Monthly Archives: June 2015

Houghton Mifflin: Zacks’ Bear of the Day Play

Houghton Mifflin Harcourt (HMHCSnapshot Report) We are a full week into summer, so by now the kids that didn’t get failing grades are running through the neighborhood and playing games like “kick the can” and “hide and go seek.” The children that didn’t do their homework are finding out that summer school is hot… but with a transition to digital books, analysts are lowering estimates. That makes HMHC a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day.

Description

Houghton Mifflin Harcourt provides education solutions for educational institutions and consumers worldwide. It delivers content, technology, and services to approximately 50 million students. Houghton Mifflin Harcourt Company is headquartered in Boston, Massachusetts.

Recent Miss

The company recently posted a loss of $1.12 when the Zacks Consensus Estimate was calling for a loss of $0.98. The topline came in $1M more than expected, a welcome change from the last two quarters where the company failed to meet the top line estimate.

The miss on the bottom line was the third consecutive miss.

Earnings Estimates

Estimates have been falling all year. The Zacks Consensus Estimate for 2015 was calling for a gain of $0.09 at the start of the year, but has since fallen to a loss of $0.51.

The 2016 Zacks Consensus Estimate slipped from a gain of $0.30 to a loss of $0.23 where it currently stands.

Valuation

The valuation for HMHC is a complex picture. Part of the reason for this is that in this year the company is expected to see revenue growth of 11% but will see earnings contract by 182%. Normally we see revenue growth drive earnings growth, but that is why this story is a little more complex than most. The price to book multiple of 2.3x is below the 3.8x industry average. The price to sales multiple of 3x is also showing the stock at a discount to the 3.5x industry average.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represent analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #5 (Strong Sell) we see that estimates are moving lower.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

He also run the new Stocks Under $10 Investor service where he looks for low priced stocks that are seeing positive earnings estimate revisions. This popular service has seen some strong early returns and offers a free trial via the Zacks Investor Collection program that includes Home Run Investor, Value Investor and Income Plus.

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Cowen Group: Zacks’ Bull of the Day Play

Cowen Group (COWNSnapshot Report) is an asset manager and investment bank. The Ramius division has some $12B in assets under management and the investment bank is a research driven for growth oriented clients. It has recently moved to a Zacks Rank #1 (Strong Buy) and today it is the Bull of the Day.

Alternative Investing

Over the last year or so there has been a big push to serve clients via “alternative investing.” This means many different things, but the Ramius strategy carries an interesting strategy of flexing that $12B across areas like small cap activism, royalty revenue streams, merger arbitrage, managed futures and of course tailored hedging strategies. By diversifying the target, Ramius is likely going to see a smother set of returns, as opposed to the bulky, one time gains that come when focusing on a single strategy.

A company presentation from September of 2014 broke out the investment banking revenues this way:

Description

Cowen Group is a publicly owned asset management holding company. Through its subsidiaries, the firm provides alternative investment management, investment banking, research, and sales and trading services for its clients. Cowen Group was founded in 1994 and is based in New York, New York with additional offices in Boston, Massachusetts, Chicago, Illinois, Cleveland, Ohio, Dallas, Texas, and San Francisco, California.

Earnings History

COWN has topped the Zacks Consensus Estimate in each of the last five quarters. Easily the most impressive beat came about two months ago when the company reported EPS of $0.20 when the Zacks Consensus Estimate was calling for a loss of $0.10. That $0.10 beat “translated” into a positive earnings surprise of 100%.

This was the second consecutive quarter that the company delivered a beat of 100%. The December 2014 quarter saw an $0.08 beat which translated into a positive earnings suprise of 100%.

Earnings Estimates

Estimates for COWN have soared. The Zacks Consensus Estimate was $0.43 in January and kicked higher by a penny in February. By April, the number added eight more cents and that is where the number has been since.

The 2016 Zacks Consensus Estimate was $0.65 when the number debuted back in December of last year. The number hasn’t moved since then, and that may be due to lack of visibility in the business of investment banking. It is likely that analysts are waiting for some updated guidance from management.

Valuation

The valuation for COWN is one that should make most investors look a little deeper into this story. The stock trades at a discount to industry average in all one one major metric that investors commonly look at. The trailing PE multiple of 13.3x is below the 15.3x industry average, but the forward PE is the one metric that shows a small premium. The forward PE of 12.5x is just slightly above the 11.7x industry average. The price to book multiple of 1x is well below the 2.1x industry average. Also showing a discount to the industry average is teh 1.6x price to sales multiple with the industry average just shy of 4x.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #1 (Strong Buy) we see that estimates are moving higher.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

He also run the new Stocks Under $10 Investor service where he looks for low priced stocks that are seeing positive earnings estimate revisions. This popular service has seen some strong early returns and offers a free trial via the Zacks Investor Collection program that includes Home Run Investor, Value Investor and Income Plus.

