Monthly Archives: October 2014

Vale Sa: Zacks’ Bear of the Day Play

Vale Sa (VALEAnalyst Report) the world’s number one iron ore producer, announced earnings before the bell on Thursday, and they missed HUGE!  This is the third consecutive earnings and revenue miss by the company.

 

The Zacks Consensus Revenue estimate was at $1.06 billion, and Vale posted a net loss of -$1.44 billion, a massive gap in expectation verse actual.  Sadly this seems to be a pattern because Vale missed the last 2 quarters by significant margins as well.

On the Earnings front, Vale has missed the Zacks Consensus Earnings Estimate for the past three consecutive quarters, and analysts have noticed.  Going into earnings Q3 earnings the Zacks Consensus Earnings Estimate has declined for Q3, Q4, FY 2014, FY 2015 by a material amount for each time period.  If you look at the chart below, it shows Vale’s Price and EPS Surprise over the past several years.  You will notice the sustained downturn after earnings for the past 7 negative quarters.

Why is Vale Doing So Bad Lately?

The issue is twofold, first the economic situation in Brazil, and specifically the declining value of their currency.  The second part is that iron ore prices have just tanked, and are now at its lowest level since 2010.  Vale derives nearly two thirds of their revenue from this natural resource. Neither one of these situations is likely to reverse itself in the near term as well.  Moreover, the company now sees itself with inventories that have risen by over 9 million tons.

So when your core business is struggling, and the currency of your headquartered country has been under solid pressure, your bottom line will suffer dearly, and suffer it did.  Going into earnings there had been a slight bounce in Brazil’s Real, but it was not enough to help the bottom line.

Forward Estimates

Going into Q3 earnings, analysts have been downgrading Vale for the past 90 days.  If you look at the chart below, it shows the Price and Consensus for the past few years.  As you can see, this has been a negative trend for a while now.   Now given their poor earnings yesterday, the stock is poised to trend down.

Bottom Line

With iron ore prices at levels not seen since 2010, and a currency that is struggling to retain its value, it is a nightmare of a situation for Vale.  While the company has a few positives, they will be under pressure until iron ore price and demand increase.  Therefore, this stock has become the Halloween, Bear of the Day.

Other Stocks to Consider

If you are determined to be in the Mining-Iron segment, you would do best by looking at Cliffs Natural Resources Inc. (CLFAnalyst Report), which holds a Zack Rank #3 (Hold), or Fortescue Metal (FSUGY) which is also a Zacks Rank #3 (Hold).

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Kennedy Wilson: Zacks’ Bull of the Day Play

Kennedy-Wilson (KWSnapshot Report) is the best treat for you to put into your plastic jack-o-lantern today.  This Real Estate Operations Company is going to scare up a positive earnings spike as they build up to and announce their third quarter earnings on November 5th.

 

During Q2 2014 Kennedy-Wilson finalized their IPO in London (KWE LN), which enables it to broaden their investments in Europe.  Kennedy-Wilson (KWSnapshot Report) owns a 13.2% stake in the spinoff.

Acquisitions

Between late March and July of this year, Kennedy-Wilson spent the entire $1.7 billion in proceeds from the KWE LN IPO, and purchased real estate related investments throughout Europe.  Further, the European spinoff has been looking into further acquisition opportunities in Italy, Spain, and Portugal.

Also, Kennedy-Wilson recently purchased a 312 unit apartment community, adding to their growing presence in Denver.  In total, Kennedy-Wilson global multifamily portfolio now totals 19,683 units including 732 units in greater Denver Colorado.

Overall Portfolio

According to the company as of yesterday, Kennedy-Wilson’s real estate related acquisitions by the company and its equity partner’s year-to-date total more than $2.6 billion, which includes just under $2 billion acquired by Kennedy Wilson Europe Real Estate plc.

Looking Towards Earnings on November 5th

This quarter will be the first quarter that will include impact from the operations in Europe by KWE London.  And Zacks models are expecting Kennedy-Wilson to post solid earnings beat of 35.0%

Kennedy-Wilson has beat the Zacks Consensus Earnings Estimates in the last 7 consecutive quarters, the average earnings beat for the last 4 quarters is an astounding 269.23%.   The table below shows its price and subsequent positive surprise price jumps.

