Monthly Archives: July 2015

Kansas City Southern: Zacks’ Bear of the Day Play

Railroad operators like Kansas City Southern (KSUAnalyst Report) have been operating in a difficult environment for quite some time now. Commodity prices have been weak, while concerns over a strong dollar have also dulled foreign demand.

We saw just this trend in KSU’s recent earnings report as the company met estimates, but struggled to match up to revenue expectations thanks in large part to their commodity business. In fact, for the Q2 report investors saw energy revenues crash 46% year-over-year, while agricultural and minerals were down about 9% (yoy) too. Shares of KSU are down about 10% in the past six months thanks to this bearish trend, but there could actually be more pain ahead for KSU in the near future.

Earnings Estimates

This poor stretch could definitely have some more room if you look to recent earnings estimates for KSU. The trends for both the current quarter and the current year have been decidedly lower and are pushing current consensus estimates into EPS contraction territory when looking at year-over-year figures.

The magnitude of these estimate changes has also been pretty intense as the current quarter figures have fallen from $1.33/share to $1.21/share in the past month, while we have seen a slide from $4.74/share to $4.48/share for the current year over the same time frame.

With this kind of pressure on earnings estimates, it shouldn’t be surprising to note that KSU has a Zacks Rank #5 (Strong Sell). That means we are looking for more underperformance from this company and really the industry at large in the near term too.

If that wasn’t enough KSU doesn’t exactly have great metrics on the growth or value fronts either. The stock has a ‘C’ grade for growth and an ‘F’ grade for value, largely thanks to its higher-than-average forward PE and weaker than industry readings on projected sales growth and projected EPS growth.

Other Choices

If you are looking for a top pick in the transportation sector, it may be time to go beyond the railroad segment. The shipping industry, with its top 20% rank, is definitely a place to seek out great stocks. In particular, Teekay (TKSnapshot Report) is a compelling selection as it has a Zacks Rank #1 (Strong Buy) along with expected double digit EPS growth this year.

So don’t take a ride on the rails right now and instead set sail for the high seas. Your portfolio will likely thank you as the earnings estimate revision trend is definitely favoring the shipping world over the rails right now.

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DR Horton: Zacks’ Bull of the Day Play

As concerns over a sharp rate hike fade, housing stocks like DR Horton (DHIAnalyst Report) are coming back into focus. Companies like DHI stand to benefit from the continuation of low mortgage rates, while a stronger economy is making homeownership a reality for more people as well.

These positive trends can be seen in DHI’s recent earnings report as homebuilding revenues for the company moved higher by 37% year-over-year, while net orders rose 22% as well. If that wasn’t enough, the backlog appears to be quite nice for DR Horton, including a 12% increase, suggesting that there is plenty of pent up demand for housing right now.

Earnings Outlook

This strong demand trend is making for an impressive earnings outlook for DHI as current quarter EPS is expected to grow over 30% (year-over-year) while the full year looks to grow earnings over 25%. But before you get concerned over these lofty growth expectations, consider that DHI has posted three straight beats, and the company has averaged a 6.5% earnings beat in the past four quarters.

For these reasons, we currently have DHI as a Zacks Rank #1 (Strong Buy) and are looking for more growth out of the company in the near future. The stock has already crushed the S&P 500 so far in 2015 and we are looking for a similar trend to close out this volatile year too.

We actually also have a ‘B’ grade for DHI on its growth metrics making it of particular interest to investors looking for this type of stock. This is due to ROE that is better than the industry, current cash flow that beats out its peers, and then projected sales growth that is nearly double the industry average too.

Bottom Line

The housing industry is looking quite strong right now and there are numerous options in the segment that could lead to gains. In fact, the industry is currently in the top 20% overall with only a single stock in the group possessing a Zacks Rank #5 (Strong Sell) out of nearly 20 companies.

But while you might have a multitude of choices here, a closer inspection of DHI is probably one of the best options. The company has solid growth prospects, a strong earnings estimate picture, and it is riding a wave of positive trends in the overall economy too, making it an excellent choice for investors looking to dive into the housing industry right now.

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Qualcomm : Zacks’ Bear of the Day Play

Qualcomm (QCOMAnalyst Report) has been a Zacks #4 Rank Sell since late May when it was trading above $70. Since then, falling earnings estimates have pushed the stock into the cellar among thousands of stocks with better profit momentum.

