For Immediate Release
Chicago, IL – September 25, 2018 – Zacks Equity Research Penumbra (PEN - Free Report) as the Bull of the Day, Facebook (FB - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis Softbank Corp STFBY, Sony Corp (SNE - Free Report) and Honda Motor (HMC - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Penumbra is a $5 billion medical device company focused on interventional products for neurovascular and peripheral vascular diseases.
The company leverages its expertise in catheter-based technology to develop access devices for treating strokes, aneurysms, deep vein thrombosis, pulmonary embolism, and other patient events caused by blood clots.
Based in Alameda, CA, Penumbra sells its products to hospitals and clinics primarily through its direct sales organization in the United States, most of Europe, Canada and Australia, and through distributors in select international markets.
On August 7, the company reported Q2 earnings and delivered a 400% EPS beat as well as raising sales guidance with total 2018 revenue to be in the range of $420 million to $425 million, vs. the previous range of $410 million to $415 million.
You would not have guessed those kind of results looking at the stock reaction the next day when shares plunged 16% from $148 to $124 on 3 times the normal volume.
But it probably had something to do with investors getting nervous that maybe the growth estimates and guidance weren't really good enough to justify the steep valuation.
Growth Catches Up with the Valuation
The company made a strong swing to sustainable profitability this year on the back of projected 27.5% sales growth from last year's $333 million to over $425 million in revenue.
The profit surge -- from last year's loss of 1-cent to a current estimate of +$0.34 -- caught analysts way off guard. We know this because in the last two quarters, the company delivered consecutive 400% EPS beats.
And that's why the stock is a Zacks #1 Rank as analysts scrambled to raise full-year 2018 EPS estimates 70%, since the early August quarterly report, from $0.20 to $0.34.
Additionally, 2019 top-line estimates are currently looking for over 20% growth to a record $500 million, giving Penumbra a 10X price-to-sales ratio.
This sales advance is expected to translate to the bottom line next year with 72% EPS growth to $0.59. At $150 per share, that would put the forward P/E multiple under 300X.
That's still rich, but characteristic of med-tech companies with key patents and strong sales growth.
Bear of the Day:
Facebook has fallen into the cellar of the Zacks Rank because analysts keep lowering their EPS estimates, trying to keep up with the digital advertising giant's "reversal of growth."
Even though that downturn is more self-inflicted than caused by celebrities inspiring the masses to #deletefacebook, the path of transformation and reinvention for Mark Zuckerberg's dream machine will result in slower revenue and earnings growth for possibly another year as the company builds a better friend machine.
What was self-inflicted? The company's own realization in 2017 that they needed to control two flows of dis-information and potential tribalism:
(1) the ad buyers who could target specific audiences with destructive or manipulative messaging (i.e., "fake news")
(2) the individual users and groups who could spread their dis-information and political propaganda, even hate speech, without recourse
And Zuck & Co. also realized they couldn't limit the virulent effect of "bots" without also reengineering their own algorithms.
In short, the mea culpa for being involved in massive political warfare -- sometimes even promoting hate groups -- has brought the mighty influence machine to a reckoning where costs are rising, less advertising is being accepted (i.e., lower revenues), and many users and former users have noticed the new restrictive nature of "big brother" Alphabet's (GOOGL) "little brother."
I discussed these techno-cultural dynamics in my July podcast and article...
Facebook Faceplant: First Large-Scale AI Fail
Still a Growth Machine
All this said, the company is still estimated to grow sales over 36% this year to $55+ billion.
And even next year still looks great in analyst binoculars with a 24.5% top line advance to a record $69 billion.
EPS growth -- despite the rising costs of hiring many thousands of human "social police" to watch the ads and content streams -- is expected to hit +14% this year and next.
And this after 2018 EPS estimates fell from $7.66 to $7.08 in the past 60 days, while 2019 profit projections dropped over 13% from $9.33 to $8.09.
