Article/Intelligence
Q4’24 US Earnings Weekly: Week Ended Feb. 14 – Quarterly Top-Line, EBITDA YoY Growth in Low Single Digits; Energy & Utilities Dragging Down Growth
Relevant Items:
Q3 Earnings Analytics
Fundamentals by Octus
With fourth-quarter 2024 earnings reporting now underway, Octus, formerly Reorg, covered 176 companies spanning high-yield borrowers, leveraged loan issuers and other midmarket leveraged credits outside of the major indexes in the week ended Feb. 14. Of these, Fundamentals by Octus covered 120 high-yield and leveraged loan issuers, with about 65% being public companies. Fundamentals focused on the major loan and bond indexes.
- Quarterly revenue growth for the cohort reporting during the week ended Feb. 14 was 2.1% when looking at the median, trailing the same quarter a year earlier by about 100 bps. Last week’s revenue growth was partly dragged down by energy, as all five companies that reported had posted negative growth. Excluding energy, top-line growth jumps to 3.5%.
- Quarterly EBITDA growth median was 3.5%, which was just below the prior year period’s growth but 80 bps higher compared with the prior quarter. Consumer staples and materials companies had the highest positive impact here – if we were to exclude the two aforementioned sectors, the median growth would be reduced to 2.7%.
- By sector, last week energy and utilities were the laggards, as all the companies that reported had posted negative year-over-year revenue growth for the quarter, followed by six out of eight companies also experiencing year-over-year EBITDA contractions.
- EBITDA margin for the median company was 20.9%, slightly improving over the previous quarter and the same quarter a year earlier. Median free cash flow margin was 13.7%, which was trailing margins from the previous quarter and the same period a year earlier by a few percentage points.
- Median company net leverage was 3.3x during the week ended Feb. 14, in line with the previous quarter and same quarter a year earlier. Median interest coverage was also in line, with the median at 3.8x.
We note that three additional companies were added to the cohort of companies that reported in the week ended Feb. 7. The impact across median metrics for that week was marginal and/or nonexistent.
Sample includes companies from week ended Feb. 14
From a distribution perspective, the latest rolling three-week data regarding revenue growth represented a somewhat normal distribution curve with a fat positive tail – meaning there was a large number of companies that posted positive revenue growth at the highest end of the spectrum (growth of more than 15%) from our outlined growth buckets. EBITDA growth distribution also represented a relatively normal curve but with fewer extremities at the tail ends. The data was skewed toward more positive revenue and EBITDA growth, with 57% and 59% of companies posting positive year-over-year growth, respectively.
The distribution of delta between current (fourth quarter 2024) versus prior-year (fourth quarter 2023) year-over-year growth was slightly more skewed toward the positive in terms of revenue growth but more skewed toward the negative for EBITDA growth. The delta of both revenue and EBITDA growth distributions had fat tails – meaning a noteworthy number of companies were represented at both ends of the distribution spectrum.
Data from the week ended Feb. 14 shows that companies were significantly more represented in the top-right quadrant (37.7% of companies, highlighted in green in the chart below) of quarterly revenue growth, which reflects companies that experienced positive revenue growth in both the fourth quarter 2024 and fourth quarter 2023. At the same time, 21.1% of companies saw a divergence, showing positive quarterly revenue growth in fourth quarter 2023 but experiencing a contraction in fourth quarter 2024.
Sample includes companies from week ended Feb. 14, excluding outliers
Sample includes rolling last three weeks of earnings
Sample includes companies from week ended Feb. 14; median values except sample size
Note: Sectors with fewer than three companies and unassigned sector companies were excluded.
In addition to coverage of individual companies, Octus provides select insights and trends by sector from our analyst team:
Automotive
By Justin Spuma, CFA
Rental car companies Avis and Hertz both reported last week, displaying similar challenges with pricing weakness and elevated operating and vehicle depreciation costs. While elevated depreciation per unit, or DPU, per month was expected to remain elevated versus historical levels for both companies because of declines in used vehicles prices over the past year and a half, Avis surprised with DPU per month just below $400, well above its guide of roughly $350, due to a shift in strategy to move out of older model year vehicles rapidly during the quarter.
