Monthly Archives: March 2015

Freeport-McMoRan: Zacks’ Bear of the Day Play

Freeport-McMoRan Inc. (FCXAnalyst Report) can’t hide from the crash in commodity prices. This Zacks Rank #5 (Strong Sell) recently slashed its dividend by 84% in order to conserve cash.

Freeport-McMoRan is one of the largest copper and gold producers in the world but in 2013, in a controversial move, it expanded its commodities portfolio into energy and now has oil and natural gas assets in North America, including in the Deepwater of the Gulf of Mexico, onshore and offshore California and in the Haynesville shale.

Dividend Cut

Even while its shares slid, Freeport-McMoRan had been paying one of the juiciest dividends in the industry at 6.80%.

But on March 24, the company announced that it was cutting the dividend by 84% to $0.05 per share from $0.3125 per share payable on May 1, 2015 to shareholders of record as of April 15 in order to conserve its cash.

It was the first dividend cut since it suspended the dividend completely during the financial crisis in 2008. Once the crisis abated, it resumed the dividend.

In 2013, the company paid $9 billion in cash and stock to acquire Plains Exploration & Production and McMoRan Exploration. Energy is now approximately 25% of revenue.

But with crude prices crashing, so has revenue.

The company is also cutting capital expenditures in the oil and gas business to strengthen the balance sheet.

Earnings Estimates Slashed for 2015 and 2016

Not surprisingly, given weaker commodities prices, the analysts have been busy cutting full year estimates.

14 estimates have been cut for 2015 and 10 have slashed for 2016 in the last 60 days.

Over the last 3 months, the Zacks Consensus Estimate for 2015 has sunk to $0.99 from $2.23.

That’s an earnings decline of 49.4% compared to 2014 when the company earned $1.96.

This price and consensus chart is what you don’t want to see as an investor. Earnings are going the wrong way. They’re going down.

Shares Still Not Cheap

Freeport’s shares have plunged 41% in the last year.

But because earnings are also being lowered at a similarly quick pace, the shares aren’t cheap.

Freeport still trades with a forward P/E of 19. That’s still above the average of the S&P 500 which is trading at 17.5. And no one is talking about how cheap the S&P 500 is these days either.

The commodities companies are in a tight place right now.

If you insist on owning one, you might want to focus on the aluminum producers like Alcoa Inc. (AAAnalyst Report). It’s trading with a forward P/E of just 11.5, so it actually IS cheap, and is expected to grow earnings by 19.5% this year. It’s a Zacks Rank #3 (Hold).

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

Sonic: Zacks’ Bull of the Day Play

Sonic Corporation (SONCSnapshot Report) recently posted blow-out second fiscal quarter results as traffic picked up at this drive-in chain. This Zacks Rank #1 (Strong Buy) is expected to see double digit earnings growth both this year and next as technology initiatives are starting to pay off.

Sonic operates 3500 drive-in restaurant locations around the United States selling cheeseburgers, hot dogs, chicken sandwiches, tater tots and numerous drink combinations.

It revolutionized the drive-in experience in 1953 when it perfected the curbside speaker for ordering.

Another Beat in the Fiscal Second Quarter

On Mar 24, Sonic reported its fiscal second quarter results and beat the Zacks Consensus Estimate by a penny. Earnings were $0.13 compared to the Zacks Consensus of $0.12.

It was the 5th consecutive earnings beat in a row. It has a solid earnings surprise record with just one miss since 2012.

But the real surprise came in the same store sales results which soared 11.5% due to higher traffic.

The company said the gains were due to growth in its core menu items and product innovation, including technology initiatives, coupled with a national media strategy.

It couldn’t have hurt that gasoline prices also fell during the quarter.

Wind at its Back

Sonic was bullish about the rest of fiscal 2015. It said it saw the second quarter momentum continuing into the third and fourth quarters.

However, it did guide same-store-sales down to a more realistic range of low to mid-single digits for the year despite the hot second quarter due to more difficult year over year comps in the second half of the year.

This would still be strong same-store-sales growth in an industry where low single digits, or even negative growth, is the norm.

It expects to open another 34 to 44 franchises this year as well.

There’s Growth But No Value

Sonic shares have been on a tear and were hitting new all-time highs into this earnings report.

They have since pulled back a bit but that hasn’t made the shares any cheaper.

Sonic trades with a sky-high forward P/E of 29.5. That is well above the average of the S&P 500 at 18x.

Investors are clearly buying the growth, but the growth is forecast to be there.

Earnings are expected to jump 30% this year and another 15.6% next fiscal year. 7 analysts raised fiscal 2015 estimates since the earnings report.