Yet still, these consensus projections from dozens of Wall Street investment banks for the #2 digital ad powerhouse, with over 2 billion monthly active users (MAU) worldwide, are what will keep large growth investors buying Facebook shares at these levels and lower as the company reinvents its platform for the better and innovates to monetize Instagram advertising.
In fact, those large funds, whether its David Tepper's Appaloosa, Andreas Halvorsen's Viking Global, or Steve Mandel's Lone Pine Capital won't mind the dips at all.
We joined them in March on the first dip to back to $150 and we sold above $190 in my TAZR Trader portfolio. I always believed that Zuck & Co. knew what they had to do to make the social media ecosystem a better environment for friends, family, entrepreneurs and even the occasional political affiliation.
And I'll probably do it again after we get the first sign that estimates have bottomed and are about to turn upward again.
The Zacks Rank will let us know.
NAFTA Players Barter as Market Trades: Global Week Ahead
In the Global Week Ahead, NAFTA talks may become a big item. Our neighbor to the North is keenly focused on this. Read on.
Here’s a quote from Scotiabank’s FX team in Canada—
“We don’t think that a US-Mexico agreement that excludes Canada is a viable threat. The agreed upon 75% local content requirement for the auto sector would be unattainable for US plants that use a lot of Canadian content if Canada is excluded from the deal, and therefore the US and Mexico would need to renegotiate auto content requirements and by corollary perhaps the minimum wage tie-in.
“The NAFTA agreement requires Trump to deliver a notice of intent to withdraw six months in advance of possibly doing so. It appears that the President does not have sole authority to make the withdrawal call six months later. He may need Congressional approval to do so—and the new 2019 Congress, where the GOP may not have majorities in both houses, would be unlikely to provide it. So the most likely scenario after failure to reach agreement would likely be a prolonged state of purgatory as NAFTA 1.0 remains in place.”
Here is what the Canadians wrote on the U.S.-China tariff tit-for-tat…
“It is possible that China’s non-US trading partners will benefit from the spat and that China may well ‘win’ over the longer term. Premier Li guided this past week that he intends to cut import tariffs on broad imports again after having done so previously in July.
“The effect is likely to be two-fold. For one, it fits into the picture of China having its own ‘whatever it takes’ moment to coin the Mario Draghi phrase. China is acting to stabilize markets and ease policy and the country has among the greatest degrees of policy flexibility anywhere. Reducing import levies, which drops consumer prices, could well stimulate domestic consumption.”
Both Canada and China are going to game the midterms, in short.
Away from NAFTA talks, here are five big Reuters’ world market themes. These are likely to dominate thinking of investors and traders in the coming week. I put them in order of importance for equity markets.
They are all rate-related this week, as the Fed meeting brings focus to fixed income markets everywhere.
1. U.S Treasuries have broken 3.0%
U.S. Treasuries — and maybe financial markets across the world — are at a critical juncture.
The bond selloff is gathering pace, pushing 10-year yields above 3 percent to the highest since May and within sight of levels last seen in 2011.
Is this the breakout, the reversal of the 30-year bull market, that some people have spent years predicting? If 10-year yields break above 3.128 percent, that view will gain credence. There are still plenty of political, fundamental and relative valuation reasons for buying bonds. But once a market move picks up momentum, it can be hard to stop.
The 10-year Treasury yield matters because it is the rate against which trillions of dollars of borrowing around the world are referenced. It touches every market in the world.
But markets, curiously, are not paying as much attention as one would expect. Wall Street sailed to new highs in the past days, emerging market stocks are up four weeks out of the last five, and market volatility remains low. Even Treasury market volatility.
It could get more interesting in the coming week.
2. The Fed hikes and issues a presser
A rate hike at the U.S. Federal Reserve’s Sept. 25-26 policy meeting is all but certain — taking the rate to 2.00 percent-2.25 percent. And the odds have also increased for a December rise and more bumps up into 2019.
But market watchers have already turned their attention to the question of when to call the next economic downturn.
