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Fabrinet and Constellation Brands have been highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – January 25, 2023 – Zacks Equity Research shares Fabrinet (FN - Free Report) as the Bull of the Day and Constellation Brands (STZ - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Caterpillar Inc. (CAT - Free Report) , Deere & Co. (DE - Free Report) and Xylem (XYL - Free Report) .

Here is a synopsis of all five stocks:

Bull of the Day:

Fabrinet is a Zacks Rank #1 (Strong Buy) that provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services. The company offers a range of advanced optical and electro-mechanical capabilities in the manufacturing process, including process design and engineering, supply chain management, manufacturing, printed circuit board assembly, advanced packaging, integration, final assembly, and testing.

Unlike most tech stocks in 2022, Fabrinet had a decent year. The stock traded to all-time highs and was up for the year by almost 10%. 2023 has already started off well, with the stock running 7% higher in just the first few weeks.

With earnings just a couple weeks away, is this stock about to breakout and become one of the best performers in 2023?

Earnings momentum, analyst estimates and a strong chart suggest higher prices are a strong possibility. Investors just need to decide if they want to front run the earnings report, or be patient for a pullback.

More about Fabrinet

The company incorporated in 1999 and is headquartered in George Town, Cayman Islands. It employs over 14,000 people and has a market cap of $5 billion.

Fabrinet serves original equipment manufacturers of optical communication components, modules and sub-systems, industrial lasers, automotive components, medical devices, and sensors.

The stock has a Zacks Style Score of "A" in Growth, but a "D" in both Value and Momentum. The Forward PE is 18 and the company pays no dividend.

Relative Strength

The stock closed 2021 at all-time highs, seemingly ignoring the tech sell off in the fourth quarter of that year. However, the sell off early last year did bring selling into the name, which pulled back about 30% in the first six months.

This price action was pretty much in line with the overall market. But Fabrinet bounced over the summer much more quickly than its peers. The stock hit new all-time highs in November and has continued higher from there.

The reason for the strong move higher has been positive earnings momentum over the last couple quarters.

Back-to-Back Earnings Beats

In August, the company reported an 8% beat. This brought investors back into the stock and close to all-time highs. From there, the stock saw some sideways trading until it jumped again after the 13% EPS beat in early November.

Looking into that Q1, Fabrinet reported $1.97 v the $1.74 expected. Revenues came in above expectations and they guided Q2 higher on both the top and bottom lines.

Management said they executed well to produce robust margins. They added that favorable foreign exchange tailwinds produced EPS that produced earnings far above expectations.  Moreover, they expect favorable demand trends to bring positive results in Q2.

Estimates Rising

Analysts hiked their estimates and price targets after that Q1 report.

Over the last 90 days, the current quarters estimates have gone from $1.73 to $1.89, or 9% higher. Numbers for next quarter have been lifted as well, with estimates going up by 7%.

Looking at the current year, we have seen estimates go from $6.95 to $7.48 over the last 90 days. For next year, estimates flatten out a bit, so investors should watch these numbers after the next earnings report in early February.

JPMorgan raised its rating on FN to Overweight and lifted its price target from $126 to $156. The firm cited the company's exposure to secular growth markets, track record to outperform, share gains and incremental outsourcing.

The Technical Take

With the stock at all-time highs, the upcoming earnings will be a big catalyst.

If the company can impress again, the bulls should be looking for a move to the $155-57 area. This is the 161.8% Fibonacci extension drawn from the 2022 highs to lows.

If the stock does pull back into a positive earnings report, it would not shock most tech investors. In the current market atmosphere, earnings beats get sold all the time. But for those interested in the stock longer-term, they should eye the moving averages.

The $130 level is the 50-day moving average, while the 200-day is all the way down at $105.  

The $125 area was strong support in Q4, so look for that level as well.

For those looking to buy a Fibonacci retracement the half way back area drawn from September lows to recent highs is $115.

In Summary

The relative strength seen in 2022 is already leading to outperformance in 2023. Investors should keep a close eye on earnings, which will be February 6th right after the market closes.