Further, the company has been solidly beating the Zacks Consensus Revenue Estimates 5 out of the last 6 quarters with an average beat of 53.75%.  Moreover, the one day price impact by the positive earnings surprise has seen the stock jump 5% in Q1, and 6.14% in Q2.

Estimates Increasing

Over the past 30 days the earnings estimates for Q3 and FY 2014 have been rising.  With Q3 earnings estimate increasing from -$0.22 to -$0.20, and FY 2014 going from -$0.09 to $0.09.  Now when you combine increasing earnings estimates with a solid history of positive earnings surprises, Kennedy-Wilson is poised for another strong earnings announcement.

Bottom Line

Kennedy-Wilson, which holds a Zack Rank #1 (Strong Buy) has a strong portfolio of real estate properties, a solid position in the KWE IPO, 5 consecutive quarters of increasing Return on Equity, Return on Assets, and Return on Total Capital to name a few of the positive tailwinds behind Kennedy-Wilson.  This stock should see a nice price appreciation up through their earnings announcement on November 5th.

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Wynn Resorts: Zacks’ Bear of the Day Play

Although we are seeing strong consumer numbers in the U.S., the global picture in this sector isn’t too favorable. This is especially true in several key emerging markets where growth levels are slowing down and worries are starting to build over economic outlooks.

 

These trends are impacting a number of multinational companies, but they are hitting the casino and gaming industry very hard in particular. That is because companies in this space are seeing strong numbers from their Las Vegas segments, but are facing weakness in their international operations, and especially in the vital market of Macau.

Macau in Focus

Macau is a huge gambling center, and with the rise of China over the last few decades, its importance to the overall market has skyrocketed. In fact, the region is now easily the most important for casino companies as total gaming revenue in the territory for 2013 was close to $45 billion, or roughly seven times the figure that Las Vegas generated.

Given this reality, many casino stocks have become plays on this region of the world much more so than the Vegas Strip. And when China is facing sluggish conditions, much like it is today, this can turn into poor trading for casino stocks until Macau turns around.

A great example of this trend is Wynn Resorts (WYNNAnalyst Report), a stock that has underperformed the broad markets as of late, and could see more pain ahead if Macau stays weak. After all, if we look to recent earnings estimate revisions, analysts aren’t too optimistic on the company’s near term future and are ratcheting down their expectations for the stock heading into 2015.

Earnings Estimates

WYNN reported a year-over-year revenue decline of 5.6% in its Macau segment, while the VIP corner of this market is down over 17% when compared to last year. And given that many do not expect this trend to reverse in the near term, we have seen some sharp declines in earnings estimates lately.

In fact, six estimates have gone lower for the current quarter (compared to one higher) in the past 30 days, while we have also seen a similar trend for the full year estimates, as five have gone lower compared to one higher. The magnitude of these revisions have also been moderate, as the current year consensus has fallen 4.5% in the last month, while the current year has fallen close to 2% as well, suggesting that the bearishness is starting to set in for this stock.

 

Bottom Line

Given the sluggish conditions in Macau and the recent earnings estimate revisions, WYNN is probably a stock to avoid in the near term. And given the weak overall conditions in the space, investors shouldn’t be too surprised to note that the gaming industry is in the bottom 20% of all segments, and that many stocks are poorly ranked in this space.

However, there are a few buy ranked stocks in the space and a couple could be interesting plays nonetheless. A possible choice, given the global weakness, could be Churchill Downs (CHDN) which has a Rank of #2 (Buy) right now.  This stock has much more of a domestic focus than WYNN, and it could be a much better pick in what is otherwise a very shaky corner of the equity market.

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GrubHub: Zacks’ Bull of the Day Play

Although most stocks have rebounded in recent sessions, many social media and so-called ‘web 2.0’ companies have still seen sluggish trading as of late. Earnings have come in weak for many of the top players in this corner of the market, while the outlooks have been disappointing for the most part as well.