In just the last 30 days, full-year 2015 EPS has dropped from $4.30 to $4.06 and 2016 projections have slid from $4.61 to $4.25.

And a big chunk of these downward earnings estimate revisions came in the last week since the company’s Q3 FY15 report on July 22. The quarter offered generally in-line results, and even a 10% beat to the Zacks Consensus EPS, but the company provided significantly worse-than-expected guidance for the next quarter.

Negative Trends in View

Most of the shortfall was due to demand concentration at the high end, including the iPhone that only utilizes Qualcomm’s baseband and Samsung’s GS6/Note 5, which increasingly uses home-grown chipsets.

While there was has been much discussion about “strategic realignment” and cost-cutting by the company and analysts, the real story might be on the top line. Qualcomm reported revenue of $5.832 billion, which was down 15.4% sequentially and down 14.3% year over year.

Yet Qualcomm also had to guide down for next quarter sales of $4.7-$5.7 billion, where the midpoint would represent negative 10.8% sequentially. And analysts remain cautious as problems with Qualcomm’s current generation products are viewed as creating a headwind for its chip division through the next several quarters.

Back to $1,000?

I remember when QCOM was the poster child of the Nasdaq Bubble, before we officially started calling it a “bubble” in perfect 20/20 hindsight.

The stock was on its way to $1,000 per share.

In the summer of 2014, QCOM shares made highs not seen since the dotcom euphoria peak in March of 2000. Apparently “mobile tech” was in a bubble too.

And we would have gotten close to that 4-figure peak again were it not for a couple of stock splits.

But since mid-2014, the trend has been a series of stair-steps downward. Below you can see how the proprietary Zacks Price & Consensus chart could have warned you of the impending pain for shareholders as EPS estimates led the way…

But Isn’t QCOM the Gold Standard in Mobile Chips?

FBR Capital Markets recently commented on the QCOM quandary…

“Stepping back, we think QCOM remains the gold standard in today’s cellular technology. However, as the mobile innovation treadmill slows, we acknowledge a growing trend among handset OEMs to ‘roll their own’ apps processors and baseband modems with the goal of reducing handset cost.”

There is also concern that QCOM’s position in the next big market, 4G LTE, is not significant enough to make a difference.

Since Gartner projects that over 5 billion handsets will upgrade from 3G over the next 2-3 years, there’s still time for QCOM to adapt and reverse the top and bottom line slides.

Just keep your eye on the Zacks Rank to let you know when the turn is taking shape.

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

Lithia Motors: Zacks’ Bull of the Day Play

Lithia Motors (LADAnalyst Report) has been riding in fifth gear all year, with an impressive 35% share rally from the mid-$80s to over $115.

The move for this operator of 129 auto dealerships in 14 states, primarily in the Northwest and Southwest, has been driven by solid earnings momentum, even after a slight hiccup last fall. More on this in a moment.

Lithia’s earnings momentum has been reflected in its Zacks Rank all year too, with the stock consistently earning either a #1 Rank (Strong Buy) or #2 Rank (Buy) since December 31.

And after their earnings beat and guidance last week, analysts have been scrambling to raise estimates further, taking full-year 2015 EPS up to $6.72 from $6.41 and 2016 projections from $7.11 to $7.39.

What Earnings Hiccup?

Here’s what I wrote about LAD on October 23…

Lithia Motors was a shining star of the automotive dealer group industry for the past three years. And just when car sales were breaking recovery records left and right this year, the stock — and more importantly, its earnings momentum — reached a peak.

One wonders if all the terrific sales numbers were also juiced in large part by ultra-cheap financing and special incentives.

On Monday October 13, Lithia warned that it is expecting its 2014 third quarter adjusted net income to be in the range of $34 million to $34.8 million, or $1.30 to $1.32 per diluted share, below its previous forecast of $1.36 to $1.38 per share.

This, of course, brought a wave of analyst earnings estimate revisions (EER). They took this year’s consensus down from $5.05 to $4.86 and next year got clipped even more on a percentage basis from $6.40 to $5.90.

But if the US consumer and Lithia both continue to be as strong as they were in the past few years in an expanding economy, then look for LAD to find a bottom sometime in the next few months.

It looks like those hiccups quickly disappeared, as LAD found bottom with the rest of US equities in October and has only marched higher.

Here’s the awesome Zacks visual on earnings momentum which explains why…

Since that third quarter warning, Lithia has posted 3 earnings beats in the last 3 quarters averaging +15%.

