According to the latest Consumer Price Index data, inflation soared in January by the most in three months. Consumer prices increased 6.4% over the year and 0.5% month-over-month, exceeding economists’ estimates of 6.2% and 0.5%, respectively.
Furthermore, the labor market is looking resilient, with strong job growth and a decades-low unemployment rate. The January jobs report showed that employers added a robust 517,000 jobs, significantly exceeding the 187,000 market estimate. The unemployment rate fell to 3.5%. Sticky inflation and a strong labor market have raised the prospect of aggressive rate hikes for longer.
Goldman Sachs and Bank of America expect the Federal Reserve to increase rates three more times this year. Amid a slew of stronger-than-expected economic data, both the banks lifted their estimates and now forecast Fed funds rates at the 5.25%-5.5% range. Moreover, there is an increased probability of a 50-basis-point (bps) rate hike when the Fed meets at the end of March.
Central bank policymakers, including Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard, indicated they are open to supporting a 50 bps rate increase at the March meeting.
With the Fed expected to remain hawkish, the economy could potentially tip into a recession. The Conference Board forecasts that the real GDP growth will slow to 0.3% this year.
Companies from utilities, consumer staples, and healthcare industries are known to fare better during a recession due to their non-cyclical nature. Amid widespread recessionary concerns, investors could consider buying defensive stocks Walmart Inc. (WMT), US Foods Holding Corp. (USFD), and American Vanguard Corporation (AVD).
Walmart Inc. (WMT)
WMT operates supercentres, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, membership-only warehouse clubs, and e-commerce websites, including walmart.com, walmart.com.mx, flipkart.com, samsclub.com, and mobile commerce applications. The company operates through three segments: Walmart U.S.; Walmart International; and Sam’s Club.
On January 12, 2023, Walmart Commerce Technologies and Walmart GoLocal announced a partnership with Salesforce.com Inc. (CRM) to give retailers access to the tools and services that enable frictionless local pickup and delivery for customers globally.
On January 5, WMT announced that it had successfully operated 36 drone delivery hubs across seven states, including Arizona, Arkansas, Florida, North Carolina, Texas, Utah, and Virginia. Over the past year, Walmart has safely completed more than 6,000 deliveries to customers in as little as 30 minutes.
WMT is uniquely positioned to offer drone delivery at scale, with its 4,700 stores located within 90% of the U.S. population, which might benefit the company significantly.
For the fiscal 2023 third quarter ended October 31, 2022, WMT’s revenue increased 8.8% year-over-year to $152.81 billion. The company’s adjusted operating income came in at $6.06 billion, up 4.6% year-over-year. Its adjusted EPS grew 3.4% from the year-ago value to $1.50. As of October 31, 2022, the company’s current assets were $87.68 billion, an increase of 5.7% year-over-year.
The company has a record of increasing its dividend for 49 consecutive years. WMT pays a $2.24 per share dividend annually, which translates to a 1.53% yield on the current price. Its four-year average dividend yield is 1.68%. The company’s dividend payouts have grown at a 1.9% CAGR over the past three years.
WMT’s revenue and EPS for the current fiscal year (ending January 2024) are expected to grow 3.3% and 6.9% from the previous year to $622.22 billion and $6.50, respectively. Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 5% over the past six months to close the last trading session at $146.44.
WMT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
WMT has a B grade for Stability and Sentiment. Among 39 stocks in the A-rated Grocery/Big Box Retailers industry, it is ranked #9.
Click here to access additional ratings of WMT for Growth, Value, Momentum, and Quality.
US Foods Holding Corp. (USFD)
USFD markets, sells, and distributes fresh, frozen, and dry food and non-food products to restaurants, national restaurant chains, regional concepts, hospitals, nursing homes, hotels and motels, country clubs, government, educational, and military organizations, and retail locations in the United States.
On February 1, USFD announced the addition of two transformative technology offerings to its CHECK Business Tools program: Bear Robotics and 7shifts, aligned with the growing trend of automated solutions for addressing labor challenges.