 

Yet, depressed prices could mean a buying opportunity for some stocks here, at least if you are willing to go beyond the seemingly always in-focus giants like Twitter or Facebook. One such company that is a very intriguing buy in this environment is the often-overlooked but extremely practical internet company of GrubHub (GRUBSnapshot Report).

GrubHub in Focus

If you aren’t familiar with GRUB, perhaps you do not order takeout or food delivery that often. The company has become a lifesaver for many consumers looking for food options, as GRUB consolidates the industry’s many options into one spot and lets you know which restaurants are open, what their menus are, and if they deliver to your location.

This service is free to users of their site, but GRUB takes a cut of the orders you place on the site, with some estimates suggesting that this percentage averages over 10%. And as more restaurants jump on board the platform, the ‘network effect’ of this business continues to grow, making it a top destination for hungry people everywhere.

GRUB Stock

Grub is a recent IPO, having made its debut less than a year ago. The stock has performed in-line with the overall market since its IPO, but it has seen sluggish summer trading and is down over the past three months.

However, the outlook for GRUB is pretty promising as the company continues to expand into new markets, and capture more market share. The company founders recently said that GRUB only has single-digit market penetration in many markets, while the international space is also a huge growth avenue, suggesting that the possibilities for GRUB in the near term are endless.

Earnings & Estimates

Although GRUB has a short history as a publically traded company, it has a pretty good track record on earnings. Though it missed in the previous quarter by 25%, it has posted two strong beats in its other reports, including a 500% beat in its first report, and then a 100% beat in the most recent quarter.

 

We have also seen some strong earnings estimate revision activity as of late, with the consensus estimate surging in just the past week. For the current quarter, the consensus has moved from 5 cents a share to eight cents a share, while the full year has moved from 20 cents a share to 25 cents a share in the past week, suggesting a growth rate of over 100% for EPS this year.

Bottom Line

GRUB is a great growth stock that is currently trading at a reasonable level following some recent weakness. The stock is poised to see a huge level of EPS growth this year, while it has a near-limitless amount of expansion opportunities at its disposal.

And with recent earnings beats and strong analyst revisions, it shouldn’t be a surprise to note that GRUB has earned itself a Zacks Rank #1 (Strong Buy) as well. So if you are looking to get in on the broader social media/web 2.0 space, consider GRUB as it is often overlooked, but it could be a practical (and profitable) way to play the sector now.

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Cree: Zacks’ Bear of the Day Play

Cree, Inc. (CREESnapshot Report) recently delivered disappointing fiscal 2015 Q1 results. Not only did the company miss on both the top- and bottom-lines, it guided Q2 EPS well below consensus. This prompted analysts to revise their estimates significantly lower for Cree – a trend that has been occurring for quiet some time now.

Investors should consider avoid this stock at least until its earnings momentum turns around.

Cree, Inc. manufactures lighting-class light emitting diode (LED) products, lighting products and semiconductor products for power and radio-frequency (RF) applications for indoor and outdoor lighting, video displays, transportation, electronic signs and signals, power supplies, inverters and wireless systems.

It reports its results in three segments:

  • LED Products (51% of total revenue in fiscal 2014)
  • Lighting Products (43%)
  • Power and RF Products (6%)

First Quarter Results

Cree reported its fiscal 2015 first quarter results on October 21. Results came in below expectations. Adjusted earnings per share (but including stock-based compensation expense) was $0.13, which missed the Zacks Consensus Estimate by 11 cents. It was a 57% decline from the same quarter last year.

Net revenue rose 9% year-over-year to $428 million, but this was also below the consensus of $435 million. Revenue in the ‘LED Products’ segment, which consists of LED components, LED chips and silicon carbide (SiC) materials, dropped 20% due to weak global demand. However, revenue in the ‘Lighting Products’ segment, which makes LED lighting systems and bulbs, jumped 51%.

Profit margins declined in both the ‘LED Products’ and ‘Lighting Products’ segments. The consolidated gross profit margin fell from 38.6% to 31.8%. This was due to lower units sold and lower pricing in the ‘LED Products’ segment and due to higher sales of LED bulbs in the ‘Lighting Products’ segment, which have lower gross margins.

