For Immediate Release
Chicago, IL – September 26, 2018 – Zacks Equity Research Alcoa Corporation (AA - Free Report) as the Bull of the Day, Sanderson Farms (SAFM - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis Nike (NKE - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Sometimes geopolitical events can help shape an investment thesis. International policy, especially with regard to trade, can create opportunities to purchase companies who are likely to see improved results. Alcoa Corporation is one of those opportunities.
The financial news lately has been dominated by stories about global trade, tariffs and the prospect of a trade war. In March, President Trump imposed a 25% tariff on imported steel and 10% on imported aluminum. Canada, Mexico and the European union were granted temporary exemptions. Later in 2018, the Trump administration rescinded those exemptions and officially imposed those tariffs on steel and aluminum imported to the U.S. from Canada, Mexico and the E.U.
China and the E.U initiated official complaints to the World Trade Organization regarding the tariffs, which they deem a violation of WTO rules. Trump claims the tariffs are allowed as they have a national security purpose.
China, Canada and the EU have responded with retaliatory tariffs of their own on American-made goods. While the situation in North America and with the EU seem to be working slowly toward a resolution, in a widely anticipated move, the Trump administration announced last week that it would be imposing tariffs on an additional $200B worth of Chinese imports. The tariffs went into effect on September 24th starting at 10% and will rise to 25% on January 1st, 2019, presumably to mitigate their impact on holiday shoppers in the U.S. who are purchasing Chinese imports.
Approximately half of all Chinese goods imported into the U.S. are now subject to some tariffs and the president made it clear that he was prepared to impose tariffs on an additional $267 billion worth of imports - which would mean virtually all Chinese goods would be subject to some tariffs. He specifically mentioned that any perceived effort on the part of the Chinese to target the American Farming or Manufacturing industries would be grounds for the imposition of additional rounds of tariffs.
One criticism of Trump’s trade policy is that the imposition of tariffs essentially picks “winners” and “losers.” As an investor, it’s important to take note of the fact that there are in fact winners. It’s only common sense to seek out investment opportunities in companies that are poised to benefit.
Acquiring Pricing Power
Producers whose finished goods are the subject of protection in various jurisdictions can now operate with reduced foreign competition and/or raise prices so that they are commensurate with the more expensive tariff-inflated products.
U.S. companies who rely on steel and aluminum have reported increased costs for raw materials even when they don’t rely on imports because of these price increases from domestic suppliers.
In their most recent quarterly presentation, Alcoa reported an increase in primary aluminum prices of 6% over Q1 2018 and 19% over Q2 2017.
Bear of the Day:
Previously, we’ve chronicled some of the winners and losers from the recent trade war that has seen multiple rounds of tariffs enacted on imports to the U.S. and retaliatory tariffs imposed by other nations on U.S. exports. Our Bull of the Day today is Alcoa, which has seen increased prices and reduced foreign competition enhance results and future projections.
Unfortunately, on the other side of the coin are companies who have seen their margins squeezed by higher costs and lower selling prices. Sanderson Farms is one of the unlucky ones.
One group of significant losers in the trade war seem to be food producers who have seen prices fall on trade uncertainty and costs rise, especially the prices of steel and aluminum packaging, as well as a recent uptick in feed prices. Simultaneously, they have experienced reduced orders from overseas and lower prices amid an oversupply of domestic protein.
Sanderson Farms reported disappointing results in August, earning just $0.50/share versus estimates of $1.08/share. Earnings would have been $0.58/share except for an $0.08/share accrual for contributions to an employee compensation plan. It was a huge miss, especially since the Zacks Consensus Estimate had already been cut by more than 60% in the past 90 days from $3.21/share. In Q2 2017, the company earned $5.21/share. SAFM is a Zacks rank #5 (Strong Sell).
Sanderson cited low domestic prices for its chicken products and increased feed costs and corn and soybeans rebounded off multi-year lows during the quarter. Feed costs increased 8% over the prior year period and “other” costs - including transportation and packaging - were up 4%,
Though the company did not specifically cite tariffs as the cause, it’s likely that increased supply of meat that would ordinarily have been exported was a contributing factor to the lower prices received.
Shares in Sanderson Farms have been slumping the past year, recently trading around $99/share, well off their 52-week highs of $176/share.
Food products, especially proteins, are a textbook example of the economic principle of substitution – grocery customers who find the selection or prices of a given product unsatisfactory are presented with a wealth of choices, usually in an adjacent space in the same cooler. The ease with which consumers can simply pick up a package of beef or pork makes pricing power at the retail level difficult to achieve.
Food companies routinely face challenges in the form of highly variable input prices and sales prices, as well as weather issues and seasonal changes in consumer demand. In general, they have become adept at managing the factors they cannot control with input price hedging and creative outputs that maximize profits. In the case of tariffs, however, Sanderson Farms is on the wrong side of the prevailing trends in both input cost and end prices and it could be rough sailing until the trade situation is worked out.
Nike Beats Q1 Estimates, Stock Falls 3%
After Tuesday's closing bell, the world's largest publicly traded apparel retailer, Nike, reported fiscal Q1 2019 earnings results. The company beat on top and bottom lines: 67 cents per share as opposed to 62 cents expected and up 18% year over year, on sales of $9.9 billion which took out the consensus estimate of $9.88 billion, up 9% (currency neutral) from Q1 2018.
Nike has not missed earnings estimates in practically forever. At least 20 quarters, going back to the end of fiscal year 2014: check the chart here.
In the quarter, the signature Nike brand grew 10% year over year, while Converse (which Nike also owns) was up 7% from the year-ago quarter, helped in large part by sales gains in Europe and Asia. Yet gross margins came in at 44.2%, 50 basis points lower than Q4 2018, which is helping lead late-market trading of the shares down roughly 3%. Nike had been trading up around 35% year-to-date prior to the earnings release.
In the breakdown by region, North America grew 6%; Europe, Middle East & Africa (EMEA) +9%; Asia-Pacific/Latin America +7% and China up a nice 24%. The company also continued its share buyback program begun in June with an additional 178 million shares purchased for a total amount of $1.4 billion. This is part of a 4-year, $12 billion program.
Nike took a gamble in the quarter ahead of the start of the NFL season this year by featuring estranged quarterback Colin Kaepernick in its print ads; many football fans took exception and staged protests, destroyed Nike merchandise, etc. upon the unveiling. Clearly, however, the company made out OK in spite of the actions taken against the company.
Ahead of its earnings announcement, Nike carried a Zacks Rank #3 (Hold) rating and a Style Score (Value - Growth - Momentum) of B. For more on NKE's earnings, click here.
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