year is expected to be between $33 per barrel and $36 per barrel, the company said.

Global oil prices have scaled back compared to last year but still remain at a level when companies can drill profitably.

“Suncor’s 2024 guidance reflects our priority to deliver improved shareholder returns through focused cost reductions, increased upstream production and a disciplined capital investment program, all targeted at improving the company’s free funds flow per share,” CEO Rich Kruger said in a statement.

The company also expects refining utilization of 92 per cent to 96 per cent in 2024, and throughput between 430,000 bpd and 445,000 bpd.

In a research note released before the bell, Desjardins Securities analyst Chris MacCulloch said: “From our perspective, there were limited surprises from the update, with capital spending, production guidance and operating costs all closely aligning with our expectations as the company continues benefiting from initiatives to improve operational efficiencies. Although we believe management has taken the necessary initial steps to execute a successful corporate turnaround after several years of sluggish operational performance, we maintain our Hold rating given the limited potential return to our $53.00 target.”

Shopify Inc. (SHOP-T) declined 4.8 per cent in response to a pair of analysts downgrading its shares after its first Investor Day event since 2019, expressing concerns about the Ottawa-based e-commerce company’s valuation following recent share price appreciation.

“While we continue to hold a favorable view of Shopify’s overall strategy and competitive positioning within eCommerce, shares have risen 53 per cent since the company reported 3Q23 results on November 2nd and now trade at a significant premium relative to software peers across key valuation metrics,” said Wedbush’s Scott Devitt. “Shares are trading above our revised target price of $68 and currently trade for 17.8 times EV/2025 estimated gross profit (vs. peer group average of 9.6 times) and 43.1 times EV/2025E adj. EBITDA (vs. peer group average of 30.1 times). We see limited room for further multiple expansion, and without incremental catalysts emerging from the investor day, we are lowering our rating to Neutral.”

Roots Corp. (ROOT-T) fell 6.5 per cent after reporting its third-quarter profit and revenue fell compared with a year ago as it says it faced economic headwinds.

The clothing retailer says it earned $519,000 or a penny per share for the quarter ended Oct. 28, down from a profit of $2.2 million or five cents per share in the same quarter last year.

Sales totalled $63.5-million for the quarter, down from $69.8-million a year earlier.

The company says the drop came as direct-to-consumer sales, which includes its corporate retail stores and e-commerce sales, totalled $52.2-million, down from $56.9-million a year ago.

Roots says the drop was driven by lower discounted sales and the tightening of consumer discretionary spending, while full-price sales rose three per cent compared with a year ago.

Partner and other sales, which includes wholesale branded products, licensing to manufacturing partners and certain custom products, totalled $11.3-million, down from $12.9-million in the same quarter last year.

Nvidia Corp. (NVDA-Q) turned lower and lost 2.5 per cent after the chip designer said it was working with the U.S. government to ensure new chips for the Chinese market are compliant with export curbs.

The California-based artificial intelligence chip designer has commanded more than 90-per-cent share of China’s US$7-billion AI chip market, but analysts have said new U.S. curbs on chip exports are likely to create opportunities for Chinese rivals to make inroads.

Reuters last month reported Nvidia had told customers in China it was delaying the launch of a new China-focused AI chip until the first quarter of next year.

CEO Jensen Huang declined to confirm the Reuters article.

“Nvidia has been working very closely with the U.S. government to create products that comply with its regulations,” Mr. Huang told a news conference in Singapore.

“Our plan now is to continue to work with the government to come up with a new set of products that comply with the new regulations that have certain limits.”

He added Nvidia needs to seek the advice of the market and the process is ongoing, adding that Huawei was a “formidable” competitor.

Nvidia warned during its November earnings that it expects a steep drop in fourth-quarter sales in China in the wake of the new U.S. rules.

Exxon Mobil (XOM-N) was down 1.3 per cent after saying will target annual project spending of between US$22-billion and US$27-billion through 2027, the company said in an update that largely continues existing spending and production goals.

The plan leaves out projected gains from the US$60-billion acquisition of Pioneer Natural Resources, which is expected to close next year. Exxon has received two requests for information on the deal from the U.S. Federal Trade Commission.

The annual forecast is watched closely by investors for its spending and production targets. This year’s outlook is keenly anticipated because of deals for Pioneer and carbon pipeline firm Denbury, both of which will underpin long-range targets.

Exxon bought Pioneer in October for nearly US$60-billion in a all-stock deal due to close in the first half of 2024, saying it plans to more than triple production in the top U.S. shale field to 2 million barrels per day (bpd) by 2027. Denbury was a US$4.9-billion acquisition to buttress its carbon business.

Exxon’s estimated production growth for next year excludes about 700,000 bpd of production it would gain from the Pioneer acquisition. That deal would double Exxon’s Permian shale oil and gas output to more than 1.3 million bpd, the company has said.

Exxon’s spending outlook will raise outlays for its energy transition unit, called Low Carbon Solutions, to US$20-billion between 2022 and 2027, from US$17-billion. But the higher spending will require government support.

“We need technology-neutral durable policy support, transparent carbon pricing and accounting, and ultimately, customer commitments to support increased investment,” Chief Executive Darren Woods said in a statement.

Exxon will increase its share buybacks to US$20-billion annually through 2025, from US$17.5-billion currently, after the Pioneer merger closes, the company said. An ongoing divestment plan for its refining operations also will continue.

Tobacco giants Altria Group (MO-N) and Philip Morris International (PM-N) slipped after UK peer British American Tobacco said it will take a US$31.5-billion hit from writing down the value of some U.S. cigarette brands.

BAT’s move comes as ever stricter regulation and growing awareness of health risks squeeze tobacco companies’ traditional business, driving declines in cigarette volumes in some markets.

The maker of Lucky Strike and Dunhill cigarettes also pointed to economic challenges in the U.S., where some inflation-weary consumers are downgrading to cheaper brands, and the rise of illicit disposable vapes putting pressure on its U.S. cigarette division.

BAT said these factors, combined with the broader move away from smoking, meant it would adjust the way some of its U.S. brands are treated on its balance sheet, shifting their value to a finite lifetime of 30 years.

This would result in an around 25 billion pound (US$31.50-billion) non-cash adjusting impairment charge, BAT said. Its Newport, Camel, Pall Mall and Natural American Spirit brands were affected, a spokesperson added.

Chief Executive Tadeu Marroco described the move as “accounting catching up with reality”.

While he did not believe cigarettes would disappear in 30 years, he said it was no longer possible to justify an indefinite value for those brands equating to around US$80-billion on BAT’s balance sheet.

With files from staff and wires

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 29/02/24 1:24pm EST.

SymbolName% changeLast
Altria Group
American Airlines Gp
Campbell Soup Company
Delta Air Lines Inc
Descartes Sys
Exxon Mobil Corp
McDonald's Corp
Nvidia Corp
Philip Morris International Inc
Roots Corp
Sentinelone Inc Cl A
Shopify Inc
Southwest Airlines Company
Suncor Energy Inc
United Airlines Holdings Inc

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