Look for the company to beat again and possibly take out the $150 level and beyond.

Bear of the Day:

Constellation Brands is a Zacks Rank #5 (Strong Sell) that produces and markets beer, wine and spirits. It is the third-largest beer company and a leading, high-end wine company in the United States. 

The company posted its first earnings miss in five quarters and the stock traded down significantly. After bouncing almost 10% off the recent lows, it might be time for longs to exit the stock due to falling earnings expectations.

About the Company

Constellation is headquartered in Victor, NY. The company was founded in 1945 and employs 10,000 people.

Constellation's portfolio consists of high-quality brands, including Corona, Modelo Especial, Robert Mondavi, Kim Crawford, Meiomi and SVEDKA Vodka. The company conducts its operations in the United States, Mexico, Italy, and New Zealand.

The company is valued at $41 billion and has a Forward PE of 21. STZ holds Zacks Style Scores of "B" in Growth, but "D" in Value. The stock pays a dividend of 1.4%.  

Q3 Earnings

The company reported EPS on January 5th, missing expectations by 1.7%. Constellation reported Q3 at $2.83 v the $2.89 expected, while revenues came in below expectations.

The company also cut its profit guidance as they warned of higher expenses. Constellation sees higher costs for raw materials, packaging, and logistics. Meanwhile some analysts are concerned that customers may trade down to cheaper drinks, which will make it harder for the company to raise prices to cover the higher costs.

Estimates

After the quarter, analysts lowered their estimates and cut their price targets.

Over the last 30 days, estimates have gone from $2.17 to $1.94, a drop of 10%. For next quarter they have fallen 6%, from $2.92 to $2.75.

Looking ahead to next year, analysts have dropped their numbers 8% over the last 60 days, from $12.76 to $11.68.

Almost every analyst that covers the stock cut their price targets after earnings:

BMO reiterated outperform but cut to $265 from $290.

JPMorgan reiterated Overweight, but lowered targets to $250 from $267.

Cowen cut to Market perform and has a $200 target.

Clearly the earnings performance will temporarily limit upside until the company gets costs under control.

Technical Take

The stock had already come well off its 2022 highs before reporting earnings, dropping from $260 to $230. After the report, the stock fell below $210, but has since rallied to the $227 area.

The 50-day moving average is at $237 and the 200-day is at $240. Investors should expect these areas to be big selling zones and take off any positions into a rally to those levels.

The stock might settle into sideways trading before taking out those recent lows. A break of the $210 area would likely bring a flush of the $200 level.

Looking to the downside, the halfway back market from COVID lows to recent highs is $182, while the 61.8% Fibonacci retracement is $163. For those looking for a better long-term entry, they should wait until the stock is in that buying zone.

Summary

Costs are adding up for Constellation Brands and it is hitting the bottom line. Investors should understand that upside in the stock is likely limited until this issue is resolved. Additionally, there is a chance for more downside if the market decides to go lower.

Additional content:

Caterpillar (CAT - Free Report) Q4 Earnings Next Week: What to Expect

Caterpillar Inc. is likely to register an improvement in both the top and the bottom lines when it reports fourth-quarter 2022 results on Jan 31, before the opening bell. Strong demand in its end markets and pricing actions are expected to have negated the impact of inflated costs and supply-chain disruptions, driving the improvement in the quarterly results.

The Zacks Consensus Estimate for quarterly earnings per share for Caterpillar is currently pegged at $3.95, which indicates growth of 47% from the year-ago reported figure. The consensus mark for total sales stands at $15.9 billion, suggesting growth of 15.2% from the prior-year quarter.

Q3 Results & Surprise History

In the last reported quarter, Caterpillar delivered improved year-over-year performance in its revenues and earnings and also beat the respective Zacks Consensus Estimate.

With the earnings beat in the last quarter, the mining and construction equipment behemoth maintained the streak of surpassing earnings estimates for ten consecutive quarters. CAT has a trailing four-quarter earnings surprise of 14.7%, on average.