Not every mid-priced restaurant chain is performing this well, even with lower gas prices. It’s dog-eat-dog out there in the race for the consumers’ dollars.

If you’re looking for a restaurant chain that is delivering the goods, Sonic should be one to keep on your short list.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

EnPro: Zacks’ Bear of the Day Play

Earnings estimates have been falling for EnPro Industries (NPOSnapshot Report) following a Q4 earnings miss in February. The magnitude of these revisions was large enough to send the stock to a Zacks Rank #5 (Strong Sell), putting it in the bottom 5% of all stocks that Zacks ranks based on earnings estimate revisions.

Despite this, shares trade at a lofty 24x forward earnings and 23x enterprise value/cash flow. Based on these factors, EnPro doesn’t appear to offer investors attractive upside potential near term.

EnPro Industries manufactures sealing products, metal polymer and filament wound bearings, components and service for reciprocating compressors, diesel and dual-fuel engines and other engineered products for use in a variety of industries around the globe.

Fourth Quarter Results

EnPro reported its fourth quarter results on February 19. Adjusted earnings per share came in at $0.52, missing the Zacks Consensus Estimate of $0.61.

Net sale rose 15% year-over-year to $316.4 million, which was actually ahead of consensus. This was due in large part to higher revenues from the ‘Power Systems’ (16% of total sales in 2014) and ‘Sealing Products’ (54% of total sales) segments. Sales in the ‘Engineered Products’ segment (29% of total sales) fell by 4%.

The total segment profit margin increased to 12.0% of sales, up from 9.0% in the same quarter last year. This was due in large part to big gains in the ‘Power Systems’ segment, thanks to $25.0 million in completed contract engine revenue recorded in the quarter compared to none in the Q4 2013.

Estimates Falling

Looking ahead to 2015, management warned that “economic volatility outside of North America and slowing project and maintenance spending in the oil and gas markets could result in lower demand levels in a few of our businesses. In addition, the weakening of the euro and other foreign currencies will likely have a negative translation effect on our sales and earnings for the year.”

Analysts revised their estimates significantly lower for both 2015 and 2016 after the report, sending the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2015 is now $2.23, down from $2.89 just 30 days ago. The 2016 consensus is currently $2.62, down from $3.06 over the same period.

EnPro is not the only company in its industry seeing a significant drop in earnings estimates. The ‘Machine – General Industrial’ industry currently ranks in the bottom 8% of all industries that Zacks ranks based on earnings momentum.

Lofty Valuation

Shares of EnPro do not look like a value here at 24x 12-month forward earnings, which is well above the industry median of 17x. Its enterprise value to trailing-twelve month cash flow ratio of 23 is no bargain either and is well above the industry multiple of 11.

The Bottom Line

With weak earnings momentum and lofty valuation, EnPro does not offer much upside potential near term. Investors should consider avoiding the stock at least until consensus estimates stop falling.

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

Express: Zacks’ Bull of the Day Play

The fourth quarter is always vital for retailers, and Express (EXPRSnapshot Report) is no exception. More than half of its operating income came from the holiday quarter last year, for instance. The company came through and delivered better-than-expected Q4 results on March 11, as both sales and EPS topped the Zacks Consensus Estimates.

Additionally, management issued encouraging guidance for 2015, prompted a flurry of positive estimate revisions from analysts. This sent the stock to a Zacks Rank #1 (Strong Buy).

Express, Inc. is a specialty apparel and accessories retailer, targeting 20-30 year old men and women. It currently operates approximately 640 stores, located primarily in shopping malls, lifestyle centers, and street locations across the United States, Canada, and Puerto Rico.

Fourth Quarter Results

Express delivered better-than-expected results for the all-important fourth quarter on March 11. Earnings per share came in at $0.49, beating the Zacks Consensus Estimate by 3 cents.

Net sales rose 1% year-over-year to $725.8 million, ahead of the consensus of $714.0 million. Same-store sales (including e-commerce) declined by 2% but beat management’s guidance.

Merchandise margins increased 70 basis points as Express benefited from more targeted promotional activity. Operating income declined 10% year-over-year, however, as operating margins fell from 11.9% to 10.5% of net sales. But this was due in part to higher incremental marketing activities, which should pay off through higher future sales.

Estimates Soaring

Following its Q4 results, management provided an encouraging outlook for 2015. The company expects same-store sales growth in the low-single digits and adjusted EPS of $0.93-$1.07. This was above consensus at the time and prompted analysts to not only revise their estimates higher for 2015 but for 2016 as well.

These large positive estimate revisions sent Express to a Zacks Rank #1 (Strong Buy).

