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Southern, Wynn Resorts, Berkshire Hathaway and Methanex highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – October 30, 2018 – Zacks Equity Research highlights Southern Company (SO - Free Report) as the Bull of the Day, Wynn Resorts (WYNN - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Berkshire Hathaway (BRK.B - Free Report) and Methanex Corp. (MEOH - Free Report) .

Here is a synopsis of all four stocks:

Bull of the Day:

2018 hasn’t been a great year for energy and utility stocks. The threat of rising interest rates has made the yield on these historically high-dividend companies look relatively less attractive and the energy sector as a whole is down 10% on the year and the third worst performer in the S&P 500, behind only materials and financials.

In some cases, high levels of debt as a result of expensive acquisitions and capital intensive projects threaten the future of dividend payouts. The combination of ballooning construction costs and regulatory control over the rates charged for energy have put the squeeze on energy companies who find themselves overextended.

The sheer size of a project to build new power generation facilities and the associated transmission infrastructure - along with a limited ability to raise end-user prices at will - leaves these companies with little margin for error when undertaking new investments.

Certain energy companies still pay attractive dividends however, and Atlanta-based Southern Company is one of them, yielding better than 5% annually and management is making a concerted effort to shore up the balance sheet and continue returning cash flow to investors.

Bucking the Industry Trend Toward Acquisitions

Unlike several of its competitors, Southern Company has been actively divesting some of its ancillary interests to raise cash and reduce debt. Having been involved in some expensive and troubled projects in the recent past, Southern recently sold its interest in Florida’s Gulf Power to NextEra Energy for $5.1B in cash and the assumption of $1.4B in debt.

Southern Company shares have also been depressed lately over concerns about the fate of the Vogtle Nuclear plant, a project in which the company owns 46%. The costs of the project have gone from an initial estimate of $14.5B in 2008 to over $27B – and the plant had been intended to be completed by 2016 but is currently only about halfway done.

The cost overruns and delays triggered covenants in the agreement that will allow the other partners in the Vogtle project to vote to discontinue construction. Initially, it seemed that Southern Company might be on the hook for a significant portion of what’s been spent already - and also cleanup costs - of $4B or more and the markets soured on SO shares as the situation played out.

Now however, it seems as though the absolute worst case scenario is that even if the whole project is scuttled, Southern will have less than $2B of exposure and there’s a good chance that the project will continue to completion.

Because of the discipline Southern has been exhibiting, it is an excellent candidate to avoid most of the debt problems that are afflicting other energy companies. By focusing on its core strengths, Southern has seen forward earnings estimates revised upward of late. It is currently a Zacks Rank #1 (Strong Buy).

In examining the results of a utility company, other metrics are more important than simple net earnings. Southern handily beats the industry in return on equity (13.1% vs 7.1%), return on assets (3.0% vs. 2.1%) and return on capital (4.8% vs. 3.4%). Though its debt load remains higher than industry averages, management is clearly working hard to reduce it without jeopardizing the dividend.

Though companies that pay out 87% of cash flows as a dividend have a lower chance for significant capital appreciation – and thus look relatively boring during raging bull markets – that income certainly starts looking a whole lot more interesting when the broad markets get choppy.

Dividends are an often overlooked component of total return in a balanced portfolio and can help dull the pain sometimes experienced in growth stocks. The management at Southern Company definitely seems to understand this concept and is taking aggressive measures to ensure it.

Bear of the Day:

Casino companies are facing a rough road ahead. Though gambler visits and room rentals have held relatively steady in the U.S., gambling and related resort activities on the Chinese island of Macau have dropped off precipitously as China deals with an economic slowdown, a lagging stock market and the lingering pain of a trade war with the United States.

Wynn Resorts is well known in the U.S as the operator of several well-known Las Vegas properties and for its charismatic – and recently deposed – founder Steve Wynn. Frequent visitors to Las Vegas are familiar with the sight of the eponymous Wynn casino and its counterpart, Encore, which Steve Wynn built with the help of his magnetic personality, deep Vegas connections and decades of industry experience gained as he moved from the Golden Nugget to the Mirage and the Bellagio.