Estimates Falling

 

Following disappointing fiscal 2015 Q1 results, management guided Q2 EPS well below consensus. This prompted a flurry of negative estimate revisions from analysts, which drove the stock to a Zacks Rank #5 (Strong Sell).

This fiscal 2015 Zacks Consensus Estimate is now $0.57, down from $1.48 just 30 days ago. The fiscal 2016 estimate has plunged from $1.86 to $0.92 over the same period.

These negative estimate revisions are nothing new for Cree. As you can see in the company’s “Price & Consensus” chart, consensus estimates have been falling for a while now:

Valuation

While shares of Cree have sold off heavily so far this year, the valuation picture still does not look very attractive. The stock trades around 44x 12-month forward earnings, which is a premium to its 10-year historical median of 32x. And its enterprise value to cash flow ratio of 9 is well above the industry median of 6x.

The Bottom Line

With weak demand for its main segment of products, declining profit margins, persistently falling earnings estimates and premium valuation, investors should avoid Cree and look for a better opportunity.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

Boise Cascade: Zacks’ Bull of the Day Play

Earnings estimates have been soaring for Boise Cascade Company (BCCSnapshot Report) after the company delivered strong Q3 results on October 23. Analysts unanimously raised their estimates for both this and next, sending the stock to a Zacks Rank #1 (Strong Buy).

While the share price has soared too, valuation still looks reasonable at 15x forward earnings.

Boise Cascade Company manufactures engineered wood products, plywood, lumber, and particleboard and distributes a wide variety of building materials as a wholesaler. It has a market cap of $1.4 billion.

Third Quarter Results

Boise Cascade delivered strong third quarter results on October 23. Earnings per share came in at 82 cents, crushing the Zacks Consensus Estimate by 17 cents. It was more than double the EPS in the same quarter last year.

Sales soared 12% year-over-year to $983.3 million, driven by a 26% increase in Wood Product sales. Building Materials Distribution sales rose 7%. The company benefited from a 15% increase in total U.S. housing starts in the quarter, which drove higher sales prices and volumes for its products.

Operating income surged 84% year-over-year as the operating margin expanded from 3.5% to 5.7%. This was due largely to a decline in materials, labor and other operating expenses (excluding depreciation) as a percentage of sales from 86.5% to 84.2%.

Estimates Soaring

 

Following strong Q3 results, analysts unanimously revised their earnings estimates significantly higher for Boise Cascade for both 2014 and 2015. This sent the stock to a Zacks Rank #1 (Strong Buy).

The 2014 Zacks Consensus Estimate is now $2.12, up from $1.84 before the Q3 report. The 2015 consensus is currently $2.57, up from $2.25 over the same period.

Based on consensus estimates, analysts are projecting 76% EPS growth this year and 22% growth next year.

Reasonable Valuation

Shares of Boise Cascade have soared in recent weeks, but the valuation picture still looks reasonable. The stock trades around 15x 12-month forward earnings, which is a discount to the industry median of 22x. Its enterprise value to cash flow ratio of 12x is also below the industry median of 18x.

The Bottom Line

With excellent earnings momentum, expanding profit margins, strong growth projections and reasonable valuation, Boise Cascade Company offers investors attractive upside potential.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

Cheesecake Factory: Zacks’ Bear of the Day Play

Few things in life are more fickle than consumer tastes. One day you’re the hottest thing on the block and the next day you’re in the bargain bin. The same goes for restaurants. Case in point, I remember going to eat the buffet at Sizzler’s. What ever happened to that place? If restaurants don’t adapt to the changing tastes and preferences of their patrons they can find themselves boarded up and out of business.

When I make a list of restaurants I haven’t been to in forever, today’s Bear of the Day is on that list. The Cheesecake Factory (CAKEAnalyst Report) is now scraping the plate as a Zacks Rank #5 (Strong Sell). Which honestly is a little bit troubling because I have had my fair share of cheesecake in my day. Regardless the story here is less about the quality of the food or how great it tastes and it’s more about the numbers.

