Semi Equipment Analysis Message Board (2024)

-- Continued rebound action in mega cap stocks

-- Better-than-expected results and guidance from CrowdStrike (CRWD) and Hewlett-Packard Enterprise (HPE) feeds ongoing AI enthusiasm

-- Drop in market rates following ISM Non-Manufacturing Index

-- Resilience to early selling acting as upside catalyst

Campbell Soup notices encouraging trends in Q3, setting the stage for momentum exiting FY24 (CPB)

Campbell Soup (CPB) remains slightly unappetizing even after raising its net sales and adjusted EBIT growth targets for FY24 (Jul). Shares of the consumer packaged goods giant have dropped by over 6% from mid-May highs, remaining down by a couple of percentage points on the year. CPB's updated FY24 guidance did not reveal the complete story as the company raised its sales and EBIT growth projections to incorporate the incremental impact of its previously closed Sovos Brands purchase. In fact, because of the acquisition, CPB's FY24 adjusted EPS took a minor hit, estimated to land between $3.07-3.10 from $3.09-3.15.

Still, CPB noticed several encouraging developments during Q3, making its recent correction potentially close to bottoming out.

• Adjusted EPS of $0.75 jumped by over 10% yr/yr, supported by robust net sales growth of 6% to $2.37 bln. CPB noted that the integration of Sovos Brands, which includes Rao's Homemade, Michael Angelo's, and several other packaged goods, has been progressing nicely, adding noticeable growth to the company's headline results in Q3. This is apparent by organic net sales growth, which backs out acquisition, divestiture, and currency impacts, remaining flat yr/yr.
• Volumes continued to improve sequentially, and organic net sales growth stabilized during Q3, especially regarding CPB's in-market performance across its meals and beverage business. Also, while its snacks business faced moderate category pressure in the quarter, CPB is confident that following improvements over the past few weeks, consumer demand for snacking will accelerate over the next few quarters.
  • Management provided additional color on its snacks business, noting that the summer holidays tend to boost snack demand, helping fuel a recovery during the second half of 2024.
• Margins also enjoyed a decent lift in Q3, with adjusted gross margins creeping 30 bps higher yr/yr, supported by supply chain productivity enhancements, cost savings initiatives, and a favorable mix. Recall CPB has been shuttering or reducing the size of its plants, making adjustments to its product suite to improve overall margins, spending around $230 mln through FY26 to add capacity and modernize its supply chain.
• Looking ahead, alongside recent uplifting demand trends in its snacks business, CPB is optimistic about the sustained demand in its meals and beverages division. Additionally, management cited an ongoing focus among consumers to stretch meals, benefiting its soup portfolio. Finally, CPB's frozen products maintained positive momentum in Q3, appositive trend heading into Q4 (Jul).

While inflationary pressures keep uncertainty elevated, as higher prices can spur heightened private-label trade down, CPB's portfolio is holding up. M&A tends to be a significant driver of continued growth for established giants in the consumer packaged goods industry, making the initial success of integrating Sovos Brands critical. As such, CBP is positioned to reverse its recent downward trend.

Dollar Tree lower on earnings/guidance, but we like strategic review for Family Dollar (DLTR)

Dollar Tree (DLTR -4%) is losing a few leaves today after reporting Q1 (Apr) results this morning. The dollar store chain reported in-line EPS and revs. However, the Q2 (Jul) guidance followed a similar story from recent quarters with DLTR guiding below expectations for the next quarter. Perhaps a silver lining was DLTR reaffirming full year revenue guidance at $31-32 bln and comps. However, it lowered full year adjusted EPS guidance to $6.50-7.00 from $6.70-7.30.

• Enterprise same store comps in Q1 increased +1.0%, driven by a +2.1% increase in traffic, offset by a -1.1% decrease in average ticket. We would characterize these comps at the low end of prior guidance of a "low-to-mid-single digit increase." Dollar Tree segment comps were +1.7% while Family Dollar segment comps were just +0.1%. The average ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment.
• The company said that its Dollar Tree Q1 segment comp came in below expectations because Easter was especially challenging. Easter is historically a major driver of discretionary demand. This year, an early Easter combined with the extra week last year created a much shorter selling season. Also, unusually cold and wet weather throughout much of the country negatively impacted how families celebrated this traditionally spring-oriented outdoor-centric holiday.
• For Q2 (Jul), the company expects enterprise comps in the low-single-digits, comprised of +2-4% comps for Dollar Tree and flat comps for Family Dollar. For the full year, DLTR reaffirmed comp guidance of a low-to-mid-single digit increase. It also reaffirmed a mid-single-digit increase in the Dollar Tree segment and a low-single-digit increase in the Family Dollar segment.
• There was also huge news outside of earnings. The company announced that it has initiated a formal review of strategic alternatives for its Family Dollar segment. This could include a potential sale, spin off or other disposition of the business. Recall that last year, DLTR announced plans to close 970 underperforming Family Dollar stores. DLTR is beginning to see progress in the streamlined Family Dollar banner. At the same time, it continues to aggressively grow the Dollar Tree banner through expanded multi-price offerings, significant planned new store openings across the US and accretive transactions like its deal to acquire up to 170 stores from 99 Cents Only.