Michael Kors: Zacks’ Bear of the Day Play

Fashion is fickle. One day you’re the coolest kid in school wearing your Member’s Only jacket and the next you’re the old guy hanging on to that trend for a little too long. This “boom-bust” cycle of fashion can make millionaires overnight and force titans of industry into bankruptcy. That’s the reason why you see new stores popping up all the time at the local mall. Trends change, fashions change, over and over again.

What was the hot item last year now finds itself on the clearance racks at TJ Maxx. Today’s Bear of the Day, Michael Kors (KORSAnalyst Report) may have had its best days in the rearview mirror. Michael Kors is a global luxury lifestyle brand which launched over 30 years ago. Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude.

KORS is scraping the bottom of the barrel as a Zacks Rank #5 (Strong Sell). Being the momentum guy here at Zacks there’s another rank that’s sticking out like a sore thumb as well. KORS has a Momentum Style Score of “F” indicating negative revisions and weakness relative to other stocks in the industry.

It’s not often that you see double-digits earnings estimate revisions in either direction but that’s exactly what you have here with KORS. Over the last thirty days a whopping 13 analysts have revised their earnings estimates for the current year to the downside. The bearish sentiment on Wall Street has pushed down the Zacks Consensus Estimate from $4.77 all the way down to $4.38.

As for the stock price, shares have been under steady pressure for most of the last year. Peaking just above $83 in September 2014, shares have been hit again and again by disappointing earnings and guidance. The last huge drop in the stock occurred in late May of this year, cutting shares down from $60 to $45.88 in a single trading session.

The recent bearish move downward has taken out that bottom seen in late May and shares now trade at $44.91. With the bottom falling out, you have to wonder where the next level of support is going to be for KORS.

Investors looking for other ideas within the same industry should take a look at Zacks Rank #1 (Strong Buy) stocks GIII Apparel (GIIISnapshot Report) and Perry Ellis (PERYSnapshot Report).

Tsakos Energy: Zacks’ Bull of the Day Play

Once the darling of the equity market, the dry bulk shipping industry has shrunk away into relative obscurity. Prior to the Great Recession, stocks in this industry were among the most sought after stocks in the market. They offered steady income through hefty dividends and profited from an expanding world economy.

But as the recession became entrenched these stocks were beaten and bruised. Among the easiest ways to measure the overall strength of this industry is the Baltic Dry Index. The BDI calculates the average shipping rate across 23 different routes and four separate sized ships. As the BDI goes, so goes stocks in this industry. Good news is, the BDI is beginning to climb again. It’s a cyclical index that tends to go up during the warm summer months.

As a result, things are beginning to heat up for my Bull of the Day Tsakos Energy Navigation (TNPSnapshot Report). Tsakos is a Zacks Rank #1 (Strong Buy) with Style Scores of “C” for Growth, and “A” for Value and Momentum. Tsakos Energy owns several ships including 21 crude oil tankers and 29 clean/product tankers. The company also has 13 ships under construction expected to be completed by 1Q2017.

Last quarter, Tsakos surprised earnings to the upside by 6 cents, coming in at 42 cents per share versus the Zacks Consensus Estimate of 36 cents. This came on the heels of a 7 cent beat for the quarter ending 12/2014. That’s part of the reason for our favorable Zacks Rank.

Another large part of the reason is the recent earnings estimate revisions to the upside. Over the last sixty days, five analysts have increased their earnings estimates for the current quarter and for the current year. The bullish sentiment has pushed up our Zacks Consensus Estimate from 19 cents per share to 35 cents for the current quarter and up from $1.02 to $1.41 for the current year.

This bullish sentiment has spread to investors as the chart has been breaking out recently. After bottoming out at $4.75 in mid-October the stock rebounded nicely, reaching a high of $8.47 in January. That level served as a firm top on the stock until a fierce rally in April pushed the stock past it. Since then, shares have tracked above the 21 day moving average for the most part. An overbought Commodity Channel Index remained for much of the rally until a recent dip below the zero line broke up the longer term trend.

A fresh 52-week high three days ago was met with a fast and furious retrace lower. Volume has been about average and buyers came in on Friday to pick up shares put on a discount by Thursday’s sell off. A pop back up above the zero line for the Commodity Channel Index would confirm the re-establishment of the long term bullish trend.