The 2015 Zacks Consensus Estimate is now $1.06, up from $0.92 just 60 days ago. The 2016 consensus estimate is currently $1.17, up from $1.00 over the same period.

Valuation

Shares have risen for Express following the strong Q4 report, but the valuation picture still looks reasonable. Shares trade around 15x 12-month forward earnings, a discount to the industry median of 19x. Its enterprise value to cash flow ratio of 9 is also well below the industry median of 12.

Its price to sales ratio of 0.6 is also a significant discount to the peer group multiple of 1.1.

The Bottom Line

With strong earnings momentum and reasonable valuation, Express offers investors attractive upside potential near term.

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

3D Systems: Zacks’ Bear of the Day Play

I get a kick out of it when people think that they’ve discovered “the next best thing” and honestly believe they are the first person who thought of it. That’s not to make fun of the dreamers, schemers and Kosmo Kramer’s of the world. It’s just that the reality of the situation often is that you’re catching onto a trend that none of your friends are talking about, but that doesn’t make it an unknown trend. Sitting in the American Legion after taking Aunt Patty to Bingo last night I had somebody walk up to me and ask, “Hey, what do you think about 3D Printing stocks? I think it’s going to be the next big deal.”

The first time someone asked me about them, about four years ago, I thought it was a novel idea. But here we sit in 2015 these stocks are about to headline my Bear of the Day. I mean, I get it. I understand the enthusiasm. The thought of being able to download a file and instantly manufacture something on the spot is an exciting idea. I think that the first several generations of this technology are going to build on each other exponentially. Eventually these companies could do very well.

But right now, things aren’t looking so great for Zacks Rank #5 (Strong Sell) 3D Systems (DDDAnalyst Report). In addition to the Zacks Rank, it’s also carrying a Value Style score of F and Momentum Style F. That’s an easy way to look at this stock and realize that it’s not making any money today and the stock price is falling. What is the catalyst for all this?

Take a quick look at the recent earnings estimates revisions over the last thirty days. Two analysts have dropped their estimates for the current quarter and next quarter, and four analysts have dropped their numbers for the current year. This bearish attitude has crushed the Zacks Consensus Estimates for these periods. Current year consensus has seen a drop from 89 cents all the way down to 73 cents. That drop is part of the reason for the sell-off in the stock.

Since the start of the year there has been an overall downward trend for the stock. After starting the year trading in the low $30s, choppy trading brought the stock down into the $27s at the beginning of February. A rally off that bottom to test the top end of the range failed miserably in mid-February and the stock has been gasping for air ever since.

Coincidentally, the spike up in mid-February was the last time the stock’s Commodity Channel Index was in overbought territory. Fading that spike, the shorts have made plenty of money on the downturn. Currently the stock is sitting below its 21 day moving average, which is negatively sloped. The CCI is bearish at -63 but has yet to reach oversold levels, implying there could be more downside to come.

Investors looking for an alternative stock in this space should look beyond the 3D printing industry. DDDs competitors are struggling to make money in this area as well. Even Hewlett Packard (HPQAnalyst Report), the tech giant that’s recently entered this market are a Zacks Rank #4 (Sell).

Multi-Color: Zacks’ Bull of the Day Play

Follow me for a second here and I give you the background for my thinking on this one. It’s not exactly the butterfly effect but you do have to connect the dots a little bit to get to this. First, I think that the world economy, specifically in the US, is doing better and will continue to improve. As a result, more and more products are going to be sold worldwide. A large percentage of these products are going to be smaller, everyday use type products. Think about the things that you’re buying at the CVS (CVSAnalyst Report).

Today’s Bull of the Day isn’t the company that’s manufacturing the products you’re going to buy nor is it any of the distribution partners getting the goods to the stores. Today I’m talking all about the label makers for those products. Somebody has to make those products catch your eye and look attractive. This Zacks Rank #1(Strong Buy) company is a global label solution company, Multi-Color (LABLSnapshot Report).

The global label market totals about $30 billion in annual sales. This market is forecast to grow at about 5% a year per annum into 2017. It’s a highly fragmented market offering significant consolidation opportunities. Given the consumer staple focus of a company like Multi-Color, it lowers their risk to economic cycles.

The company believes there is increasing importance of labels in generating consumer interest and influencing purchasing decisions. With more and more competition out there, making an interesting label that is eye-catching leads to more sales. Especially given the relatively homogenous products in the consumer staples space. I mean, how much different is one brand of baby powder from another?

