Yahoo Finance Datadog and Builders FirstSource have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – June 20, 2024 – Zacks Equity Research shares Datadog DDOG as the Bull of the Day and Builders FirstSource BLDR as the Bear of the Day. In addition, Zacks Equity Research provides analysis on McDonald's Corp. MCD, Wingstop Inc. WING and Brinker International, Inc. EAT.
Here is a synopsis of all five stocks:
Bull of the Day:
Datadog, a data analytics company that makes tools for monitoring infrastructure and application performance, surfaced back on my "buy radar" this month after we last took profits on the stock on the big move from $80 to $120.
Here's what I told my TAZR Trader group on June 11...
Portfolio is buying Datadog (DDOG).
I've been eyeing our re-entry here and things have lined up pretty decent...
1. Back to Zacks #1 Rank after earnings, despite a stock sell-off
2. Software/Cloud getting killed elsewhere with CRM, MDB, SNOW, and SQ still in penalty box
3. Chart stabilizing at $110 support
4. Baillie Gifford still big holders, only selling 3% of shares in Q1
5. Valuation back to reasonable at 13X sales growing at 21-22% and EPS growing 17%
6. Goldman noted yesterday on DDOG's "clear AI vision" as described here...
Management indicated that the hyperscaler growth witnessed in the first quarter "is attributable to AI value largely accruing at the infrastructure layer as limited GPU capacity comes online for model training (where Datadog has less exposure)," analyst Kash Rangan wrote.
The Goldman analyst observed that management has plans to expand the company beyond model providers "as more use cases emerge and inferencing workloads grow," he added.
Rangan also tried to explain some commentary from Datadog CEO Olivier Pomel about how Gen-AI is expected to increase data quantity and complexity, noting that Pomel believes "Datadog's core applications (ITIM, APM, Logs) should capitalize on this durable tailwind. Further, with a new category of AI-enabled applications emerging, the CEO noted that new tooling will be required, which Datadog is investing against."
The Goldman analyst reiterated his $143 PT, which is the Street average, offering 26% upside potential.
Finding Footing Above $110 After the Quarter
After Datadog's May 8 earnings report, there was some concern about growth leveling off. Here's what the Wedbush analyst team, led by Dan Ives, wrote about the numbers which highlight Net New ARR added that was the highest in almost 2 years...
One of the data points that we and investors have been using to estimate DDOG revenues has been its correlation with AWS revenues. For the past few quarters, we have seen AWS Revenues and DDOG Revenues being in sync tracking similar growth trajectories and the "attach rate" (DDOG Revenues/ AWS Revenues) follow a predictable path.
That math had led us and others to estimate DDOG Revenues in FQ1'24 could be ~$620m+. But that correlation broke down this quarter and DDOG revenues came in lower than those expectations, and in-line with the "typical" beat of ~$20m. Even though broadly speaking longer-term growth in Cloud and AWS is a positive for DDOG, the company had been cautioning that AWS revenues and DDOG revenues are unlikely to be in perfect sync every single quarter.
Despite these concerns, more than a dozen Wall Street analysts raised their EPS estimates for this year, driving the Zacks Consensus up 8.5% from $1.42 to $1.54.
And next year saw a bump from $1.73 to $1.80. These boosts represent nearly 17% annual profit growth for this year and next.
The Wedbush team maintained their conservative $155 price target for DDOG. And they sound ready for upside surprises in the coming quarters. So while the stock drifts between $110 and $120, I think data-centric investors are getting good risk/reward on an AI future where hyperscale datacenters are one of the fastest growing segments of industrial real estate.
Bear of the Day:
Builders FirstSource is an $18 billion enterprise that calls itself "the nation's largest supplier of structural building products, value-added components and services to the professional market for new residential construction and repair and remodeling."
You could think of it as the "wholesale" Home Depot. For comparison's sake, Home Depot is a $350 billion market cap company doing about $155 billion in annual sales.
But in a strong housing market, BLDR beat all comps, rising out of the bear market lows of late 2022 to post stock performance of over +225% by March of this year.
And even after a stock correction of 30% since then, BLDR shares are still up nearly double that of the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), the two major SFR (single family residential) indexes.
Was the Outperformance Justified?
The driver of that rally was an EPS trailing twelve-month (TTM) moonshot from $2 to $18 that occurred from 2020 through 2022.