Over the last week alone, fourteen analysts have revised their earnings estimates for the current year and next year to the downside. The magnitude of the revisions has been very significant as well. The revisions have dropped current year consensus down from $2.21 to $2.11 and next year’s numbers down from $2.58 all the way to $2.41.

The revisions follow an alarming trend for the Cheesecake Factory. Revisions have steadily decreased consensus since March 2013. You can see the continuing downward revisions by taking a quick look at the Price and Consensus chart below. The fear is that as revisions continue downward, the stock will accelerate its decline, catching up with the slack to the downside.

A quick look at the technical picture isn’t making things look all that better. After a huge rally in 2013, CAKE has been range bound for most of this year. Basically the stock has been locked between $42 and $49.50. The most recent bull run took the stock from $42.50 in early August to the highs of October at $47.47. But since the bearish estimate revisions have come in, CAKE has tumbled, taking out the lows for the year a few days ago before recovering the last couple of days and hanging in at $44.58. With that low pierced and the bad news for the current year’s numbers you may want to stay away from this one.

Investors looking for other restaurant ideas can take a look at a few Zacks Rank #1 (Strong Buy) choices in the same space. Domino’s Pizza (DPZAnalyst Report) and Ruby Tuesday (RTSnapshot Report) are two alternatives worth looking into.

Tyson Foods: Zacks’ Bull of the Day Play

With the world population growing by 75 million each year, the United Nations projects the world population will reach 9 billion by 2050. As a result, it’s estimated that in 40 years the world will need double the food production of today with global protein consumption projected to grow more than 500% from 1960 to 2022. As people enter the middle class globally, they add protein to their diets. To feed the global demand, the US is exporting more of its domestic protein production.

Tyson Foods (TSNAnalyst Report) is one of the largest meat protein companies in the US and is the world’s largest fully-integrated producer, processor and marketer of chicken and poultry-based food products. Tyson is a comprehensive supplier of value-added chicken products through food service, retail grocery stores, club stores and international distribution channels. Although its core business is chicken, in the US Tyson is also the second largest maker of corn and flour tortillas under the Mexican Original brand and through its subsidiary Cobb Vantress, the top chicken breeding stock supplier. The company produces nearly 1 in every 5 pounds of chicken, beef and pork in the US. They have a strong, diversified portfolio of iconic retail foods brands including Hillshire Farm, Jimmy Dean, Sara Lee and Ball Park.

It seems like analysts have taken note of the explosive growth in the meat producer segment as well. The industry ranks number 2 out of the 265 industries in our Zacks Industry Rank. Earnings estimates have shown a bullish trend not just for Tyson but for every company in this competitive space. Two analysts have revised their estimates for Tyson’s earnings next year over the last 30 days. This has pushed consensus up from $3.27 all the way to $3.38 for the company. These recent revisions are a big reason why Tyson comes in at a Zacks Rank #1 (Strong Buy).

Tyson isn’t exactly a high-flying momentum stock. Typically a stock like this would fit more in a value-type wheelhouse. But exciting things have been happening to TSN. The range on the stock has been narrowing over the course of the last year. While earlier in the year the stock consistently made lower highs, the bottom it put in during June of this year seems to have been a turning point. Since then the stock has made two quick pushes towards $42. The last of which happened ahead of the market’s violent downturn at the start of October.

Since the market carved out a bottom on October 15th, price has stabilized and now could be a great time to buy. Stochastics are oversold and the stock is lingering just below the 25 day moving average shifted by 5 days. A break above this level puts the stock back in an uptrend and it could potentially make a run at new 52 week highs.

Avon: Zacks’ Bear of the Day Play

Analysts have been cutting their estimates for this door-to-door beauty products seller ahead of its Q3 earnings report due on October 30. Sliding estimates sent the stock back to Zacks Rank # 5 (Strong Sell) last week.

Avon Products (AVPAnalyst Report) is global beauty company, with nearly about $10 billion in annual revenue. The company is the world’s largest direct seller with more than 6 million active independent sales representatives.