Overall, this was another disappointing quarter for the dollar store chain. Family Dollar has been struggling for a while, but even Dollar Tree stumbled a bit in Q1. This was not a total surprise as its peer Dollar General (DG) offered some cautious commentary on tis call last week. Finally, we were actually quite pleased to hear about the Family Dollar strategic review. We think a sale or spin off of the struggling banner would allow DLTR to focus more on Dollar Tree, which has been performing better. Also, there have been some positive changes made at Family Dollar, so maybe that would increase the sales price.

CrowdStrike rises above macro headwinds to deliver strong beat-and-raise Q1 report (CRWD)

CrowdStrike (CRWD) demonstrated yet again why it's considered to be the premier name in the cybersecurity space, delivering a solid beat-and-raise Q1 earnings report in an IT spending environment that's characterized by heightened deal scrutiny and elongated sales cycles. Those macro-related headwinds caused a few of CRWD's key competitors to issue disappointing outlooks recently, including Palo Alto Networks (PANW), SentinelOne (S), and Okta (OKTA), creating concern that CRWD would follow suit last night.

• Those concerns, though, which dragged CRWD shares lower by 11% since last Monday, proved to be unfounded as the company's competitive advantages enabled it to navigate through the challenging business climate and likely gain additional market share.
• In fact, while some enterprise software companies, such as Salesforce (CRM), experienced more measured buying behavior in Q1, CRWD actually saw larger platform deal sizes. This is evidenced by the 95% yr/yr surge in deals with eight or more modules in Q1.
• Furthermore, CRWD CEO George Kurtz commented that win rates remained strong and consistent with last quarter and that the company is entering Q2 with a record pipeline. Indeed, with net new ARR growing by 22% yr/yr to $212 mln, there is little evidence to suggest that macroeconomic pressures are slowing CRWD down at all.

The secret to CRWD's success includes several ingredients, but two really stand out.

• First, the technology and architecture underlying its platform is providing a significant competitive advantage. More specifically, the Falcon platform was built to seamlessly enable customers to add new functionalities, without having to reboot their systems or to stitch together cybersecurity tools from other vendors.
• Currently, CRWD provides 28 modules, which it believes are best-in-class on a standalone basis, but when they are combined together on the Falcon platform, they are even more effective. This ease-of-use and wide-ranging set of capabilities is allowing companies to save a significant amount of money by consolidating their cybersecurity network onto a single AI-native platform.
• Second, the company's Falcon Flex program augments the benefits of CRWD's Falcon platform. Instead of having to acquire modules individually, customers can take advantage of the Falcon Flex licensing model, which provides them with access to a set of modules of their choosing. Since launching this program three quarters ago, customers who have signed up for Falcon Flex account for over $500 mln in deal value.

If there is any disappointment, it's that CRWD didn't raise its FY25 guidance by a larger amount, especially after factoring in the upside results for Q1. However, during the earnings call, CRWD stated that it's taking a "prudent approach to its outlook", given the macroeconomic challenges. In other words, the company is simply being cautious, which is sensible in our view.

Overall, it was another stellar performance from CRWD as it continues to distance itself from its peers in a highly competitive cybersecurity industry.

Thor Industries expresses caution over the year ahead as economic headwinds refuse to budge (THO)

A raincloud still lingers over Thor Industries (THO -1%) after the world's largest RV manufacturer lowered its FY24 (Jul) guidance for the second consecutive quarter in Q3 (Apr) despite outperforming earnings and revenue estimates. By operating in a highly discretionary field, the RV industry has been particularly hurt by elevated interest rates, upping financing costs, and persistent inflation, raising an already-high cost of ownership, including fuel, parts, and maintenance.

THO and its rival Winnebago (WGO) tend to align their RV shipment forecasts with projections from the RV Industry Association, or RVIA, which has consistently lowered its 2024 estimates since December. The RVIA recently lowered its 2024 forecast to 328,900-359,100 units, a 7% decline from six months ago. While the RVIA's 2024 estimate represents a solid improvement from the around 313K units shipped in 2023, there is still considerable ground to make up from the 493K units shipped in 2022 and 600K in 2021.

