With incoming president Donald Trump’s focus on tariffs as a means of controlling trade, investors might reasonably expect that the cost of importing some international goods could substantially increase after the arrival of the new administration in 2025. One possible outcome of this move might be an increase in domestic production and manufacturing. This is not yet the case—for December 2024, the S&P Global U.S. Manufacturing PMI, a measure of whether the manufacturing industry is growing or contracting, fell to 48.3 from 49.7 the prior month (a level of 50 or higher indicates growth).
Still, investors who are bullish about manufacturing in the United States may be drawn to companies affiliated with this industry. Besides the firms that are responsible for the manufacturing of different products themselves, a key component of the industry is transportation and logistics services. Freight transporters like XPO Inc. (NYSE: XPO) and Old Dominion Freight Line Inc. (NASDAQ: ODFL) provide less-than-truckload (LTL) service domestically and internationally, making them a critical part of the process of connecting manufacturers with end customers. Of these firms, XPO stands out for its strong performance in the last year (shares of XPO are up 57% for the year as of December 20, 2024, while ODFL has declined by more than 9% over the same period).
XPO’s customers include businesses in the industrial, manufacturing, retail, consumer goods, and logistics spaces, among others. These businesses have a range of options to choose from when determining how to transport their products. ClearBridge Investments summed up some of the reasons XPO rises above its competitors in a recent investor letter, saying that the firm’s “healthier industry structure and better pricing dynamics” merit consideration separate from rivals like United Parcel Service Inc. (NYSE: UPS).
XPO’s third-quarter earnings reflect this dominance. The company reported 3.7% year-over-year improvement in revenue, driven by both North American and European business. XPO’s North American LTL operation was a particular standout for adjusted operating income, which climbed by 16.5% year-over-year. This business line achieved an adjusted operating ratio of 84.2%.
The company didn’t see just top- and bottom-line growth, though, but also climbing revenue rates per shipment and operating leverage—indicators that XPO is operating efficiently and maximizing its growth potential.
XPO’s North American LTL business also boosted its adjusted EBITDA for the third quarter to $284 million from $241 million one year earlier, the result of higher yield exclusive of fuel and reduced purchase transportation costs.
Analyst Favorite
In addition to its strong stock performance throughout much of 2024, XPO has attracted analyst attention as well and has become a favorite. Out of 16 analysts covering the company, 15 have assigned it a Buy rating. In December alone, analysts at Goldman Sachs, Oppenheimer, JPMorgan, and Stephens all either reiterated or increased their price targets for XPO shares. The company’s consensus price target is now $147.31—based on share prices as of December 20, the stock would need to increase by almost 7% to match that target.
Notably, the most recent price targets assigned by the four firms above are much higher than the consensus target. Goldman Sachs’ analysts expect XPO shares to reach $167, for instance, while Oppenheimer’s analysts predict it could go as high as $176.
Uncertainty at the End of the Year?
Right at the end of 2024, XPO shares seem ready to give up some of the gains they’ve achieved throughout the year—in the five days of trading leading to December 20, the stock has fallen nearly 14%. Much of this is likely due to competitor FedEx Corp.’s (NYSE: FDX) late-December announcement that it would lower its fiscal year guidance amid ongoing challenges for the industrials sector more broadly.
FedEx is also planning to spin off its freight trucking business, a move that could ultimately be a positive for the specialized LTL industry of which XPO is a part, but which will likely cause some volatility for transporters nationwide over the short term. Investors considering an investment in XPO in the new year would be wise to also keep a close watch over the ongoing developments with FedEx, as well as the firm’s other competitors in the transportation industry.
CarMax (NYSE: KMX) has headwinds in 2204 but is navigating difficult times well, selling more cars than expected and sustaining a solid margin. The company isn’t thriving but is growing and building leverage for when economic headwinds ease.