There are increased product information and disclosure requirements nowadays and a greater concern over product safety and security. This all leads to companies spending more money to get a quality label placed on their product. With the onset of big data, there’s also increased demand for tracking systems facilitated by labels. Tracking supply trends can help reduce inventory, saving companies money in the long run.

Recently, analysts have jacked up their earnings estimates for the current quarter and the current year. The revisions have pushed the Zacks Consensus Estimate up from 71 cents to 83 cents for the current quarter and up from $2.80 all the way to $3.13. That’s a big reason for the favorable Zacks Rank.

Another big reason is the recent earnings surprises to the upside. Over the previous four quarters, LABL has surprised by an average of 16 cents or 25.52%. The most recent earnings beat for Q4 2014 came in at 73 cents versus consensus estimates for 60 cents.

The stock has been in go-mode since the start of the year. After trading down in the low $50s, a rally through the middle of January faded a bit just for the bulls to catch their breath. After the brief dip to start February the stock marched all the way above $72. The rough couple of sessions in this market helped push the price back down to the $67 range. This looks like a great opportunity to jump back in the direction of the longer term bull trend with the CCI nearly oversold at this level.

McDonald’s: Zacks’ Bear of the Day Play

McDonald’s Corporation (MCDAnalyst Report) is in the midst of trying to find its competitive footing after years of global domination. This Zacks Rank #5 (Strong Sell) is expected to see a decline in earnings in 2015 as it struggles against nimble competition.

McDonald’s is one of the world’s largest restaurant chains with over 36,000 locations globally.

It’s famous for several of its brands including the Big Mac, Quarter Pounder and, in the month of March, the Shamrock Shake.

February Sales Disappointed

On Mar 9, McDonald’s reported February’s monthly sales results which decreased 1.7%.

The United States, despite lower gasoline prices and a recovering economy, declined 4%. Asia/Pacific, Middle East and Africa fell 4.4%.

The company cited broad-based consumer perception issues in Japan for part of the downturn in Asia.

One of the few bright spots was Europe, which saw a gain of 0.7% despite the continent’s lackluster overall economic growth.

Another New CEO

Earlier this year, McDonald’s made a change at the top. As of Mar 1, 47-year old Steve Easterbrook became CEO. He was formerly global chief brand officer.

Many analysts believe that branding will be key to the changes that will come to the company. McDonald’s menu is now far more extensive than its original mission of burgers and milkshakes.

Additionally, with the emergence of specialty burger chains like ShakeShack, Habit Grill, Red Robin and Smashburger, McDonald’s now has to worry about more than just its former rivals of Burger King and Wendy’s for consumers dollars.

Estimates Slashed for 2015

The analysts aren’t optimistic that 2015 will be the year of the turnaround.

10 estimates have been cut for 2015 in just the last 30 days. Analysts now expect earnings to fall 7.2% compared to 2014.

They’re also not that optimistic about 2016. They see earnings growing just 8% and that is now off a lower bar.

Still Not Cheap

While shares sank in early 2015, they have since rebounded with Easterbrook taking over the helm.

Investors won’t get a deal on McDonald’s right now. It is trading with a forward P/E of 20, which is well over the average of the S&P 500 of 17.9.

But why concern yourself with when McDonald’s will turn it around?

There are other restaurant chains where earnings are rising.

Investors should take a look at Darden Restaurants, Inc. (DRIAnalyst Report). The owner of the Olive Garden spun off its Red Lobster chain and is now a Zacks Rank #1 (Strong Buy). It is expected to grow earnings by 46% in fiscal 2015 and another 12.3% in fiscal 2016.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

Snap-on: Zacks’ Bull of the Day Play

Snap-on Incorporated (SNAAnalyst Report) is cashing in on the economic recovery. This Zacks #1 Rank (Strong Buy) is expected to see double digit earnings growth in 2015 and in 2016.

Snap-on makes tools, equipment, diagnostics and repair information for car dealerships and repair centers as well as for customers in aviation and aerospace, agriculture, mining, power generation and technical education.

Even though it’s headquartered in Wisconsin, it’s a global operation.

Another Beat in Q4

On Feb 5, Snap-on reported its fourth quarter results and once again beat the Zacks Consensus Estimate. Earnings were $1.97 compared to the Zacks Consensus of $1.83.

Check out the amazing earnings surprise track record. It hasn’t missed in 5 years and shares have soared to all-time highs.

Sales rose 7.5% to $857.4 million from the fourth quarter of 2013, excluding unfavorable currency translation. Organic sales jumped 9.8%.

Its largest segment, Snap-on Tools Group, saw sales rise 10.5% to $387.5 million from the year ago quarter due to sales increases in both the US and international franchise operations. Excluding unfavorable currency translation, organic sales increased 11.8%.