In coordination with this strategy shift, the company also recognized a related asset impairment of $2.5 billion. Hertz similarly reported DPU per month of $422 versus its guided range of $350 to $375 due to what the company said was an effect of Manheim Index values falling below its forecast levels.
Both companies are undergoing significant fleet refreshes, claiming that costs on model year 2025 vehicles are substantially lower than 2022 through 2024 model year purchases it made in the prior few years because of inflationary effects from Covid-related supply-chain constraints. Avis and Hertz management both said they expect DPU to remain elevated in the upcoming few quarters but expect it to subside toward historical levels of around $300 by the end of 2025.
Direct operating expense, or DOE, per day was also elevated for both companies in the fourth quarter, which each attributed to lost fixed-cost leverage on smaller fleet size. Avis separately attributed higher DOE partially to maintenance on vehicles held-for-sale, while Hertz pointed to elevated insurance costs. Each company communicated its expectation for DOE to subside sequentially throughout 2025 as each benefits from a newer fleet that would be expected to require less repair and maintenance, though Hertz said that in the near term it will be difficult to make substantial improvements on DOE, given the significantly smaller fleet size and lost fixed-cost leverage.
Pricing was weak for both companies, with revenue per day, or RPD, declining about 2% year over year for both Avis and Hertz. It is unclear whether these companies are sacrificing pricing for higher fleet utilization rates or if it is more mix-related, though both companies called for sequential revenue per unit improvement throughout 2025.
Broadband
By Jeremy Sherby, CFA
Broadband providers Lumen and Altice USA released earnings last week, both reporting good results in their respective fiber internet businesses.
Altice USA said the fourth quarter was its “best-ever” quarter for fiber subscriber net additions, surpassing milestones for both fiber subscribers, of 500,000, and homes passed with fiber, of 3 million. The company said it expects to spend $1.3 billion on capital expenditures in 2025, down from $1.4 billion in 2024. Management said that it intends to upgrade speeds across its legacy cable broadband footprint using mid-split cable upgrades that are much cheaper than building fiber, at just over $100 per passing versus $800 to $900 per passing to build fiber.
Lumen likewise reported a “record year” for its mass markets Quantum Fiber business, adding 161,000 net fiber subscribers and passing an additional 501,000 homes with fiber in 2024. In the fourth quarter alone, the company added 42,000 net subscribers.
Healthcare
By Kyle Owusu, CFA
The trend of increasing operational stability reflected in volumes, rates and costs, which has been underway within the healthcare industry since the second half of 2023, should continue through fiscal year 2025, especially for larger acute care and post-acute care providers with less-aggressive capital structures.
The relative stability appears reflected in HCA’s and Tenet’s current credit spreads, which we expect to experience limited volatility through FY 2025 given our expectations for near-term fundamentals.
For FY 2025, hospital operator HCA said that it expects 3% to 4% year-over-year equivalent admissions growth and 2% to 3% growth in net revenue per equivalent admission.
The anticipated volume growth would represent a slight step-down from FY 2023 and 2024 levels.
Hospital and ambulatory surgery center operator Tenet anticipates same-hospital admissions growth of 2% to 3%, in line with FYs 2023 and 2024. Management said that it continues to see commercial rate increases in the 3% to 5% range.
Nevertheless, whether it is the No Surprises Act, changes to the Medicare Advantage risk adjustment and star ratings model, or the Two-Midnight Rule, the industry has seen its share of policy changes. FY 2025 is no different, with potential cuts to Medicaid and/or increased tariffs among the items presenting uncertainty for the industry.