Avon products which are available in over 100 countries include color cosmetics, skincare, fragrance, fashion and home products, under brand names like Avon Color, ANEW, Skin-So-Soft and Advance Techniques.

A string of disappointing results and bribery allegations have resulted in a steep decline in the stock price over the past few months. Avon was earlier featured as the “Bear of the Day” on May 6; it’s down about 13% since then.

Disappointing Results

AVP reported its Q2 results on July 31. Total revenue for the quarter declined 13%, while the adjusted gross margin was down 30 basis points from the prior-year quarter. Adjusted net income was $0.20 per share, down from $0.29 per share, for same quarter a year ago and was also short of the Zacks Consensus Estimate of $0.21 per share. This was company’s third miss in the last four quarters.

On October 10, Moody’s downgraded the rating on unsecured notes issued by the company based on “concern that competitive and structural challenges associated with Avon’s direct selling model are creating pressure on representative levels, revenue and cash flow”.

CFO Transition

Last month Avon announced the resignation of CFO Kimberley Ross and appointment of the Corporate Controller as the CFO while the company completes the search for a permanent CFO.

Negative Earnings Estimates Revisions

As a result of worsening outlook for the company, analysts have been revising their estimates lower. Zacks Consensus Estimates for the current and the next year now stand at $0.78 and $0.90 per share, down from $0.81 and $0.97 per share, 30 days ago. Declining estimates sent AVP back to Zacks Rank # 5 last week.

The following chart shows the trend of declining estimates for AVP:


Better Play in the Industry?

Cosmetics industry is currently ranked 248 out of 265 Zacks industries (bottom 6%). There is no stock with Zacks Rank # 1 or #2 in this industry as of now. Given its weak outlook, investors may like to avoid the industry for the time being.

The Bottom Line

Avon’s turnaround efforts do not seem to be working. With poor execution strategy and declining sales force, the outlook does not appear to be brightening anytime soon. Investors should therefore avoid this stock for the time being.

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Amira Nature Foods: Zacks’ Bull of the Day Play

Founded in 1915, Amira Nature Foods (ANFISnapshot Report) is a leading provider of packaged Indian specialty rice, predominantly “Basmati” rice. Rising analyst estimates sent the stock back to Zacks Rank # 1 (Strong Buy) last month.

The company has successfully evolved from a domestic Indian business to a global growth company with its strong brand and product innovation, excellent supply chain and well-established relationships with leading retailers. They are now based in Dubai and had their IPO in 2012.

The company sells its products in more than 40 countries around the world. During FY 2014, EMEA accounted for 43% of Amira’s sales, while 41% of sales were in India.

Solid First Quarter Results

Amira reported its fiscal first quarter 2015 results on August 28. Revenue for the quarter jumped about 26%, to $138.8 million. This was driven by increased volumes, price & mix, both in India and globally.

Sales in India increased by more than 30% (excluding currency impact) and international sales also increased by about 30%. Adjusted earnings increased by 24% to $0.26 per share, from $0.21 per share in the prior-year quarter, significantly ahead of the Zacks Consensus Estimate of $0.16 per share.

The management expects 20%+ revenue growth in FY 2015.

Positive Earnings Estimates Revisions

After impressive earnings, Zacks Consensus Estimate for the current year and next year have increased to $1.43 per share and $1.75 per share respectively from $1.35 per share and $1.72 per share, 60 days ago. The following chart shows the positive earnings momentum:


Rising estimates sent Amira back to Zacks Rank #1 (Strong Buy) last month.

Solid Industry Outlook.

“Agriculture Operations” industry is currently ranked 10 out of 265 Zacks Industries (top 4%). Amira’s specialty product–Basmati rice which is well known for its aroma and taste–grows only in the Indian subcontinent.  Being superior quality, this rice commands premium price and high margins.

Basmati rice is used extensively in Indian cuisine. Rapid growing middle class in India with rising incomes is positive for Amira as more and more families are willing to spend more on better quality food.

Further, with its strong presence in some key growth international markets for its products, Amira looks poised for strong growth in the coming years.

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