Factors to Note

Per the Federal Reserve, total industrial production rose at an annual rate of 1.7% in the October-December quarter. These figures indicate that Caterpillar might have witnessed an increase in order levels in the quarter. This, along with the solid backlog of $30 billion reported at the end of the third quarter of 2022, are expected to get reflected in Caterpillar's third-quarter top line. Also, the fourth quarter of the year is historically the strongest quarter in terms of sales due to seasonal factors, and the fourth quarter of 2022 was no exception.

Supply-chain headwinds, labor constraints currently faced by the industry and inflated costs for raw materials and freight services are likely to have weighed on the company's margins in the quarter to be reported. Higher selling, general and administrative expenses due to increased incentive compensation and elevated R&D expenses to support the company's growth strategy and new product development might have aggravated the pressure on margins. Nevertheless, savings from Caterpillar's cost control measures and restructuring actions are expected to have negated some of these headwinds and contributed to the company's margins.

Segment Expectations

The Zacks Consensus Estimate for the Resource Industries segment's fourth-quarter external sales stands at $3,202 million, reflecting year-over-year growth of 21% on higher end-user demand for equipment and aftermarket parts as well as favorable price realization. Improvement in heavy construction, quarry and aggregates might have contributed to the segment's performance. Sales are expected to be up across all regions. The segment is anticipated to report an operating profit of $513 million, suggesting growth of 68% from the year-ago quarter's figure of $305 million.

The consensus mark for the Construction segment's external sales stands at $6,474 million, indicating growth of 14% from the year-ago quarter. In North America, demand from both residential and non-residential construction is likely to have aided the segment's performance in the quarter to be reported. Increased construction activity is expected to have driven machine demand in EAME and Latin America as well.

Lower construction demand in China due to the impact of lockdowns is likely to have been offset by higher demand in other regions of Asia Pacific. The Zacks Consensus Estimate for the Construction segment's operating profit stands at $1,210 million, indicating growth of 54% from the prior-year quarter.

For the Energy & Transportation segment, the consensus mark for external sales stands at $5,387 million, suggesting an improvement of 13% from the prior-year reported figure. The Zacks Consensus Estimate for the Energy & Transportation segment's operating profit is pegged at $969 million, suggesting a 44% improvement from the year-ago reported figure.

What Our Model Unveils

Our proven model predicts an earnings beat for Caterpillar for the fourth quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This is precisely the case here.

You can uncover the best stocks before they're reported with our Earnings ESP Filter.

Earnings ESP: Caterpillar has an Earnings ESP of 1.14%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

You can see the complete list of today's Zacks #1 Rank stocks here.

Price Performance

Shares of the company have gained 17.9% in the past year, compared with the industry's 16.5% growth.

Stocks Poised to Beat Earnings Estimates

Here are some Industrial Products stocks, which according to our model have the right combination of elements to post an earnings beat in their upcoming releases:

Deere & Co. currently has an Earnings ESP of +2.83% and a Zacks Rank of 2. The Zacks Consensus Estimate for DE's first-quarter fiscal 2023 earnings have moved 2.6% north in the past 60 days and is currently pegged at $5.49 per share. The consensus mark suggests year-over-year growth of 88.1%

The Zacks Consensus Estimate for DE's quarterly revenues is pegged at $11.4 billion, indicating growth of 33.9% from the prior-year quarter's levels. DE has a trailing four-quarter earnings surprise of 7.1%, on average.

Xylem currently has an Earnings ESP of +2.10% and a Zacks Rank of 3. The Zacks Consensus Estimate for fourth-quarter 2022 earnings has been stable in the past 60 days and is currently pegged at 79 cents per share. This suggests year-over-year growth of 25.4%

The Zacks Consensus Estimate for XYL's quarterly revenues is pegged at $1.4 billion, indicating year-over-year growth of 6.1%. XYL has a trailing four-quarter earnings surprise of 13.3%, on average.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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