The company’s CHECK Business Tools program provides foodservice operators with a growing suite of technology solutions designed to help drive traffic, simplify staffing and reduce waste. This innovation aligns with the industry’s growing trend and should help the company navigate the existing labor problems.
For the fiscal fourth quarter that ended December 31, 2022, USFD’s net sales increased 11.5% year-over-year to $8.50 billion, driven by food cost inflation of 8.4% compared to a year ago. Its adjusted gross profit rose 16% from the prior-year quarter to $1.50 billion. The company’s adjusted EBITDA grew 33.6% year-over-year to $350 million,
Furthermore, the company’s adjusted net income increased 43.8% year-over-year to $138 million, while its adjusted EPS was $0.55, an increase of 44.7% year-over-year.
Analysts expect USFD’s EPS and revenue for the current fiscal year (ending December 31, 2023) to increase 20% and 5.4% year-over-year to $2.57 and $35.81 billion, respectively. In addition, the consensus EPS and revenue estimate of $3.16 and $37.61 billion for fiscal 2024 indicates an improvement of 22.9% and 4.7% year-over-year, respectively.
Shares of USFD have gained 7% over the past month and 22.4% over the past six months to close the last trading session at $39.61.
It is no surprise that USFD has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system. USFD has an A grade for Growth and a B for Value and Stability. Out of 81 stocks in the B-rated Food Makers industry, it is ranked #4.
Beyond what we’ve stated above, we’ve also rated USFD for Momentum, Sentiment, and Quality. Get all USFD ratings here.
American Vanguard Corporation (AVD)
AVD develops, produces, and markets specialty chemicals globally for agricultural, commercial, and consumer purposes. It sells its products through national distribution corporations, buying groups or co-operatives, sales offices, salesforce executives, sales agents, and wholly-owned distributors.
On January 17, 2023, AMGUARD™ Environmental Technologies, the specialty markets division of AMVAC Chemical Corporation, a wholly owned subsidiary of AVD, acquired the product and trademark assets of American Bio-Systems, the manufacturer of proprietary-formula microbial cleaning products BioMop-Plus® and DrainGel®.
Shayne M. Wetherall, CEO of AMGUARD, said, “BioMop-Plus and DrainGel are a great fit with AMGUARD’s portfolio and our strategy to provide compelling biological solutions to the commercial pest control industry.”
On December 22, 2022, AVD’s AMVAC® added BioWake™ dual-use biological seed lubricant to its GreenSolutions™ biological product portfolio. BioWake is an all-in-one biological planter solution that facilities accurate seed placement and superior plant health. This launch is expected to boost the company’s revenue streams.
Also, in December, AVD’s Board of Directors declared an increase of 20% in its quarterly cash dividend and paid $0.03 per share of the company’s common stock to shareholders on January 11, 2023. This dividend payment continues the company’s history of providing cash returns to shareholders based on its solid operational and financial performance.
AVD’s current dividend translates to a 0.59% yield annually, while its four-year average dividend yield is 0.44%. Over the last five years, its dividend payouts have grown at an 11.8% CAGR.
For the third fiscal quarter that ended September 30, 2022, AVD’s net sales increased 3.3% from the year-ago value to $152.12 million. Its gross profit rose 7.6% year-over-year to $61.38 million, while its operating income grew 25.7% year-over-year to $11.24 million. In addition, its earnings per common share increased 27.8% year-over-year to $0.23.
Analysts expect AVD’s revenue to increase 8.2% year-over-year to $657.70 million in the fiscal year ending January 2023. The company’s EPS for the ongoing year is expected to grow 41.6% year-over-year to $1.23. Shares of AVD have gained 36.7% over the past year to close the last trading session at $20.40.
AVD’s promising outlook is reflected in its POWR Ratings. The stock’s overall A rating translates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Value, Stability, Sentiment, and Quality. In the B-rated Chemicals industry, it is ranked #3.
Beyond the POWR Rating grades highlighted above, AVD ratings for Momentum and Growth can be viewed here.
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WMT shares were unchanged in premarket trading Monday. Year-to-date, WMT has gained 3.28%, versus a 6.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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