Acacia Research: Zacks’ Bear of the Day Play

Acacia Research (ACTGSnapshot Report) has consistently been a Zacks #4 Rank (Sell) or #5 Rank (Strong Sell) for most of the past two years. In that time, the stock has fallen from $30 to new 5-year lows this month under $9.60.

Acacia Research Corporation, through its subsidiaries, develops, acquires, and licenses patented technologies. It assists patent owners with the prosecution and development of their patent portfolios, protection of their patented inventions from unauthorized use, generation of licensing revenue from users of their patented technologies and enforcement against unauthorized users of their patented technologies.

The slide in ACTG shares really accelerated this year as analyst earnings estimates plummeted further. Here’s what I wrote in March when I profiled this earnings evaporation…

“In just the past 60 days, the consensus EPS estimate for this year dropped from $0.62 to $0.50 while those for next year fell from $1.23 to $0.86, a 30% wipeout.”

Today’s update: 90 days later, those full-year EPS estimates have cascaded from $0.50 to $0.21 for 2015 and from $0.86 to $0.68 for 2016. The evaporation continues.

You can see the longer-term EPS decline in the Zacks proprietary Price & Consensus chart…

Until this earnings evaporation stops and reverses, it’s probably best to keep this portfolio of patents out of yours.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.

Pep Boys: Zacks’ Bull of the Day Play

Pep Boys (PBYSnapshot Report) has had a bunch of good news in the past month and shares have risen 27% to prove it.

On May 20, the Wall Street Journal reported “Potential buyers are kicking the tires of Pep Boys -Manny Moe & Jack. Private-equity firm Golden Gate Capital and other suitors have recently expressed interest in buying the auto-parts and services retailer, according to people familiar with the matter.

“Pep Boys isn’t working with an investment bank on a sale and isn’t currently in negotiations with any of the parties, one of the people said. It isn’t clear whether the company wants to sell and a deal is far from certain.”

That day’s news was good for a 16% pop from $9.25 to $10.75.

Then on June 8, PBY delivered its first earnings beat in a while and the company outlook spurred analysts to raise estimates significantly, taking this year from $0.16 to $0.25 and next year from $0.23 to $0.33. Thus the boost in the Zacks Rank.

That surprise was worth 9% to shares the following day, June 9.

And last week, the company announced the appointment of Scott Sider as its new CEO. Mr Sider was also appointed to the Board of Directors. Mr Sider most recently served as Hertz Corporation’s Group President, Rent A Car Americas, their largest division.

This news didn’t bring any further surge in shares, but one look at the volume this month and you can see that big funds are definitely on the prowl, with the 10-day average exceeding 1 million shares vs. the 90-day average of under 500,000.

GAMCO On the Prowl

But some of the most interesting news this spring for PBY has been the jockeying by big funds to see who is going to out-bid or out-maneuver the other in an attempt to potentially take PBY private.

In the midst of all this has been one large investment fund quietly increasing its stake and not-so-quietly trying to take over the board of directors.

Mario Gabelli’s GAMCO Investors, which now holds about 10.17 million shares of Pep Boys representing almost 19% of the company, first announced in April that it was planning to nominate five candidates for the board of the auto parts and services retailer.

At the end of Q1, GAMCO held only a 12% stake.

And another big holder who had been selling recently suddenly had a change of heart in May. Glenhill Advisors, who reduced their stake from 7.8% to 7% in Q1, filed an original 13D in late May, shifting from a 13G, to effectively declare themselves (or obtain the right to be) activist investors.

In the 13D filing, Glenhill noted that in light of the recent GAMCO filing and press reports about potential acquirers, Glenhill may choose to engage in a dialogue with PBY or others concerning the best future plans for the Company.

But since this May filing action, Glenhill may have backed off. It looks like they sold about 400,000 shares in mid-June and went back to a 13G filing, effectively letting GAMCO have their way.

From the looks of the earnings momentum (despite the high forward multiple near 40X) and the price action (a “high-and-tight” bullish flag), I think this battle of titans should help keep a bid under shares. If you have any doubt, look at the volume bars for the past month as these heavies, and probably many others, accumulate shares.

Disclosure: I own PBY shares for the Zacks Follow The Money Trader.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

Gorman-Rupp: Zacks’ Bear of the Day Play

Earnings estimates have fallen sharply for Gorman-Rupp (GRCSnapshot Report) following a big Q1 miss. A sharp drop in oil and gas production hurt sales and margins in Q1.

The negative estimate revisions have been significant enough to send shares of Gorman-Rupp to a Zacks Rank #5 (Strong Sell). That puts the stock in the bottom 5% of all companies that Zacks ranks based on earnings momentum.