Driving the earnings growth is strong top-line growth. Second quarter 2015 revenue from continuing operations increased $775 million, or 63%, to $2.0 billion from $1.2 billion for the second quarter of 2014.

And here were the sales highlights of a strong Q2…

Second Quarter-over-Quarter Operating Highlights:

Total same store sales increased 11%

New vehicle same store sales increased 8% Used vehicle retail same store sales increased 16% Service, body and parts same store sales increased 10%

Lithia remains a strong growth franchise in auto sales. As long as the economy and consumer are firing on enough cylinders, LAD should continue its winning ways.

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

Air Methods: Zacks’ Bear of the Day PLay

Air Methods (AIRMSnapshot Report) is seeing earnings estimate slide after the company recently revised guidance lower. It is a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day.

Company Description

Air Methods provides air medical emergency transport services and systems in the United States. Air Methods was founded in 1982 and is headquartered in Englewood, Colorado.

Earnings History

AIRM has beaten the Zacks Consensus Estimate three times in the last six quarters.

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.

NeoPhotonics: Zacks’ Bull of the Day Play

NeoPhotonics (NPTNSnapshot Report) is benefitting from a long term trend in the tech sector. Big companies like Facebook (FBAnalyst Report), Google and Apple (AAPLAnalyst Report) are all building very large data centers that cost billions of dollars each. NPTN is part of the supply chain for these huge investments. Analysts have recently increased their earnings estimates and that has helped push the stock to a Zacks Rank #1 (Strong Buy) and today it is the Bull of the Day.

Data Center Thesis

I have identified several stocks that benefit from the recent trend of tech companies building out massive data centers. This is one of those companies as the data center needs to be able to hand the massive amounts of data that comes in on fiber optic lines.

Description

NeoPhotonics makes hybrid photonic integrated optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks. Its products include transmitter, receiver, and switching products for 100 gigabits per second (Gbps) optical transmission applications over distances of 2 to 2,000 kilometers. NeoPhotonics was founded in 1996 and is headquartered in San Jose, California.

Earnings History

The company beat the Zacks Consensus Estimate in each of the last four quarters so that is great, but the best part is the last two quarters saw 200% positive earnings surprises.

In the most recently reported quarter, which hit the wire back on May 7, the company posted a gain of $0.06 when the Zacks Consensus was looking for a loss of $0.06. So that was a 200% positive earnings surprise, and as a result, the stock was up more than 24% in the session following the release. That is what I am talking about!

The company reports again on or about August 6, and Wall Street is looking for $85M in revenue and EPS of $0.15. The Zacks EPS number is $0.11 due to how we treat options expenses.

Earnings Estimates

This story is something that will catch on pretty soon. I see that the Zacks Consensus Estimate was calling for a loss of $0.25 back in February, but that saw a huge swing to a gain of $0.08 the next month. In May the number launched again to $0.30 and then added a nickel in June. The number has held still in July, but earnings are right around the corner.

The 2016 numbers saw a similar move and are resting at $0.45 for now. I would not be surprised to see that number move much higher after the next earnings release.

Growth

Topline growth is crucial to long term success, especially for a small cap company like NPTN. I see they posted revenue growth of 8.5% in 2014 and are expected to improve on that this year to 9.2%. Those are nice numbers, but I really want to see double digit revenue growth. Right now, analyst are calling for 7.4% revenue growth, but again, I think that number will move up after some time and the next earnings report.

EPS grew 22% last year and is exploding this year to 170%. That is great to see, especially when we will have two quarters of that huge growth. Next year analysts are calling for EPS growth of 29% on top of the 170% move for this year… so that is good to see.

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 Ultimate

Lumber Liquidators: Zacks’ Bear of the Day Play

Lumber Liquidators (LLSnapshot Report) is still embroiled in issues related to its laminate floors from China. Until that clears up, this Zacks Rank #5 (Strong Sell) is expected to see earnings decline 84%.

Lumber Liquidators is the largest retailer of hardwood flooring, with 355 locations featuring more than 400 flooring varieties, including solid and engineered hardwood, bamboo, cork, laminate, and resilient vinyl.

60 Minutes Report Hurt First Quarter Results

On Apr 29, Lumber Liquidators reported its first quarter results which missed on the Zacks Consensus for the third quarter in a row.

