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Q4 Earnings Weekly: Week Ended Jan. 31 – Financials Lead the Way, Median Top Line & EBITDA Growth Relatively Flat Across the Rest of the Universe; Net Leverage Exposure Reduced

Relevant Items:
Q3 Earnings Analytics
Fundamentals by Octus

With fourth-quarter 2024 earnings reporting now underway, Octus, formerly Reorg, covered 79 companies spanning high-yield borrowers, leveraged loan issuers and other midmarket-leveraged credits outside of the major indices in the week ended Jan 31. Of these, 37 high-yield and leveraged loan issuers were covered by Fundamentals by Octus, with 70% of these being public companies. Fundamentals focused on the major loan and bond indices.
 

The following observations were made using the 55 companies that have reported in the past three weeks and are included in Fundamentals by Octus.
 

  • Quarterly revenue growth for the cohort reporting during the week ended Jan. 31 improved compared with both the third quarter of 2024 and the same period last year, with the median reaching 2.9%. However, this was heavily skewed by strong figures posted by financials. Excluding financial companies, median growth was slightly negative at negative 0.4%.
     
  • Quarterly EBITDA growth median was 3.4%, which was almost two times higher compared to the same period last year and in line with the previous quarter growth. Although, again, when excluding strong financials performance, median EBITDA growth was almost flat at negative 0.1%.
     
  • Out of the covered sectors, financial companies continued their outperformance, extending from previous quarters, both in terms of quarterly top line and EBITDA growth year over year (though important to note that last week’s financials data is represented by only three companies). Conversely, materials continues to be the sector to watch, as it was the only group in the red in terms of both revenue and EBITDA growth.
     
  • EBITDA margin for the median company slightly deteriorated compared with the same period last year and with the third quarter of 2024, with median at 16.4%. Conversely, median free cash flow margin improved by 1.3% versus last year, with the median at 14.3%.
     
  • The median company during the week ended Jan. 31 deleveraged by about 0.4x when compared with the previous quarter and previous year, with net leverage at 3x. While median interest coverage (4.8x) was in line with the previous quarter, it has contracted when looking at previous year figures.

     

All Companies – Revenue Growth Distribution, Q4 2024
Sample includes companies from week ended Jan. 31

 

All Companies – Earnings Overview – Key Metrics, Q4 2024
 

 

 

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 62% and 55% 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 more skewed toward the positive in terms of revenue growth but more skewed to the negative regarding 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.

The week ended Jan. 31 data showed that companies were significantly more represented in the top right quadrant (44.1% of companies, highlighted in green in the chart below) of quarterly revenue growth, which reflects companies that experienced positive revenue growth both this and last year. At the same time, 17.7% of companies saw a divergence – showing positive quarterly revenue growth last year (fourth-quarter 2023) but experiencing a contraction this year (fourth-quarter 2024).
 

All Companies – QRT Revenue Growth YoY Distribution, Q4 2024
Sample includes companies from week ended Jan. 31, excluding outliers.

 

All Companies – Distribution – Revenue & EBITDA Growth & Delta, Q4 2024
Sample includes rolling last three weeks earnings.

 

 

 

All Companies – Earnings Overview – Sectors, Q4 2024
Sample includes companies from week ended Jan. 31; median values except sample size.
Note: Sectors with fewer than three companies and unassigned sector companies were excluded.

 

 

Sector Highlights

In addition to coverage of individual companies, Octus provides select insights and trends by sector from our analyst team:

Auto Dealers
Justin Spuma

Automotive dealers reported generally strong fourth-quarter results with revenue and volumes each up year over year on a same-store basis for Asbury Automotive Group and Group 1 Automotive, driven by increased traffic post-election. New vehicle gross profit per unit, or GPUs, showed some resiliency sequentially after rapidly deteriorating over the past few quarters, driven by strength in pricing and, in the case of Asbury, a surge in higher profit luxury vehicle sales.

Asbury Group management expressed optimism regarding the new administration, highlighting a shift back toward higher concentration of internal combustion engine, or ICE, vehicles as a positive for volumes and GPUs. It said any thoughts on tariff implications are “too early to call” and shared its belief that the administration will “get [it] worked out.” Group 1 provided similar comments, saying that it had not yet had discussions with OEMs but that it knows they are “war-gaming” the potential outcomes.

Credit Card and Personal Loans
Patrick Moon

Private-label credit card bellwether Synchrony’s fourth-quarter 2024 and full-year consumer spending volume decreased compared with 2023, as the company attempts to normalize the amount of credit it offers to borrowers. Synchrony’s customers’ purchase volume in the past year was the second highest ever, with 2022 to 2024 marking the three highest annual totals for the lender. A larger-than-expected amount of balances were written off, highlighting the weakening credit position of U.S. consumers. The lender said it expects net charge-offs for the upcoming year to come down, but we pointed out that its stated target is still worse than what management forecasted for 2024.

Bread, although a much smaller lender, serves a relatively similar customer base and also said it expects write-downs to remain elevated, with only a modest improvement in customer collections.