While building his showcase Las Vegas properties, Steve Wynn was also among the first to realize the as-yet untapped potential of the gaming industry on the Island of Macau, successfully winning one of only three gaming concessions made available on the resort island and opening Wynn Macau in 2006.

Newly affluent Chinese customers were drawn to Wynn’s luxury amenities and the resort – awash in gaming revenues - was significantly expanded just one year after opening. Earnings accelerated as revenues from the Chinese properties quickly eclipsed those from Wynn’s Las Vegas properties.

Derailed by a messy public divorce from his wife, Elaine Wynn, and multiple allegations of workplace misconduct, Steve Wynn stepped down as the company’s Chairman and CEO in February of 2018. A protracted legal battle ensued for control of the company and was eventually settled with Wynn selling his remaining stake in the company – making Elaine Wynn the single largest shareholder with 9%.

Unfortunately for casino operators on Macau, the recent downturn in the Chinese economy and stock markets has weighed heavily on resort and gaming revenues recently.

In their Q2 earnings report, Wynn posted an 18% decrease in Macau casino revenues and a 13% drop in table-games turnover.

Q2 earnings were a significant disappointment, as Wynn’s $1.53/share net profit missed the Zacks Consensus Estimate of $2.03/share by 25%. Downward revisions followed and the consensus for full year 2018 earnings is now $7.35/share, down from $8.27/share 90 days ago. 2019 estimates have been lowered as well, currently at $8.27/share – down from $9.70/share.

WYNN is currently a Zacks Rank #5 (Strong Sell).

Additional content:

The Upside-Down Earnings Season

In the Global Week Ahead, can it be about earnings fundamentals?

Let’s hope not! LOL

Strong earnings reports have been BAD news for long holders of stocks in this crazy third quarter.

In short, companies that beat on their earnings consensus are falling the most this quarter. Yes: doing better is getting punished. It’s the first time we have seen that since Q2-2011.

Here’s the key set of facts distinguishing this earnings season—

Companies in the S&P 500 that reported positive earnings surprises for Q3 have averaged a -1.5% decrease in price from two days before the company reported actual results through two days after.

Over the past five years, companies that reported positive earnings surprises witnessed a +1.0% increase in price during this 4-day window.

That could mean this: big shareholding institutions are treating this reporting period as ‘a peak’ in a long business cycle — and unloading some of their long-held positions — to be careful.

We do have a contentious midterm election in a few short days, a possible impeachment in the months ahead, and a major U.S.-China trade war in play for who knows how long.

Nonetheless, marquee earnings from Apple and Facebook highlight a very busy earnings schedule in the coming week. About half of companies have reported already.

Other notable companies expected to report results include —

  • Akamai, Constellation Brands and KLA-Tencor on Monday

  • Facebook, General Electric. Mastercard, Aetna, Coca-Cola, Under Armour, Pfizer and eBay on Tuesday

  • General Motors, Kellogg, Yum Brands and AIG on Wednesday

  • Apple, Dow DuPont, Church & Dwight, Zoetis, Metlife, CBS and Starbucks on Thursday

  • ExxonMobil, AbbVie and Chevron on Friday

The Forward P/E valuation for the S&P 500 is down to a more reasonable 15.5.

Next, I have reproduced five big Reuters world market themes. These are likely to dominate the thinking of investors and traders alike in the coming Global Week Ahead. I re-ranked them in order of importance to U.S. stocks.

Also, on Friday, traders and investors will close out the week with the monthly U.S. jobs report.

(1) What happens to stocks?

Gulp! The savage global stock markets selloff means October could finish as the worst month for MSCI’s all-country index in at least seven years next week — with losses since January’s peaks now closing in on 15 percent.

The bear market has been extending its reach gradually around the world for months – from China to broader emerging markets to European autos and banks and almost 65 percent constituent stocks of MSCI’s all-country world index. Even the FANG+TM index of U.S. and world tech and internet stocks has joined the slump.

So what happens next? $7 trillion has been already wiped off of global stocks but there has been little hint of a bounce. Just as, importantly, the Federal Reserve and ECB show no sign of blinking in terms of tightening policy, and China stimulus has yet to bite. History suggests that markets only tend to stop panicking when central banks start panicking.