While net sales rose 5.6% year over year, they were significantly weaker in March after the 60 Minutes show aired, which alleged unfavorable allegations about the company’s laminate floors which were manufactured in China.

March sales fell 12.8% to $89.4 million year compared to March 2014.

In the first quarter, comparable store sales fell 1.8% compared to the first quarter of 2014 due to a 6.2% decrease in the average sale. March told the story, as comparable store sales fell 17.8% after the 60 Minutes report aired.

2015 Estimates Plunge

Not surprisingly, the analysts have been cutting the full year estimates over the last 60 days on continued worries about the fallout from the 60 Minutes segment.

2 estimates were cut for 3015 in the last 60 days.

The 2015 Zacks Consensus Estimate has fallen to $0.37 from $1.47 ninety days ago. That is an earnings decline of 84% as the company made $2.31 in 2014.

Analysts are bearish on 2016 as well as 2 estimates were also cut for the full year in the last 2 months. The 2016 Zacks Consensus Estimate has fallen to $1.40 from $2.09.

Is Lumber Liquidators Cheap?

Shares plunged after the 60 Minutes show aired and remain near 52-week lows.

But they’re still not cheap. With earnings expected to be just $0.37 this year and $1.40 next year, that gives the company a forward P/E of 51.

Lumber Liquidators is expected to report earnings again on August 5. Investors will obviously want to see an improvement in sales.

If you want to own a company in the home remodeling space that doesn’t have these public relations issues, consider one of Lumber Liquidators biggest competitors, The Home Depot,Inc. (HDAnalyst Report). It’s a Zacks Rank #3 (Hold) but it’s supposed to grow earnings by 14.5% this year.

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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.

J.C. Penney: Zacks’ Bull of the Day Play

Is J.C. Penney Company, Inc. (JCPAnalyst Report) back from the dead? This Zacks Rank #1 (Strong Buy) is expected to grow earnings by the double digits both this year and next.

Are you buying?

J.C. Penney operates 1,020 apparel and home furnishing stores across the United States. It also operates jcpenney.com web site.

Big Beat in the Fiscal First Quarter

On May 13, J.C. Penney reported its fiscal first quarter and beat the Zacks Consensus by 22 cents. Earnings were a loss of $0.57 compared to the Zacks Consensus of a loss of $0.79.

While it still isn’t profitable, analysts were encouraged by the progress the company was making in turning business around.

Comparable store sales rose 3.4% year over year.

Its strategy is still the same: to become the preferred shopping choice for Middle America. It is focusing on its market.

In the first quarter, it saw a strong Easter and Mother’s Day as Women’s apparel, Men’s and Home were the company’s top performing merchandise categories.

Gross margin improved 330 basis points to 36.4%, up from 33.1% in the fiscal first quarter of 2014.

There are now 515 Sephora locations within the stores which are performing well. It also is selling other name brand products, including a line from Disney.

Raised Guidance

The company liked the strong trends it saw in the first quarter and raised full year guidance.

Comparable store sales are now expected to rise between 4% to 5%, up from its prior guidance of 3% to 5%.

Gross margin is also forecast to improve 100 to 150 basis points, up from its previous guidance of 50 to 100 basis points.

Estimates Rise for Fiscal 2015 and 2016

Given the positive first quarter and the guidance raise, analysts are bullish on J.C. Penney for the rest of this year and next year.

While the company is still expected to have negative earnings, the estimates are now moving in the right direction. The losses are getting smaller.

For fiscal 2015, the estimate jumped to a loss of $1.30 from a loss of $1.50 in the last 90 days. That is earnings growth of 51.3% as it lost $2.67 in fiscal 2014.

For fiscal 2016, the estimate has jumped to a loss of $0.63 from a loss of $0.76 in the last 3 months.

This is what you want to see as an investor.

F2014 EPS: – $2.67
F2015 expected EPS: – $1.30
F2015 expected EPS: – $0.63

Buying Opportunity?

Unlike a lot of the other retailers which have been reporting better-than-expected news, shares of J.C. Penney haven’t rallied to new 52-week highs.

For investors looking for a retail turnaround story that is being ignored by the Street, J.C. Penney is one to keep on the 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.

Learn More>>

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.

Barracuda Networks: Zacks’ Bear of the Day Play

Barracuda Networks (CUDASnapshot Report) recently delivered disappointing fiscal 2016 first quarter results, prompting analysts to revise their estimates lower for both this year and next. This sent the stock to a Zacks Rank #5 (Strong Sell).

