Planes, pizza and clothes
Planes, pizza and clothes:
Believe it or not, this week’s picks have nothing to do with A.I. Those stocks have been spoken for in the past week, and yes, A.I. has a long life ahead. Instead, we’re looking at airplanes, clothes and pizza.
Airbus enjoys a duopoly, but doesn’t endure the drama and turmoil of its competitor, Boeing. Instead, Airbus continues to work through its backlog, driven by still-strong consumer travel demand. Last February, for example, Air India ordered 250 planes.
Even if a recession hits, long-term demand for planes will sustain this company. Meanwhile, European stocks as a whole have roared back after Russia’s war on Ukraine in early 2022.
Still, there are some caveats: Airbus’ beta of 1.66 makes the stock vulnerable to sudden market downturns. The stock current trades at 28.3x PE, above its five-year average of 25.64x. Also, EADSY is trading within $2 of its 52-week high of $35.52 at levels not seen since January 2020. The ongoing parts shortage doesn’t help overcome its multi-year backlog.
The bullish response is that Airbus is enjoying momentum and will likely make new highs. The PE level is deserved given this momentum and the fact that Airbus has beaten its last three quarters.
Also, year-to-date Airbus has rallied 13.6% while Boeing has added only 6.9%. It goes back to demand: the world’s airlines want more planes and Airbus is the airline-maker that has kept its corporate nose free of controversy.
This Canadian success story also carries a high beta (1.58), faces uncertainty if there’s a recession, the retail sector had a very choppy reporting season in May, and after five months in 2023 ATZ shares are down 23%. So, why recommend it?
Aritzia remains a strong performer, beating quarter after quarter. EPS grew 19% over the past year, while revenue grew 24.19% over the past five years. A key area to watch is the company’s U.S. expansion, planned at eight to 10 locations per year through 2027. Bloomberg recently called Aritzia the “hottest fashion chain in the U.S.”
A month ago, the company reported a strong Q4 with revenues of $637.6 million (all values CAD) vs. $444.3 million the previous year. However take note that U.S. sales surged 55.7% to now account for 52.9% of all revenue. Income increased from $34.2 million to $37.3 million YOY.
Shares have fallen so much recently that Artizia now trades at 22.48x compared to the five-year average of 47.69x. Buy on current weakness, though a stock with this beta could decline further, so consider that risk. Long-term, though, Aritzia is a winner.
This Canadian chain is everywhere and its brand is known by everyone. That is PZA‘s strength—an entrenched fast-food chain with locations to serve nearly every corner of this massive country. If an economic slowdown hits, PZA will endure as diners trade down and loyal customers will continue to snack here.
Some numbers work in PZA’s favour: trading at a beta of 1.04, a three-year return of 65.69%, and paying a dividend of nearly 6%. However, that comes at a payout ratio of 92%, while EPS growth shrank 5% YOY.
A concern may be that PZA is trading at 16.44x PE, above its five-year average of 12.96x. However, the street pegs its forward PE at 15.48x. Still, by the end of May, shares were making 52-week highs of $14.76.
Summertime could boost sales even further, so there’s a little more room to run, but the sweet spot would be buying a market-wide pullback of a few percentage boosts to add more zing to your return. Not a slam dunk of a stock, but a likely winner that will be recession proof. And can their pizza be better? Well, that’s another discussion.