Between then and now, the company can execute its plans while buying back shares, and the buybacks are significant. Activity in Q3 topped $114 million and reduced the share count by 2.2% year-over-year (YoY).
CarMax’s share repurchases are expected to continue because of the margin strength in Q3 and the $2.04 billion left under the current authorization. Regarding the business, demand for used cars is solid and is expected to improve as interest rates fall. The only bad news is that the pace of interest rate reduction is less than first indicated by the Fed, and it may take several more quarters for revenue growth to improve significantly.
CarMax Outperforms in Q3, and Its Share Price Surges Higher
CarMax had a solid quarter in Q3 despite lower realized prices for used cars. The critical details are that demand remains solid, with volume up 5.8% across the network, driven by positive results in all segments, and CEO William Nash says the market is stabilizing. Results from Q3 include $6.22 billion in net sales, up 1.1% compared to last year and 280 basis points better than forecasts. Retail units sold increased by 5.4% and wholesale by 6.3%, offset by a 3.9% and 5.7% decline in average price, respectively. Sales were underpinned by a 7.9% increase in units purchased, aided by a 15% increase in digital channels.
Margin news is the best in the report. The company widened its gross margin despite the decrease in the average selling price by controlling costs. The gross margin gain is partially offset by a 20 basis point increase in SG&A, but only partially. The net result is a 70 basis point improvement in the net margin for a leveraged gain on the bottom line. The $125.4 million in net earnings is up more than 50% compared to last year, leaving the adjusted EPS at $0.81, $0.20 better than MarketBeat’s reported consensus estimate, and up 56% YoY.
Carmax didn’t give guidance but showed strength and reverted to growth sooner than expected. The analysts’ consensus figures for Q4, which predict a seasonal sequential decline but a 3% YoY revenue growth, are likely too low. In this scenario, investors may expect analysts to lift their estimates for the quarter, year, and next year and provide a tailwind for the market.
Carmax Builds Value for Investors in Q3
Carmax’s Q3 balance sheet highlights show it is building value for investors. The details include a reduction in current assets tied to its cash balance, but total assets are up on increased receivables and property, and long-term debt and total liability are down. The result is a 2.75% increase in equity and low leverage, leaving the business in a solid financial position. The company’s net-debt leverage is only 0.25x equity.
However, investing in Carmax is not without risks. The short-sellers are interested in this stock and have a reason to be. The used car market is stronger than expected but still struggling, and the impact of lower rates may already be factored into the equation. The short interest rate ahead of the report was over 10%, not remarkably high but high enough to create a headwind for stock prices.
The price action following the release includes a price surge at the open, but the subsequent activity suggests that short-sellers are taking advantage of the pop. The market is forming a large bearish candle and showing significant resistance at the top of the established trading range. The silver lining is that the market has not fallen below critical support at the short-term moving average and may sustain upward traction over the next few weeks or months.
Is quantum computing the next trillion-dollar market opportunity? Investors are certainly betting on it. The quantum computing sector is heating up, and two companies are at the forefront of its development. Both companies have experienced impressive stock growth fueled by investor excitement and the immense potential of this transformative technology. But with vastly different approaches to quantum computing, understanding the underlying technologies and market dynamics is crucial for navigating this high-growth, high-risk sector.
Quantum Investing: A High Risk, High Reward Play
The quantum computing market is predicted for explosive growth, with forecasts varying but generally pointing towards a multi-billion dollar industry within the next decade. This rapid expansion is fueled by advancements in hardware and software, growing recognition of practical applications, and increased investment from private and public sectors. However, this fledgling industry is not without its challenges. The technology is still in its relatively early stages of development, and significant hurdles remain in scaling quantum computers to commercially viable sizes and achieving fault tolerance. The competitive terrain is intensely dynamic and volatile, with established tech giants and numerous startups vying for market share. Regulatory uncertainties and the potential for rapid technological shifts also present significant risks.