During that same period, TTM revenues tripled from $7.5 billion to $23 billion.
This seems extraordinary, but I think two major forces explain it: one macro and one company-specific.
First, the macro supply/demand situation can best be described by data from Lance Lambert who goes by @NewsLambert on Twitter. Here's how he previewed his new research service in October of 2023...
We are in a historically significant chapter for housing, one that has witnessed affordability deteriorate to levels unseen in decades. That's why I just quit Fortune to launch ResiClub, a news and research outlet that'll track the U.S. housing market.
And here's the quick data picture he posted just two days ago...
May 2021: 0 of the nation's 200 largest housing markets were back to pre-pandemic inventory levels
May 2023: 7 of 200
May 2024: 32 of 200 (with 19 in Florida/Texas)
(end of Lambert data view)
So we hear about the rise in interest rates and housing prices keeping affordability out of reach for many buyers.
And we see that many of the "hotter" markets are cooling off, with rising inventory levels.
But the big picture remains one of an overall housing shortage. Still. And those sunbelt markets will continue to attract new migrating homeowners this decade.
What "BFS" Does Different
When I dove into studying this company, I knew very little about them. But when I went to their website, I started getting intrigued their Digital Tools.
As an NVIDIA (NVDA) shareholder and avid fan of how electronic and system design capabilities have transformed most engineering and manufacturing processes into what I call "CAD/CAM on steroids," I should not have been surprised to see that this key builder supplier has embraced the digital age for its hammer and saw customers.
Then, I felt really in the dark as I started seeing tabs and video links about someone called Matt Risinger, host of the BuildShow. I assumed this was another HGTV "rehab" show I never saw (as I watch very little TV).
But then I played part of an "episode" of what appears to be the BFS network with Matt and I was drawn further in. It turns out...
Matt Risinger is a nationally recognized expert in building science and high-performance construction, gaining fame as host of The Build Show on YouTube. Matt regularly works with Builders FirstSource (aka "BFS") on all sorts of projects, including building houses with their READY-FRAME® system, taking advantage of BFS Digital Tools, and even appearing at their live events.
Matt started learning about construction by working summers at an inner-city ministry that fixed up row houses for elderly people. After graduating from college, the national mold crisis in 2002 inspired him to become fluent in Building Science. In 2005, Matt relocated to Austin where he founded Risinger & Company, and has since become a leader in the industry.
When I watched episode 5, I learned how fanatic Matt is about preventing mold -- and how BFS helps him design materials and construction strategies to do so. Their flatbed delivery of precisely labeled pre-cut lumber and custom materials is amazing -- and important since they admit that many home-building crews will have new, inexperienced members who benefit greatly from on-site "wood prints" for how the puzzle gets nailed together.
To see the episode #5 that I watched, use this link. Here's how they describe it...
Matt's team begins framing the house in this episode, and he showcases how BFS's READY-FRAME® system streamlines framing with pre-cut, labeled lumber packages. He also demonstrates how our myBLDR.com digital homebuilding platform uses 3D modeling to identify and solve MEP clashes before construction even begins. See how these innovations save time, reduce waste, and lead to a smoother building process!
So Why Is BLDR a Zack #5 Rank?
On May 7, BLDR delivered another "top and bottom beats" quarter, but the growth slowdown was confirmed after a meteoric ramp.
The company came out with quarterly earnings of $2.65 per share, beating the Zacks Consensus Estimate of $2.42 per share. But this comps to earnings of $2.96 per share a year ago.
This quarterly report represents an earnings surprise of only 9.50%. A quarter ago, it was expected that this construction supply company would post earnings of $2.70 per share when it actually produced earnings of $3.55, delivering a surprise of 31.48%.
It appears that the slowdown in BLDR growth, and rising home inventories, has propelled Wall Street analysts to take down EPS estimates.
Mind you, the downward revisions to growth are hardly a blip, like 1%. But both the top and bottom lines look "flatish" for this year and next.
So the real "adjustment" is about how far the stock ran into this growth as it levels off.
I would expect BLDR to continue to be a winner of the digital home-builder revolution and we should look to buy shares on dips into $120-140. The Zacks Rank will give us a heads up about the earnings turnaround.