The company expects sales momentum to carry into 2015.

3 estimates were raised for 2015 in the last 60 days. Analysts expect earnings to grow 10.5% in 2015 and another 11% in 2016.

Shares Soar

Shares hit new all-time highs after the solid earnings report but have since given some of it back.

Snap-on used to be a value play but with the surge in the shares it is now trading with a forward P/E of 18.1. That is basically in-line with the S&P 500 which trades with an average P/E of 17.9.

For those looking for an industrial name with a great earnings track record and double digit earnings growth, Snap-on is one to keep on your short list.

Want More of Our Best Recommendations?

Zacks’ Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

PennyMac Mortgage: Zacks’ Bear of the Day Play

PennyMac Mortgage Investment Trust (PMT) is a REIT that invests primarily in residential mortgage loans and mortgage-related assets. The company is an externally managed by PNMAC Capital Management, an investment adviser.

The company invests in residential mortgage-related opportunities including mortgage loans, mortgage servicing rights and mortgage-backed securities. It invests in both newly originated prime mortgage loans and distressed mortgage loans.

Disappointing Fourth Quarter Results 

The company reported its Q4 results in February. Net income for the quarter was $26.5 million, down 52% from the prior quarter.

Net investment income was $53.1million, down 50% from the prior quarter.  ROE declined to 7% from 14% in the prior quarter.

The company reports results through two segments– Investment Activities and Correspondent.  Investment Activities segment suffered due to the impact of lower current and expected home prices and a seasonal slowdown in loans.

The Correspondent Production segment also had to struggle due to highly competitive correspondent market for newly originated conventional conforming loans.

Downwards Revisions

Due to disappointing results, quarterly and annual estimates have been revised sharply downwards in the past few weeks by analysts.

Zacks Consensus Estimates for the current and next fiscal year now stand at $2.58 per share and $2.73 per share, from $2.78 per share and $3.10 per share, before the results.

Declining estimates sent PMT back to Zacks Rank # 5 (Strong Sell).

The Bottom Line

Adverse pricing conditions in the distressed loans market and a highly competitive origination environment will continue to pose headwinds for the stock.

Further, a brightening economy and rising rate environment does not bode well for the profitability of the company.

Better Play in the Industry?

Investors looking for a better opportunity in the Real Estate operations industry could consider Jones Lang Lasalle (JLL) a Zacks Rank# 2 (Buy) Rated stock.
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Darden Restaurants: Zacks’ Bull of the Day Play

Thanks to savings from lower gas prices, consumers are now more willing to open their wallets. Higher spending at restaurants has resulted in a positive momentum for  the industry in general.

About the Company     

Founded in 1968 and headquartered in Orlando, FL, Darden Restaurants (DRIAnalyst Report) is one of the largest casual dining restaurant operators worldwide. The company has operations in the US and Canada with more than 1,500 restaurants. The company owns and operates restaurant chains, primarily under the brands Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V s and Yard House.

Excellent Earnings and Upbeat Guidance

The company reported financial results for its fiscal third quarter on March 20. Total sales from continuing operations increased 6.9% to $1.73 billion, while adjusted earnings increased 39% to $0.99 per share, easily beating the Zacks Consensus Estimate of 84 cents. Higher revenues and comps and lower interest expenses contributed to the beat.

Sales were up in almost all the company’s units. At LongHorn Steakhouse, sales were up 11.4% to $404 million. Sales at Olive Garden increased 3% year over year to $957 million, whereas sales at The Specialty Restaurant Group were up 3% year over year to $957 million.

Following excellent results, the company increased its earnings guidance for fiscal 2015. Earnings are expected in the range of $2.45 to $2.48 per share compared with the previous expectation of $2.25 to $2.30 per share, up 43% to 45% year over year. The company also raised the same restaurant sales growth guidance to a range of 2% to 2.5% from 1% to 2%.

Positive Earnings Estimates Revisions  

After excellent results and upbeat guidance, analysts have raised their estimates as well as price targets for the company. Zacks Consensus Estimates for the current year and the next year are now $2.49 and $2.76 per share respectively, up from $2.30 and $2.63 per share, 7 days ago. Rising estimates sent the stock back to Zacks Rank #1 (Strong Buy) after the results.

The Bottom Line

Recent results signify continued turnaround for the company after many years of weak growth, as the group remains focused on improving operational efficiency. During the conference call, the management also revealed that they are exploring opportunities to unlock shareholder value with their real estate holdings.

Further, the Restaurant industry has seen strong momentum of late as consumers are ready to spend more on eating out, thanks to savings from lower gas prices.

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