The traditional indicator is the yield curve inverting — in the United States this has been a pretty accurate predictor of recessions. However, another interesting sign could be read from the relationship between the fed funds rate and employment.
The fed funds rate has risen above the employment rate ahead of prior recessions - and the unemployment rate, currently 3.9 percent, is now near the lowest in 18 years.
So the fed funds rate and the employment rate are still a far bit apart. But they are inching closer and another hike will trim the gap a little bit more.
3. Mainland China may ease it reserve requirement ratios -- RRR
Much of the emerging market universe is in a rush to tighten monetary policy, but in China speculation is rife that authorities will ease reserve requirement ratios (RRR) again.
For one, the pattern of this year’s RRR cuts has been a quarterly one. Second the economy has been looking more sluggish. And finally, new U.S. tariffs of 10 percent on about $200 billion of Chinese products will kick in on Sept. 24, rising to 25 percent by year-end. China’s retaliatory tariffs on 5,207 U.S. products also enter into force in the coming week.
With trade wars set to take a toll on the economy, Chinese authorities, despite a campaign to curb risky financing, may have little choice but to provide support. Not via any grand stimulus plan, but through targeted measures, such as cutting RRRs.
The problem is that monetary easing will pressure the yuan, which is not far below the key 7-per-dollar level, the rate that in past years tended to inflame capital outflows. Those outflow fears are less than they used to be. But policymakers will still have to tread carefully.
4. Italian Debt
D-day looms for Italian government debt markets. Known as BTPs, the bonds are trading nervously before the Sept. 27 deadline for Italy’s coalition government to present details of its 2019 budget. Focus will be on the budget deficit, the cause of months of investor angst.
In one corner is economy minister Giovanni Tria. Unaffiliated to any party, Tria has assured markets he will keep the deficit below limits stipulated by the European Union — 3 percent of annual GDP. That pushed Italian risk premiums steadily lower over the summer — 10-year yields are more than 50 bps off end-May highs.
But Tria is up against coalition cohorts Luigi Di Maio and Matteo Salvini, deputy prime ministers, who have become increasingly vocal in urging more spending to meet election promises.
The horse-trading has raised market volatility. But longer-term, a rules-busting budget that raises conflict with the EU, could trigger a credit ratings downgrade and foreign investor exodus. And all that could hit just as the ECB’s bond-buying program nears its end.
5. Did the Emerging Market tornado blow itself out?
Don’t say it too loudly, but the emerging market tornado might just have blown itself out. The principal reason is the dollar’s sudden loss of power, as well as China’s reassurance that yuan devaluation is not on the cards.
But the coming week could make or break the rebound — hinging on whether the Fed meeting ends up recharging the dollar or if Beijing’s retaliation to U.S. trade tariffs is harsher than it has signaled.
But there have been other changes, too — for instance Turkey’s whopping interest rate rise that stabilized the lira and signs of progress in Argentina’s talks over an IMF loan. Some prominent investors have also said the selloff might be overdone — many currencies are trading well below what could be considered fair value.
There is a blizzard of data from the likes of Brazil and India and plenty of central bank meetings too and it will be copper powerhouse Chile’s turn to lay out its budget.
Top Zacks Rank Stocks—
I noticed three Japanese stocks doing well this week. It’s been a crummy year for this country’s stock market. But is the bottom in?
Their Prime Minister is likely to be the longest serving one it that nation’s history. Political strength and stability brings benefits to markets.
With U.S. stocks trading at rich valuations, this is a non-US market to position some cash, and wait for that inevitable rotation to better value.
Softbank Corp: This is classed as a wireless non-US stock. Its market cap is $107B. The Zacks Value score is B.
Sony Corp:What Japanese stock list would be complete without this marque name? It’s a $75B market cap stock. The Zacks Value score is B.
Honda Motor:It’s a $55B market cap stock. I can’t imagine this group is not going to enter the electric and autonomous car race in a big way, in the coming years. The Zacks Value score is B.
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