The Gorman-Rupp Company designs and manufactures pumps and pump systems for use in diverse water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications.

Its product line consists of pump models ranging in size from 1/4″ to nearly 15 feet and ranging in capacity from less than one gallon per minute to nearly one million gallons per minute.

First Quarter Results

Gorman-Rupp reported disappointing first quarter results on April 23. Earnings per share came in at $0.28, missing the Zacks Consensus Estimate of $0.41. It was a 26% decline from the same quarter last year.

Net sales fell 10% to $99.233 million, well below the consensus of $119 million. This was due to “the extremely rapid decline in oil and natural gas production, combined with adverse winter conditions.” The gross profit margin fell 934 basis points to 24.1% of net sales.

Despite the revenue drop, S,G & A expenses rose 3.5% year-over-year. As a percentage of net sales, S,G & A jumped from 11.7% to 13.4%. These factors led to a 28% drop in operating income year-over-year.

Meanwhile, total inventories jumped 8% year-over-year, due to a 154% increase in finished products. This suggests that the company may face sales and margin headwinds in the upcoming quarters too.

Estimates Falling

Following the big Q1 miss, analysts lowered their earnings estimates for both 2015 and 2016. The agreement and magnitude of estimate revisions was significant enough to send shares of Gorman-Rupp to a Zacks Rank #5 (Strong Sell).

The 2015 Zacks Consensus Estimate is now $1.38, down from $1.56 before the report. The 2016 consensus is currently $1.41, down from $1.51 over the same period.

Valuation

Shares of Gorman-Rupp do not look like a value here. Its 12-month forward P/E ratio is around 21, above its 10-year historical median and the industry median. Its enterprise value to cash flow ratio of 15 is also above both its historical and industry medians.

The Zacks Value Style Score for Gorman-Rupp is a ‘D’.

The Bottom Line

With falling sales, profit margins and earnings estimates, and with soaring inventory and a lofty valuation, investors should look elsewhere for now.

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

Knoll: Zacks’ Bull of the Day Play

Earnings estimates have risen sharply for Knoll (KNLSnapshot Report) after the company delivered strong first quarter results on April 20. Not only did the furniture maker deliver strong revenue growth in Q1, margins expanded significantly, leading to enormous growth in profits.

The agreement and magnitude of analysts’ estimate revisions has been strong enough to send shares of Knoll to a Zacks Rank #1 (Strong Buy). That puts it in the top 5% of all stocks that Zacks ranks based on earnings momentum.

Knoll designs and manufactures furnishings and accessories, textiles, fine leathers, and felt, for the workplace and home. Its products are targeted at the middle to upper end of the market and are sold primarily in North America and Europe.

The company reports its results in three segments: Office (office furniture; 63% of net sales in Q1), Studio (lounge seating, side, cafe and dining chairs, barstools, and conference, dining and occasional tables, as well as indoor and outdoor furniture and lighting; 26%) and Coverings (high-quality textiles, felt, and leather; 11%).

First Quarter Results

Knoll reported strong first quarter results on April 20. Earnings per share came in at $0.36, crushing the Zacks Consensus Estimate of $0.24. It was double adjusted EPS of $0.18 in the same quarter last year.

Net sales jumped 16% year-over-year to $266.5 million, well above the consensus of $253.0 million. Excluding an acquisition, organic sales soared 12.7%.

Each segment experienced top-line growth and profit margin expansion. Net sales in the Office segment grew 15% year-over-year.

Meanwhile, the gross margin expanded from 33.4% to 35.8% of net sales, driven in part by price increases in its Office segment and a greater mix of high-margin Specialties sales.

Knoll also benefited from a weakening of the Canadian dollar relative to the U.S. dollar. Knoll generally benefits from a stronger dollar because a higher percentage of its costs are denominated in foreign currencies than its revenues. In 2014, for instance, about 12% of revenues were denominated in currencies other than the U.S. dollar. However, more than 30% of its cost of goods sold were in currencies other than the greenback.

Knoll also leveraged its fixed expenses in Q1, which helped increase the operating margin from 5.4% to 8.4% of net sales.

Estimates Rising

Following the strong Q1 beat, analysts unanimously revised their estimates significantly higher for Knoll.

The 2015 Zacks Consensus Estimate is now $1.46, up from $1.35 before the report. The 2016 consensus is currently $1.62, up from $1.56 over the same period.

This sent the stock to a Zacks Rank #1 (Strong Buy).