In terms of credit quality across risk grades, the following two excerpts from Synchrony’s recent earnings call highlight what the company is seeing in terms of spending habits and minimum payment trends.
 

“They’re being disciplined … [and] managing to a budget. We have seen a pullback in the lower-income cohort, and I think that’s pretty consistent across the industry. … On the higher-income customer, they’re pulling back a little bit, but I think still very healthy. And I think that’s good from a credit perspective.”
 
“We are seeing movements generally across all credit grades. So it’s not centered around non-prime. We see it probably a little bit more in the upper-prime category than the low-prime, which means they’re kind of coming back from some place where they had excess liquidity.”

On the personal loan side, OneMain expressed confidence that the broader demand for these loans in addition to the lender’s relatively quick tightening of underwriting standards would be key drivers of earnings and capital generation. The company saw its first year-end decrease in delinquencies since 2020 and said it anticipates a solid decrease in net charge-offs for 2025.

The levels of fee-based income and demand for personal loans appear to be strong enough for SoFi Technologies to consider pivoting from loan originations to loan servicing as part of a capital-light strategy. During its earnings call, CEO Anthony Noto stated, “One of the things that we contemplate is, could we push all of our lending into the loan platform business over time? And I’m not opposed to that at all. The economics are very attractive.” As credit card interest rates continue to rise, as we pointed out in our previous U.S. consumer finance quarterly report, the demand for personal loans as a debt consolidation tool continues to increase.

Data Storage Technology
Rucha Amdekar

Key data storage technology and infrastructure providers Western Digital and Seagate Technology reported robust earnings led by surging demand in cloud storage space, particularly in nearline mass capacity within the hard disk drive, or HDD segment. Better pricing power led to distinct improvement in margins, causing a substantial decrease in net leverage.

Seagate Technology reported a decline in net leverage to 2.5x as at the end of its second quarter in fiscal 2025, from 6.5x as of the end of the prior-year period, while Western Digital reported decline in its credit agreement defined net leverage to 1.9x as of the end of the fiscal second quarter versus 11.3x in the fiscal second quarter of 2024.

Addressing the ongoing slump within the flash segment, Western Digital said that short-term oversupply in the market led to pricing pressure within the segment.The company guided to a decline in expected revenue for the flash segment, given muted demand in the personal computer original equipment manufacturing companies and retail consumer segments.

Homebuilders
William Hong

High-yield homebuilders M/I Homes, Century Communities and Beazer Homes each reported a persistent reliance on rate buydowns/incentives and spec homes to sustain sales. Consequently, these builders each recorded material hits to their gross margins – a continuation of trends from prior quarters – and projected continued compression as this year unwinds.

Such trends are not a surprise for Century Communities, which has operated a nearly 100% spec model and targeted entry-level buyers for a while; the company’s business model focuses on a prolific volume of sales and community openings. In fact, 60% of Century’s homes closed in its fourth quarter were both sold and closed within the same quarter. Negative sentiment from M/I Homes and Beazer Homes, which are relatively more focused on custom homes and move-up buyers, paints a concerning picture ahead.

M/I Homes reported that 50% of its buyers were first-time buyers and 68% of its sales were specs in the fourth quarter, both of which are relatively smaller proportions within its peer group. Management also admitted that its custom homes carry 100 bps to 200 bps of higher gross margin than specs and that its move-up buyer is performing better than its first-time buyer. Despite a more favorable makeup, M/I Homes warned that demand “still remains somewhat of a challenge” heading into the busy spring selling season as more buyers rely on rate buydowns.

Beazer Homes more concerningly noted that it is rolling out longer-term rate incentives on its custom homes, despite admitting that its custom homes carry 300 bps to 500 bps of higher gross margin than its spec homes. The following excerpt from Beazer Homes CEO Allan P. Merrill’s comments on the company’s earnings call highlights a shift in power toward homebuyers.
 

“I think I was surprised by how deep folks went to move finished inventory. I don’t ever attribute to our peers that they do anything that’s illogical or not financially astute, they may advertise, call it, a 2.99% rate. But that rate is now in the market. So, everybody we see says, gosh, that would be a great rate. And so what do those buyers do? They hold out. They say, well, we’ll check back with you in January.”

The central question heading into the spring selling season is discerning whether homebuyers across the board truly require incentives to close sales or if homebuyers have gotten accustomed to aggressive rate buydowns offered by homebuilders in the past couple of years. If the latter scenario prevails and prospective homebuyers beyond the typically sensitive entry-level buyer demand concessions, homebuilders will face additional difficulty closing sales and preserving margins in an environment where the existing home market has yet to thaw.

As the prevalent use of incentives continues to dent gross margins, homebuilders have looked to other avenues to protect their gross margin. One key highlight among the homebuilder earnings calls is that companies are emphasizing reducing construction cycle times and costs. This favors certain categories of building products, as we discussed in depth in our most recent building products quarterly.