Additional content:
McDonald's (MCD) Aided by Loyalty Program, Comps
McDonald's Corp.benefits from the robust loyalty program, menu innovation, expansion efforts and global comps growth. McDonald's expects its velocity accelerators of Experience of the Future, digital and delivery to drive growth in the long term.
Despite the aforementioned factors, the company's shares have lost 13.7% in the past year, compared with the industry's decline of 7.2%. Inflationary pressures and macroeconomic woes are the reasons behind the decline. Let's delve deeper.
Growth Drivers
Ever since the launch of the loyalty program in the United States, the company has been able to transform its offerings across drive-thru, takeaway, delivery, curbside pick-up and dine-in. The program has not only helped in retaining the existing customers but also in expanding the customer base. MCD has already introduced a loyalty program in more than 50 markets, including the United States, Germany, Canada, the U.K., Australia and France.
In the first-quarter 2024 earnings call, the company stated its notable improvements in digital penetration across markets thanks to increased loyalty sales and record mobile app orders, leading to greater frequency and increased spending by loyal customers. It also stated the success of McDonald's World-Famous Fries feature at the center of a digital campaign in Australia. The alignment of seamless digital experience with campaigning resulted in incremental customer acquisition and increased the market's loyalty sales.
Also, the U.K. market showcased loyalty results with the return of the Winning Sips digital experience, encouraging customers to add a drink to their order with a chance to win on every cup.
To boost its loyalty program participants and encourage customers to avail the digital platform, McDonald's is expecting to deploy "Ready on Arrival," which is a digital enhancement initiative in the United States. This initiative will focus on enabling the crew to begin assembling a customer's mobile order before their arrival at the restaurant and is expected to be launched across the top six markets by 2025 end.
McDonald's believes that there is a huge opportunity to grow all its brands globally by expanding the company's presence in existing markets and entering new ones. Its expansion efforts continue to drive performance. In the first quarter of 2024, the company opened 6,000th restaurant in China, on track to fulfill its global expansion plan.
MCD is planning to open more than 2,100 new restaurants globally in 2024, including 500 openings in the United States and IOM segment and 1,600 (including nearly 1000 in China) inaugurations in the IDL market. The new unit growth aim for 2024 showcases about 4% contribution to new unit growth (net of closures). Also, the company expects net restaurant unit expansion to contribute nearly 2% to 2024 systemwide sales growth. It targets to open 50,000 restaurants by 2027.
This Zacks Rank #3 (Hold) company continues to impress investors with robust comps growth. In the first quarter of 2024, global comps increased 1.9% compared with a rise of 12.6% reported in the prior-year quarter. In the quarter, the company's comparable sales grew more than 30%, marking the 13th consecutive quarter of positive comparable sales growth, compared with the past four years.
The uptrend was backed by average check growth driven by strategic menu price increases, successful restaurant-level execution, effective marketing campaigns featuring the core menu and continued digital and delivery growth. Also, the effective implementation of the Accelerating the Arches strategy added to the uptick.
Concerns
The persisting inflationary pressures are likely to hurt the company's margins. In the first quarter of 2024, margins suffered due to continued pressure from elevated commodities and wages. In the first quarter, McDonald's company-operated restaurant expenses were $2.04 billion, up 6% from $1.92 billion reported in the prior-year quarter. A challenging macro environment, including rising interest rates, remains headwinds.
Given the ongoing inflationary headwinds, MCD expects the operating margin to remain pressurized in the near term. The company expects commodity and food and paper inflation to be at the higher end in 2024. Also, it expects labor inflation to be in the high single digits.
Key Picks
Wingstop Inc.sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today's Zacks #1 Rank stocks here.
It has a trailing four-quarter negative earnings surprise of 21.4%, on average. The stock has surged 112% in the past year. The Zacks Consensus Estimate for WING's 2024 sales and earnings per share (EPS) indicates a rise of 27.5% and 36.7%, respectively, from the year-ago levels.
Brinker International, Inc.currently sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 213.4%, on average. EAT's shares have risen 85.4% in the past year.
The Zacks Consensus Estimate for EAT's 2024 sales and EPS indicates 5% and 41.3% growth, respectively, from the year-earlier actuals.
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McDonald's Corporation (MCD) : Free Stock Analysis Report
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Datadog, Inc. (DDOG) : Free Stock Analysis Report
