For Immediate Release
Chicago, IL – November 21, 2019 – Zacks Equity Research Shares of Applied Materials (AMAT - Free Report) as the Bull of the Day, Warrior Met Coal Inc. (HCC - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Alibaba (BABA - Free Report) and Amazon (AMZN - Free Report) .
Here is a synopsis of all four stocks:
Bull of the Day:
Applied Materials posted stronger-than-projected earnings and revenue results on November 14. Shares of AMAT were already up roughly 70% in 2019 prior to its post-earnings surge, as part of a larger semiconductor industry comeback.
Applied Materials is a semiconductor equipment firm that has been on a tear in 2019 despite the fact that its sales and earnings fell for four straight periods. The company with a $55 billion market cap is a leader in “materials engineering solutions” that are used to make “virtually every new chip and advanced display in the world.” AMAT’s recently-reported Q4 sales fell 13%, while its adjusted earnings dipped nearly 6%.
The Santa Clara, California-headquartered firm is, of course, not alone in the notoriously cyclical semiconductor and chip industry. Big-names such as Nvidia also posted four straight periods of declining revenues. But this is not totally unusual for chip firms, especially when they come up against hard-to-compare periods of outsized success.
Luckily, Applied Materials and others such as industry giant Intel impressed Wall Street with their guidance. And the reason is relatively simple: everyone from Apple to Microsoft rely on semiconductors and they will remain essential backbones of the technological revolution for years to come.
AMAT’s first quarter fiscal 2020 guidance came in well above Wall Street estimates, as signs of a recovery in demand continue. “Applied Materials’ fourth quarter results reflect a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company,” Applied Materials CEO Gary Dickerson said in prepared remarks.
“The semiconductor industry is increasingly adopting a new playbook for improving chip performance, power, area and cost, and we are investing in unique solutions to enable our customers’ success in the AI-Big Data era.”
As we alluded to at the outset, the chip equipment maker’s shares have soared roughly 80% in 2019. This crushes the S&P 500’s 23% climb and its industry’s 53%. AMAT stock also popped right after its Q4 report but has pulled back slightly since then.
Applied Materials stock closed regular trading Wednesday at $59.65 per share, down just a few dollars from its new highs. Investors will notice in the chart above that AMAT shares have now climbed ahead of their early 2018 highs.
Along with its industry-topping run of 160% in the last five years, Applied Materials is a dividend payer. The firm currently pays an annualized dividend of $0.84 per share, for a yield of 1.4%.
Bear of the Day:
Shares of Warrior Met Coal Inc. have plummeted over 20% in 2019 as part of a larger downturn in the coal industry. Warrior isn’t exposed to the decline in coal used for electricity, but the steel industry that HCC serves has faced hard times as well.
Warrior Met Coal, as its name and ticker might suggest, produces and exports metallurgical or met coal that is used in the steel making process. Warrior mines its premium hard coking coal in the U.S. and sells it to steel producers across Europe, South America, and Asia.
Meanwhile, more than a half dozen large U.S. coal companies have filed for bankruptcy over the last year, according to an October Wall Street Journal report. The downturn comes as U.S. natural gas production continues to soar and renewable energy from hydropower to wind becomes more popular. In fact, coal-based electricity is expected to power just 25% of the U.S. grid in 2019, down from 48% in 2008, according to the U.S. Energy Information Administration.
Warrior Met Coal, as we mentioned, does not really care about coal’s fall from grace when it comes to U.S. electricity. But the company has been impacted by the overall negativity, which is hard to escape. The coal industry that HCC is a part of currently rests in the bottom 8% of more than 250 Zacks Industries.
Despite steel industry woes, which include tariffs, the Brookwood, Alabama-headquartered firm’s Q3 fiscal 2019 revenue did jump over 5% from the year-ago period. And Warrior’s revenues were up around 4.5% through the first nine months of the year.
However, the firm’s costs climbed and its adjusted quarterly earnings tumbled roughly 25%. The company also fell short of our quarterly earnings estimates on October 30. “Even with the seasonal steel slowdown in the third quarter, as well as additional macro issues in the global economy significantly impacting pricing we were still able to execute another quarter of strong sales volume along with a significant increase in production volume,” CEO Walt Scheller said in prepared remarks.
Moving on, our current Zacks Consensus Estimates call for Warrior’s fourth quarter revenue to tumble over 41% from the year-ago period to $211.6 million. This is expected to pull the firm’s full-year fiscal 2019 sales down by 8.3%. Peeking ahead, HCC’s fiscal 2020 revenue is projected to tumble another 15.8%.
The bottom end of the income statement looks even worse. HCC’s adjusted Q4 earnings are projected to plummet 80%, with fiscal 2019 expected to sink 35%. Then the firm’s full-year fiscal 2020 EPS figure is projected to fall another 42%.
Alibaba Debuts Shares in Hong Kong: BABA Implications
China’s largest e-commerce player just executed an equity offering in one of the most chaotic cities in the world right now. Alibaba just issued roughly $13 billion in stock and executable options on the Hong Kong exchange in a global offering. Individual investors were able to get in on the action and placed more than 40 times as many shares as they were initially offered, according to the WSJ article.
This demonstrates an enormous amount of confidence in China’s Amazon of the East. Alibaba is planning on using the funds to further build out its product offering beyond online shopping like cloud computing and digital media, following in Amazon’s footsteps.
Alibaba’s primary revenue driver is its domestic commerce retail, which makes up 64% of its income and grew at a sizable 40% in its latest September quarter earnings. International commerce only makes up 7% of the firm’s total revenue, but there is still an enormous amount of growth opportunity in the markets abroad.
Alibaba has been slowly building out its cloud computing, digital media, and entertainment product offerings as these capabilities have become in demand globally. Alibaba Cloud is growing fast with year-over-year increases in the high double-digits to triple-digit percentages since it went online in 2014. The segment is still not profitable, but like any growing business, it is gaining market share and international traction.
The recent trade war hasn’t appeared to have materially hampered business performance for the enterprise, and BABA continues to drive returns for investors. China’s economy is slowing down, and the trade war is a significant catalyst. The fact that Alibaba has still been able to return investors over 35% year-to-date illustrates the firm’s impervious growth. As you can see below, BABA has been able to outperform its American competitor, AMZN.
BABA vs. AMZN
Alibaba may be smaller than Amazon, but it is right on its coattails. China is expected to be the largest consumer market in the world by the end of this year, and Alibaba has secure domination of this market and a share that continues to expand.
BABA is also able to achieve much stronger margins than AMZN and is actually more profitable than America’s favorite shopping site. Alibaba is expected to grow its topline at a substantial premium to Amazon’s, and with its leaner operations, it will continue to gain on them.
Right now, BABA is trading at a considerable discount to AMZN. Below you can see the PEG ratio of each company, representing the comparable forward P/E valuation of each stock accounting for growth.
As long as China’s consumer market doesn’t fall apart, I have confidence that BABA will outperform AMZN in the years to come. A trade war resolution will prove to have a much larger upside to BABA.
Alibaba is hot right now, and its latest oversubscribed debut on the Hong Kong exchange illustrates this. This stock has a lot of upside potential, with the looming trade war being the only hampering its surge. Investors are still nervous about the economic slowdown in China and are pricing BABA accordingly. Analysts are considering this stock to be high risk, but its resilience to the trade war thus far gives me confidence in its ability to continue expanding.
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