Homebuilders
By William Hong
Taylor Morrison reported its fourth-quarter earnings last week and highlighted particular strength in its move-up buyer segment, in which orders increased 27% year over year, compared with 5% growth in entry-level segment orders. Taylor Morrison also reported a slightly improved gross margin of 24.8% in the fourth quarter, aided by modest increases in incentives, strategic pricing, and strength from its move-up and active adult lifestyle customer bases – this stands out in sharp contrast to other homebuilders that recently reported deteriorating gross margins. Taylor Morrison’s relatively optimistic outlook on move-up buyers corroborates what M/I Homes reported, but clashes with what KB Home and Beazer Homes reported in prior weeks.
Hotels
By William Hong
Hotel operator Wyndham Hotels & Resorts reported its fourth-quarter earnings last week and highlighted a surprisingly improving sentiment for U.S. leisure demand, echoing what its peer Hilton Worldwide reported in the prior week. Wyndham continued to focus its development pipeline in its international markets and midscale segments.
Industrials
By Patrick Moon
Equipment rental company Herc Holdings Inc. reported its fourth-quarter earnings and attributed its record sales year to the strength in large-scale national account projects, which cover many areas such as liquefied natural gas, data centers and semiconductors. Management noted that while these mega projects contributed to the company’s growth in 2024, it continues to prefer a larger mix of local projects in the long term. Herc mentioned that it is not yet factoring the recent Los Angeles wildfires into its guidance as it waits for more information regarding funding decisions to rebuild.
After suggesting on the earnings call that management would continue to weigh acquisition opportunities, Herc on Feb. 18 made a surprise announcement to acquire H&E Equipment Services at a 14% premium to United Rental’s previous bid at the end of H&E’s 35-day go-shop period. The anticipated acquisition is expected to increase Herc’s leverage over the next few years and capture more market share in what is a highly fragmented equipment rental industry.
Property and Casualty Insurance
By Patrick Moon
Property and casualty insurer Mercury General reported record full-year premiums for 2024 last week as auto and home insurance premiums, especially in the company’s main area of business in California, continue to climb. While the company’s auto written premium growth can be largely attributed to rate increases that the California Department of Insurance approved, the increase in home insurance written premiums was likely a result of Mercury’s customer expansion in wildfire-prone areas where many large insurers have been reducing or eliminating coverage.
During the same day of Mercury’s earnings release, the state’s insurance commissioner approved a request from the California FAIR plan program to charge an initial $1 billion assessment toward private residential and commercial insurers based on their market share of coverage for these lines. These companies are required to pay their share of the assessment within 30 days of the announced ruling. The expectation is that these insurers would be allowed to pass on half of their owed fees to customers in the form of higher premiums once this action is explicitly approved, with future charges above the $1 billion threshold passed down entirely to consumers, all during a period in which home affordability is already a challenge.
Titanium Dioxide
By Michael Axon
Leading TiO2 producers Tronox and Chemours both reported relatively flat fourth-quarter TiO2 volumes, with Tronox volumes up 4% year over year and Chemours volumes down 1%, with average TiO2 pricing down 2% for both companies.
Given the weak continuing macroeconomic outlook, both have been focused on reducing operating costs, with Chemours’ fourth-quarter TiO2 adjusted EBITDA margins expanding about 250 bps year over year to 12%, and Tronox’s adjusted EBITDA margins expanding about 300 bps (excluding a negative $15 million supplier-related impact in the year-earlier quarter) to 19%. Both companies said they are focused on further TiO2 cost reductions.
Chemours said it has recently begun seeing some “green shoots” for TiO2, noting that there has been some recent pullback of Chinese exports, particularly to Europe and Brazil, while adding that there have been some recent signs of an improving housing market that could benefit coatings (and TiO2) demand later this year.
Overall, Chemours said, it is “cautiously optimistic.” Further, Tronox said it believes that the competitive landscape should improve in 2025 with anti-dumping measures in Europe and Brazil (and now India). Tronox noted there have been some recent “pullbacks” of Chinese production and exports, echoing Chemours’ statements about some reduction in Chinese export pressure.