Reasonable Valuation

The valuation picture looks reasonable for Knoll. Shares trade around 16x 12-month forward earnings, which is in-line with the industry median. And its price to cash flow ratio of 16x is slightly below the industry multiple of 17.

The Bottom Line

With strong top-line growth, expanding margins, rising earnings estimates and reasonable valuation, Knoll offers investors a lot to like.

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

Greif Inc.: Bear of the Day Play

Greif Inc. (GEFAnalyst Report) recently posted their fourth consecutive massive earnings miss, and second consecutive revenue miss.  Management attributed the recent miss on several items including weakness in Brazil, the U.S. industrial economy which was on a downtrend, and a slowdown in China.  Further, FX headwinds and expected weakness in overall volumes are further obstacles for the company to overcome.  Due to the combination of these factors, Greif Inc. is the Zacks Bear of the Day.

This Zacks Ranked #5 (Strong Sell) company produces and sells industrial packaging products worldwide.  The company has four main segments; Rigid Industrial Packaging & Services, Paper Packaging, Flexible Products & Services, and Land Management segment.  The company produces steel, plastic, fiber, flexible and corrugated containers, packaging accessories and containerboard, and provides bending, filling and packaging services.  It also manages acreage in the United States.

In their most recent quarter, the company saw overall revenues decrease 16.8% y/y; the Rigid Segment experiencing a revenue decline of 15%, the Paper Segment saw revenues drop 21.8%, the Flexible Segment saw revenues drop 22.1%, and Land Management saw positive revenues, but the segment only accounts for less than 1% of total sales.  Further, in all segments outside of Land Management, volumes were either flat or declining.

Estimates Graph

The graph below shows GEF’s historic price levels against the EPS consensus.  As you can see the estimates are significantly declining.

Declining Estimates

Over the past 30 days, estimates have declined for Q3 15, Q4 15, FY 15, and FY 16; Q3 15 fell from $0.63 to $0.42, Q4 15 dropped from $0.76 to $0.49, FY 15 shrank from $2.27 to $1.74, and FY 16 slipped from $2.63 to $2.31.

Bottom Line

Management is in the midst of a transformation thought 2017, but 2015, and 2016 appear to have significant headwinds.  While the story sounds positive, it will take more time to meet management’s expectations.  In the meantime, revenue and volume issues persist.

If you are inclined to invest in the Containers Metal/Glass segment, you would be best served to look at Crown Holdings (CCKAnalyst Report), or Mobile Mini Inc. (MINISnapshot Report).  Both companies carry a Zacks Rank #3 (Hold).

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InterDigital: Zacks’ Bull of the Day Play

InterDigital (IDCCSnapshot Report) is at the forefront of wireless innovation.  The company recently announced that they have been invited to join the 5G Forum as a member.  This non-profit organization is researching 5G technology and services in Asia.  Further, InterDigital has been participating in Europe’s, European Union Initiatives for the rollout of 5G infrastructures throughout Europe.  Moreover, InterDigital has met or beat the Zacks Consensus Earnings and Revenue estimates for the past three quarters.  Due to these strong factors, InterDigital has become the Zacks Bull of the Day.

This Zacks Ranked #1 (Strong Buy) company designs and develops technologies that enable and enhance wireless communications in the United States and internationally.  It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks.  Their patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants, wireless infrastructure equipment comprising base stations, and components, dongles, and modules for wireless devices.

In their most recent quarter, InterDigital saw total revenues increase 47.6%.  These revenues all came from reoccurring revenue, representing an increase of 96% y/y.  Management was able to decrease intellectual property enforcement expenses by 32% y/y.  Further, management was able to increase ending cash and short-term investments to $911.2 million, enabling them to further pursue any new deals.  Finally, management announced an additional $100 million for their share buy-back program, bringing their current total repurchase funds to $179.8 million, or just about 8% of total shares currently outstanding.

Increasing Estimates

The graph below shows InterDigital’s historic Price and EPS surprise.  As you can see these positive announcements have caused significant price appreciation.  InterDigital has posted a four quarter average positive earnings surprise of 17.43%, indicating that not only do they beat the earnings estimates they crush them.

Over the past 30 days, estimates for InterDigital have increased for Q2 15, Q3 15, FY 15, and FY 16; Q2 15 jumped up from $0.58 to $0.81, Q3 15 rose from $0.49 to $0.54, FY 15 increased from $2.35 to $2.62, and FY 16 rose from $2.36 to $2.59.

Bottom Line

This mobile technology company is uniquely positioned in the 5G, and wireless market.  This position has enabled the company to post revenue growth, and declining enforcement expenses.  These positives coupled with their massive share repurchase program have this company poised for long term future growth.

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