Despite shares of Barracuda selling off, it still does not look like a value at more than 200x forward earnings.

Since I last warned about Barracuda Networks (CUDASnapshot Report) in the ‘Bear of the Day’ on January 30, shares have fallen -19%.

Barracuda Networks, Inc. provides storage and security solutions. Its products address security threats, enhance network performance, and protect and store data. The company is headquartered in Campbell, California and was founded in 2003. It has a market cap of $1.5 billion.

First Quarter Results

Barracuda Networks reported its fiscal 2016 first quarter results on July 9. Adjusted earnings per share (but including stock-based compensation expense) came in at -$0.03, missing the Zacks Consensus Estimate of +$0.04.

Revenue rose 18% year-over-year to $77.97 million, which was ahead of the consensus of $77.0 million.

Adjusted EBITDA (but once again included stock-based compensation) plunged 43% year-over-year. However, operating cash flow increased 17% to $6.3 million.

Research and development costs increased from 19.6% to 23.1% of total revenue. The company recorded total stock-based compensation expense of $6.5 million in the quarter, which was more than double the amount in the same quarter last year.

Estimates Falling

Earnings estimates have fallen for Barracuda Networks following its earnings miss. The fiscal 2016 Zacks Consensus Estimate is now $0.11, down from $0.15 before the report. The 2017 consensus is currently $0.19, down from $0.23 over the same period (once again, these numbers include stock-based compensation expense).

Barracuda Networks is a Zacks Rank #5 (Strong Sell) stock.

Lofty Valuation

Despite the selloff in shares of Barracuda, the stock does not look like a value here. It trades around 213x 12-month forward earnings. And its enterprise value / free cash flow ratio is 32.

The Zacks Value Style Score for CUDA is an ‘F’.

The Bottom Line

Not only is Barracuda Networks in the bottom 5% of companies we rank based on earnings momentum, it is in the bottom 5% of companies we rank for value. Investors should continue to avoid this stock for now.

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

Lennar: Zacks’ Bull of the Day Play

Earnings estimates have risen sharply for Lennar Corporation (LENAnalyst Report) after the company delivered strong second quarter results on June 24. A recovering housing market is helping to drive solid revenue and earnings growth for the homebuilder.

Lennar is a Zacks Rank #1 (Strong Buy) stock.

Lennar Corporation is a homebuilder that operates across the United States. It was founded in 1954 and is headquartered in Miami.

Second Quarter Results

Lennar reported its second quarter results on June 24. Earnings per share came in at $0.79, beating the Zacks Consensus Estimate of $0.65. It was 30% increase over the same quarter last year.

Revenues jumped 32% year-over-year to $2.393 billion, well ahead of the consensus of $2.041 billion. Revenue in its homebuilding segment, which accounted for 88% of total revenues, rose 29%. Revenues from home sales rose 30%, driven by a 20% increase in the number of home deliveries, excluding unconsolidated entities, and an 8% increase in the average sales price of homes delivered to $348,000.

Through the first two quarters of 2015, the average sales price of homes delivered from 5.9% year-over-year, from $320,000 to $339,000.

CEO Stuart Miller stated that “[t]he homebuilding market continued its steady improvement throughout our second quarter. Driven by higher wages and employment, reasonable affordability levels, supply shortages and favorable monthly payment comparisons to rentals, the homebuilding market is well positioned for multi-year growth ahead.”

Estimates Soaring

Following the Q2 beat, analysts unanimously revised their estimates significantly higher for both 2015 and 2016. This sent the stock to a Zacks Rank #1 (Strong Buy).

The Zacks Consensus Estimate for 2015 is now $3.24, up from $3.13 before the report. The 2016 consensus estimate increased from $3.53 to $3.74 over the same period.

Based on these estimates, analysts are projecting 16% EPS growth this year and 15% growth next year.

In the company’s 10-Q, management stated that “[o]ur company’s strategy continues to be driven by our belief that the real estate market remains positioned to continue to recover and that our company remains well positioned to benefit from such recovery.”

Valuation

Shares of Lennar trade at less than 15x 12-month forward earnings, which is in-line with its 10-year median. Its enterprise value to EBIT ratio is also around 15.

The Bottom Line

With an improving housing market, rising earnings estimates and reasonable valuation, Lennar 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.