The more optimistic, though, point out that Christmas is coming and Santa rallies often turn up a month early. Halloween is on Wednesday this year, so there is plenty of time for things to get scarier, especially if Apple’s results on Thursday turn out sour.

(2) The U.S. non-farm payroll report for October hits

Next week’s U.S. non-farm payrolls report is expected to show a rebound in job creation after the unexpected slowdown in September, with headline employment growth estimated at 190,000 in a Reuters poll.

Unemployment looks set to hold near a 50-year low too, but what could really grab attention is worker pay, which has long lagged the recovery in outright U.S. employment.

Economists in the Reuters poll estimate that wage growth could finally breach the 3 percent level on an annual basis for the first time since the end of the Great Recession of 2008-2009.

Any indication that wages are gaining traction will feed expectations for higher inflation and more U.S. interest rate hikes as a result. That could lift the dollar and U.S. bond yields, as well as President Trump’s attack level on the Federal Reserve.

(3) What happens with Brexit? The Bank of England has a say this week

What happens with Brexit is still anyone’s guess, but UK finance minister Philip Hammond will have to stand up on Monday and give his best approximation of a budget.

Britain’s economy isn’t exactly roaring, so despite the promises of his boss, Prime Minister Theresa May, to end austerity, “Spreadsheet Phil” as he is known in the UK press won’t be able to splash the cash — or “show May the money” as Tom Cruise would yell it.

He will probably dangle the prospect of more spending if a smooth EU exit by March can be achieved, but the civil war raging in May and Hammond’s ruling Conservative Party also means any talk of raising taxes to plug the UK’s financing holes will be avoided for now, at least.

Bank of England Governor Mark Carney faces a similar problem on Thursday. The central bank is expected to keep interest rates on hold and say it is sticking to its plan to raise them gradually. But that is also assuming Britain gets a Brexit deal, and for both Hammond and Carney that is still a big unknown.

(4) The Bank of Japan shows us a monetary policy swing

It will be “kanwa no keizoku,” or easy policy on autopilot, when the Bank of Japan meets this week, but it will come as little surprise given its goal of 2 percent inflation is slipping away again and the raging trade wars and market meltdowns.

It last tweaked policy in July, when it added a bit of flexibility to its zero percent target on 10-year Japanese government bond yields, and this time there is chatter it might lay the groundwork to infuse some greater movement at the longer end of the bond curve which could be done by being less transparent with its monthly bond purchase plans.

Yet the yen and JGBs have been some of the main refuges in the global markets storm, and neither the BOJ nor investors want that to be disturbed. So this meeting may well be all about keeping the peace.

(5) Lots of Eurozone data this week

This week brings a heavy dump of Eurozone data.

On Tuesday there is the first reading of Q3 GDP and the main economic sentiment survey for the 19-country bloc, and Wednesday there are key inflation numbers. Together they will show just how much of an impact the trade war and stock market stresses are having on the economy.

ECB Chief Mario Draghi showed little sign of panicking this week in face of the cocktail of hazards that have been building, but if inflation misses forecasts of 2.2 percent for the headline number and 1.2 percent for the core print — which excludes volatile food and energy prices — it could give the central bank watchers a little more cause for concern.

Similarly, quarterly GDP growth is expected to come in at around a 0.4 percent, and any undershooting there probably won’t be taken too well either. That applies to the euro especially, which is already down 4 percent in the last month against the dollar.

Top Stocks--

Berkshire Hathaway: Warren Buffett’s stock price is down below $200. It was just above $220 a few weeks ago. The Value score is C now. But the Zacks Rank is #1.
Companhia Brasileira de Distribuicao (CBD): This is a big retail supermarket chain in Brazil. I believe it’s like a 7-11 in the USA. The stock has A’s in Value and Growth. It may be time to buy here.

Methanex Corp.: Chemical stocks have been hit hard by the broad selloff. This one went from $80 to $65 in a few short weeks. But the Zacks VGM scores are straight A’s now. And the Zacks Rank is #1.

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About the Bull and Bear of the Day

Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.

About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous analyst coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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