For Immediate Release
Chicago, IL – June 28, 2019 – Zacks Equity Research General Electric (GE - Free Report) as the Bull of the Day, FedEx (FDX - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Asbury Automotive Group Inc. (ABG - Free Report) , Vale S.A. (VLEEY - Free Report) and Ferrari N.V. (RACE - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
General Electric, a once industrial behemoth turned sour, is making a comeback with new CEO Larry Culp at the helm. GE lost roughly 75% of its market value from the first day of 2017 to the last in 2018. So far in 2019, the stock has surged over 27% and analysts are becoming increasingly optimistic about the stock. Sell-side analysts have been raising estimates for GE over the past 60 days propelling this stock into a Zacks Rank #1 (Strong Buy).
GE has been experiencing systemic issues in their business since the financial crisis with GE Capital being the key catalyst. GE capital created an enormous amount of liability for the firm during the financial crisis, with its leveraged business model. GE stock fell over 75% in 2008 to the level we see today, though it quickly recovered. The firm started rolling off its GE Capital balance sheet in 2015 to focus on core industrial competencies, which they should have done five years earlier. This delay has weighed heavy on the firm’s financials and stock, as investors see GE Capital as a substantial liability.
GE has been restructuring its business over the past few years and this has brought to light a lot of fundamental issues within the firm. General Electric made a few poorly timed acquisitions that have afflicted the stock over the past few years.
GE wrote down over $22 billion in goodwill impairment in 2018 primarily due to its overpriced acquisition of the French energy company, Alstom, which was made in 2015. Alstom boosted GE’s revenue but significantly pulled down margins because of a lack of profitability. This was a result of poor management decisions.
GE acquired a majority stake in the gas & oil company, Baker Hughes, in 2017. Unfortunately, the two firms were unable to find the proper synergies with each other and this has further shrunk margin for GE. Over the past year, GE has been slowly selling down its stake in Baker Hughes.
All of these issues I mentioned above have been priced into the stock and more, exemplified in the massive price decline. I believe that the worst of GE’s pain is behind us and that if management is able to make sound strategic decisions moving forward, their reign as industrial champs is not over.
The Comeback Story
GE’s comeback story hinges on Larry Culp’s ability to turn operations around. Culp has not been slacking since he took the helm in October of 2018. Already he has engaged in over 10 deals. The most significant deal being with Culp’s previous firm, Danaher. GE made a deal to sell off its highly volatile BioPharma business to Danaher for over $21 billion.
Culp is leaning up operations within GE so that it can focus on its core competencies.
Not all of GE’s segments have been weighing on its profitability. Their aviation group, which focuses on manufacturing plane engines, has been this firms “knight in shining armor”, growing GE’s top and bottom line for years and now makes up 60% of the firms operational profits. This segment is expected to continue being the principal growth driver for the firm, with 12% year-over-year top-line growth just this past quarter.
GE’s Healthcare division is the only other division in GE’s portfolio that is showing positive growth over the past 3 years. This segment was initially intended to be spun-off in the restructuring and they even filed for an IPO at the end of 2018. Larry Culp is now rethinking this decision to get rid of a profitable division.
The least profitable segment under GE’s operations is power, which has seen substantial declines in revenue and earnings. I believe a lot of this decline is due to Alstom’s burden, which has now been written down.
The Environmental Protection Agency just modified the Obama-era Affordable Clean Energy bill in an attempt to revive the coal-power industry. This new bill will allow older power plants to operate as they did before the Obama administration’s bill. This should boost profits from GE’s power segment that has a significant stake in coal-powered plants.
The issues with GE have been more than priced into its stock and I believe with Larry Culp’s guidance, this firm can come out of the furnace blazing upward. The firm has the connections to maintain the proper level of investment to keep growth on the table.
GE’s restructuring is not over, which could cause more stock price volatility in the short term but I am confident that after this restructuring is through this once industrial powerhouse will shine once again.
Bear of the Day:
FedEx has lost more than 30% of its value over past 52-weeks with international headwinds being the key catalyst for this decline. FedEx just released an earnings beat earlier this week but management’s guidance for its largest segment, FedEx Express, was softer than expected. Analysts have significantly reduced EPS estimates for 2020 and 2021, pushing FDX to a Zacks Rank #5 (Strong Sell).
TNT Acquisition & FedEx Express
The TNT Express acquisition in 2016 for $4.4 billion was meant to expand FedEx’s international presence to rival top competitor, UPS, who has already established global distribution. FedEx Express, which includes TNT, is now able to service 220 countries making up 99% of the world GDP.
Weaker than expected international growth over the past year or so, along with some systemic cost concerns, have been dragging FedEx down with TNT. FedEx Express isn’t producing the same top-line growth that it anticipated with soft European and Chinese output. This segment saw a 7% year-over-year decline in operating income as revenues and margins are pinched.