Considering the high-risk, high-reward nature of this sector, different investor profiles will find varying suitability. Investors with a high-risk tolerance and a long-term investment horizon are better positioned to navigate the market volatility inherent in early-stage technology stocks. Short-term traders might find the substantial price swings attractive, but need to carefully consider the potential for rapid corrections. A thorough understanding of the companies’ technologies, financial health, and competitive position is crucial for all investors. Diversification within a portfolio is also strongly recommended.
D-Wave Quantum: A Pioneer in Quantum Annealing
D-Wave (NYSE: QBTS) was founded in 1999 and is headquartered in Burnaby, Canada, and the company is a leader in commercial quantum computing, specializing in quantum annealing. The company’s business model centers on providing cloud-based access to its quantum computers (through its Leap™ platform) and offering professional services to guide businesses through the process of adopting this technology.
D-Wave’s stock price has seen a remarkable 918% year-to-date price increase, but D-Wave’s earnings report for the third quarter of fiscal year 2024 (Q3 FY2024) provided mixed signals. While Quantum Cloud Access as a Service (QCaaS) revenue exhibited substantial growth, the overall revenue decreased, primarily due to a decline in professional services.
The company has successfully executed a $175 million at-the-market equity offering, bolstering its cash position and enabling it to invest further in R&D and business growth. Notably, D-Wave has consistently maintained its SOC 2 Type 2 compliance, demonstrating a commitment to data security.
D-Wave’s analyst community ratings show a Buy consensus, yet this rating comes with a significant discrepancy between the current share price and analyst price targets.
The recent increase in short interest is another potential risk factor to monitor.
IonQ: A Trapped-Ion Approach to Quantum Supremacy
IonQ (NYSE: IONQ) was established in 2015 and is based in College Park, Maryland. It is another significant player in the quantum computing sector, employing trapped-ion technology. IonQ’s business model is similar to D-Wave’s, focusing on cloud-based access to its quantum computers. However, it has broader ambitions in quantum networking and is expanding into new enterprise solutions.
IonQ’s earnings report for the third quarter of fiscal year 2024 exceeded revenue expectations fueled by a hefty $54.5 million contract with the US Air Force Research Lab (AFRL). The earnings report also exceeded revenue guidance, highlighting IonQ’s commercial momentum.
The acquisition of Qubitekk further solidifies IonQ’s position in the emerging quantum networking market. The recent unveiling of its new enterprise-grade Quantum OS and Hybrid Services suite indicates a significant effort to improve the performance and usability of quantum computing for businesses, which is critical for commercial success.
IonQ also boasts several essential technology partnerships that bolster its competitive advantage and market position.
Analyst ratings for IonQ currently show a Moderate Buy consensus, again with a stark difference between the current share price and analyst price targets.
D-Wave and IonQ’s Battle for Market Share
A direct comparison of D-Wave and IonQ reveals distinct approaches and a very competitive terrain. D-Wave’s quantum annealing technology is well-suited for specific optimization problems, while IonQ’s trapped-ion approach offers the potential for more general-purpose quantum computation. Both companies operate primarily in the cloud-based access model. However, IonQ has a stronger emphasis on expanding into the quantum networking space and offers a more advanced, enterprise-ready system with its new Quantum OS. Their respective target markets show considerable overlap, but nuanced differences in their technological approaches might lead to distinct market segmentation in the future. Both face the shared challenges of scaling technology and achieving a quantum advantage over classical computation.
A Quantum Leap Requires Careful Consideration
D-Wave and IonQ represent two distinct approaches to quantum computing, each with its own unique advantages, challenges, and investment implications. While both companies have experienced remarkable growth in their stock prices, investors must carefully consider the inherent risks associated with investing in this early-stage industry.
$2 trillion has disappeared from the US government’s books.
The reason why is a new, secretive move being carried out by the Fed that has nothing to do with lowering or raising interest rates… but could soon have an enormous impact on your wealth.
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