However, early forecasts for 2025 RV shipments signal a nearly 14% improvement over 2024 estimates. As such, even though THO remains in a downward trend since early March, shares are still up around 35% from 2022 lows, underpinning a market not completely losing its optimism over a significant demand uptick next year, betting on the Federal Reserve cutting rates and further disinflation rekindling consumer demand.

• Nevertheless, in the interim, the challenging macroeconomic landscape remained apparent in THO's headline numbers in Q3. The company posted a 5% drop in EPS yr/yr to $2.13 following a 65% plunge in the year-ago period. Similarly, revenue contracted by 4% to $2.8 bln despite lapping a 37% decline from the year-ago quarter.
• Weaknesses continued across North America and Europe during the quarter, albeit to a lesser degree overseas. Like last quarter, retail registrations in Europe were relatively strong versus North America, inching 6.4% higher yr/yr during the first quarter of 2024. Furthermore, supply-chain headaches are mostly behind THO in Europe. Management believes dealer inventory levels of its motorized RV brand have been restocked to normalized levels and are ready for the peak selling season.
• Given the ongoing slowdown in retail activity, THO stayed cautious about its final quarter of FY24, reducing its annual EPS and revenue guidance, targeting $4.50-4.75 from $5.00-5.50 and $9.8-10.1 bln from $10.0-10.5 bln, respectively. A new development was THO's comments surrounding FY25, noting that it is also cautious about the year ahead, citing an elusiveness surrounding relief from macroeconomic inhibitors.

Given how fluid the RVIA's forecasts have proven to be over the past several quarters, its early 2025 outlook should probably be taken with a grain of salt. While THO and WGO remain bullish on the long-term health of the RV industry, citing a higher foundation of demand for the camping lifestyle since the pandemic, clouds still circle about over the near term, i.e., interest rates and cumulative inflation, which can keep volatility elevated.

Hewlett Packard Ent surges on impressive revenue upside fueled by AI server sales (HPE)

Hewlett Packard Enterprise (HPE +12%) is surging today following its Q2 (Apr) results last night. HPE reported solid but not huge EPS upside. What stood out more was the strong revenue upside, which surprised investors following misses in the last two quarters. The Q3 (Jul) guidance was decent with the EPS mid-point a little below analyst expectations while the revenue midpoint was nicely above expectations.

• HPE said that improving enterprise demand for traditional servers on top of an expected sharp ramp in AI servers drove the outperformance. Enterprise customer interest in AI is growing rapidly with HPE's sellers seeing a higher level of engagement. Enterprise orders now comprise more than 15% of its cumulative AI systems orders, with a number of enterprise AI customers nearly tripling yr/yr.
• HPE says that AI demand continues to accelerate with cumulative AI systems orders reaching $4.6 bln this quarter. HPE has a robust pipeline in this business and expects continued revenue growth, driven by increased AI systems demand, continued adoption of HPE GreenLake, and ongoing improvement in the traditional infrastructure market, including servers, storage, and networking.
• Specifically, HPE was able to more than double its AI systems revenue sequentially to over $900 mln, helped by improved GPU availability, which was an issue in Q1 (Jan). For example, HPE says its lead time to deliver NVIDIA H100's is now between 6-12 weeks. HPE expects this will provide a lift to revenue in the second half of the fiscal year.
• Beyond AI, we think investors were pleased to hear HPE say it's also seeing indications of a market recovery in traditional and cloud infrastructure markets. Orders for traditional service grew sequentially and yr/yr, driven by enterprise public sector and SMB customers in North America and Europe. The number of customers using HPE GreenLake increased almost 9% sequentially to 34,000. Looking ahead, HPE says it's very enthusiastic about its pending deal to acquire Juniper Networks (JNPR), which it expects will close by the end of 2024 or early 2025.

Investors might be surprised to see such a big move in HPE considering the modest Q2 EPS upside and mixed Q3 guidance. However, we think sentiment was pretty low heading into this report. Recall that last quarter, HPE was talking about soft demand industry-wide and there was a GPU supply shortage. HPE struck us as notably more bullish on this call, especially for AI but also for its traditional business.

Furthermore, the Q2 revenue upside and Q3 revenue guidance was significant. That followed two misses, so that caught our attention. Finally, the stock has been in a narrow $15-20 trading range for much of the past year. We will see if this report can finally nudge HPE above this range, which would be a bullish signal.