FedEx Express makes up over 50% of the firm’s top-line but its low profitability is shrinking the business’s overall margins. In FDX’s earnings release earlier this week, management voiced their uncertainty about this segment’s future performance, lowering their 2020 guidance, and pointing to global economic slowdown and trade disputes as the cause for concern.
Amazon Effect & Broader E-Commerce
FedEx announced earlier this month that it would not be renewing its US air delivery contract with Amazon and emphasized how little they rely on them for their top-line, quoting that Amazon only makes up about 1.3% of revenues and are not concerned about Amazon’s in-house delivery. For a company that is stressing the importance of growing their e-commerce exposure, this is a very precarious move, with Amazon controlling almost 50% of the US e-com market.
FedEx continues to lose e-commerce market share to UPS. UPS deals with more than 20% of Amazon’s volume and makes up more than 50% of the US e-com market. FedEx needs to rethink its e-com strategy if it is going to make it a “focal point” of its business model moving forward.
Other Risk Factors
FedEx runs the largest fleet of cargo aircrafts in the world. It is extremely capital intensive to keep these planes in the air, not to mention the volatile jet fuel costs that are associated with it.
FedEx’s fuel exposure poses some risks for the firm as fuel prices rise. The capital needed to maintain this excessive air fleet might not be available if the economy were to turn south, which is on all investor’s radars with the looming trade disputes and weak global growth figures.
I wouldn’t be putting a short position on FedEx quite yet, but I would limit my exposure. FDX is being traded at very low multiples but for a good reason. The uncertainty in FedEx’s largest segment is cause for concern and could weigh heavily on the business’s future earnings. With slowing international business output, a decrease in FedEx Express’s volume is inevitable. Their net margins are shrinking fast, currently sitting below 1% and it will not take much for that to tilt negative.
3 Auto Industry Stocks to Buy Right Now
The auto industry has bounced back well in June after many stocks fell in May due to tariff and trade war fears. With that being said, here are a few stocks that may outperform their peers and continue to add to their recent gains.
All these auto industry stocks currently hold a Zacks Rank #2 (Buy) or better.
Asbury Automotive Group Inc.
Zacks Rank #2 (Buy)
Atlanta-based Asbury Automotive Group is a Fortune 500 company that owns and operates over 90 automobile retailers across 10 states. Asbury currently boasts an overall “A” VGM (Value, Growth, and Momentum) grade in our Style Score system, along with its Zacks Rank #2 (Buy). Asbury’s PEG ratio of 0.64 is significantly below the industry average, which is currently 1.49. Over the past 5 years, ABG has traded with a PEG significantly closer to industry average than its current value. Asbury over the past 5 years had a median PEG of 0.78, compared to the industry median of 0.96. Over the past 8 months, the gap between ABG’s PEG and that of the industry has widened significantly. These numbers suggest that ABG is currently somewhat undervalued and is part of the reason it earns an “A” for Value.
Additionally, Asbury is expected to have some solid growth. Zacks Consensus Estimates call for revenue growth of 3.85% in fiscal 2019, which will fuel 7% earnings growth. Looking further ahead, fiscal 2020 is projected to bring further revenue and earnings growth, 0.83% and 2.20%, respectively, on top of their fiscal 2019 numbers. This projected growth would bring 2020 EPS to $9.19 compared to just $8.41 in 2018. YTD, ABG is up 24.3%, significantly outperforming the S&P 500.
Zacks Rank #1 (Strong Buy)
Valeo is a French-based company that supplies products to automakers and the aftermarket. Valeo’s stock has had a very poor past 12 months, falling 40.6%. With that being said, the stock has gained 25% since the start of June and the company’s projected growth could help to continue this bounce back. Zacks Consensus Estimates call for fiscal 2019 earnings to fall 6%, while revenue are set to grow 6%. But, fiscal 2020 looks much better, with earnings expected to surge 30.94%, along with 5.68% revenue growth on top of their respective fiscal 2019 figures. In terms of P/E, VLEEY is currently trading at an 8% discount to its industry average.
Zacks Rank #2 (Buy)
Headquartered in Maranello, Italy, Ferrari is a luxury sports car manufacturer. Ferrari’s stock has performed extremely well YTD, with a 60.7% gain. RACE has significantly outperformed its industry’s 21.5% average and done even better when compared to the S&P 500, which has gained 14.9% YTD. Ferrari is expected to have strong growth over the next two years. Our Zacks Consensus Estimates call for fiscal 2019 revenue growth of 4.94%, which is set to help boost bottom line growth by an estimated 2.49%. On top of these numbers, fiscal 2020 is expected to see earnings growth of 9.47%, on the back of 7.84% revenue expansion. Based on these estimates, fiscal 2020 EPS is expected to be $4.51 per share, $0.49, or 12%, higher than 2018’s EPS. Ferrari stock has been on a tear of late and the expected growth could help drive RACE stock higher.
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