For Immediate Release
Chicago, IL – January 2, 2020 – Zacks Equity Research Shares of Northrop Grumman Corporation (NOC - Free Report) as the Bull of the Day, Analog Devices (ADI - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on D.R. Horton, Inc. (DHI - Free Report) , Lennar Corp. (LEN - Free Report) and NVR, Inc. (NVR - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
With an annual budget north of $4.4 trillion, The U.S. is the largest single consumer of virtually everything it purchases. The defense portion of U.S. expenditures naturally rises in time or war, but with conflict in Iraq and Afghanistan greatly reduced, had settled into a range between $560 and $600 billion annually during the second term of the Obama administration.
As of 2016, the United States accounted for more than a third of global defense spending and it’s been on the rise since then.
President Trump campaigned on a promise to “rebuild our depleted military” and in office, he’s living up to that promise.
Trump signed into law the 2019 National Defense Authorization Act, committing $716 billion to defense spending during the fiscal year. Even when other budget consideration remain unresolved, Congress and the President have an easy time agreeing on defense spending.
Texas Republican Rep. Mac Thornberry, chairman of the House Armed Services Committee suggested that even higher defense budgets are on the horizon, saying of the 2019 allocation, “The first job of the federal government is to defend the country. We’re doing that on about 15% of the federal budget, but we’ve cut too much in the past eight years and we have to make up for some of the ground that’s been lost.”
Northrop Grumman Corporation supplies a wide range of Military systems to the U.S and also other countries. The business is broken down into four main categories – Aerospace Systems, Mission Systems, Technology Services and the newly acquired Innovation Systems.
In the Aerospace division, Northrop produces aircraft, spacecraft, high-energy systems and microelectronics. Mission Systems makes military radar, sensors and related products. Technology Services works on the entire lifecycle of civil and defense platforms through a wide range of services, including logistics, security, network operations and integrated air and missile defense serving not only the U.S government and other Sovereign nations, but also municipalities like the state of Virginia. Finally, Innovation Systems was borne from the acquisition of Orbital ATK and is a leader in space, defense and flight systems.
Defense stocks are also generally defensive stocks, providing stable earnings regardless of the state of the overall stock market. With a beta of 0.76, NOC shares tend to move considerably less than the broad markets, especially during times of turmoil. In fact, periods of armed conflict – which cause significant uncertainty for most stocks – are actually the best times for defense companies as nations expand their offensive capabilities and refresh depleted resources.
Another positive aspect of the defense sector is that these companies generally have an easier time passing along cost increases to their customers than other industrial companies. When rising steel, oil or labor costs increase the price of finished goods, ordinary consumers can much more easily choose to delay the purchase of an automobile or even a tractor, but the government can’t necessarily put off defense purchases. Defense companies are also naturally resistant to trade wars and tariffs, because governments are unlikely to enact tariffs on goods and services of which they themselves are the purchasers.
In their most recent earnings report, NOC handily beat the Zacks Consensus Estimates of $4.74/share in earnings, with $5.49/share in earnings on sales of $8.48B.
Analysts expect $20.38/share in earnings in full year 2019 and $23.01 in 2020. Both have been revised upward several times over the past quarter.
Northrup Grumman is a Zacks Ranks #2 (Buy).
Northrop also pays a 1.5% dividend, and has over $2.5B in Free Cash Flow to back it up.
There’s one more story that bodes well for the futures at Northrop Grumman. The most recent defense budget bill also provided the framework for the development of an additional branch of the US military – the Space Force.
The establishment of the Space Force will likely be a windfall for Northrup Grumman. It’s a fair bet that a company with Northrop’s expertise in the space sector would make it a natural choice for the goods and services the new division would require. Until we know more about the ultimate size and shape of the Space Corps, this is a non-quantifiable wildcard, but one with the potential to create a strong tailwind for the company.
In an investing environment that includes all sorts of apparently hidden risks – trade wars, rising commodity prices, increased labor costs, etc., there are some companies that appear particularly well-equipped to weather the storm. With the support of a Presidential administration devoted to increased defense spending, Northrop Grumman belongs in any well-diversified portfolio.
Bear of the Day:
Analog Devicesis the $44 billion manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, and other semiconductor devices found in cars, planes, factories and home appliances around the globe.
ADI moved to the cellar of the Zacks Rank after reporting a disappointing Q4 fiscal 2019 (ended October) and outlook that caused analysts to take down estimates for their FY20. Adjusted earnings of $1.19 per share missed the Zacks Consensus Estimate of $1.21, as the bottom line decreased 19.6% year over year and 12.5% sequentially.
Revenues of $1.44 billion in the quarter also missed the Zacks Consensus Estimate by 0.6%. And the top line declined 6% year over year and 5.5% from the fiscal third quarter.
This downside can be attributed to weak performance of the company in all end-markets served. Moreover, macroeconomic headwinds negatively impacted the topline.
Analysts responded to the company outlook by dropping full-year 2020 revenue projections to $5.66 billion, representing a 5.46% decline from FY19.
And the 2020 EPS consensus fell 10.3% to $4.78 from $5.33, for a projected 7.2% drop on the bottom line.
Revenues by End Markets
Industrial generated revenue of $744.1 million (accounting for 52% of total revenues), which was flat year over year.
Communications revenue came in at $260.1 million (18% of revenues), decreasing 19% year over year.
Automotive revenue fell to $226.1 million (16% of revenues), down 8% from the year-ago quarter.
Consumer generated revenue of $212.8 million (15% of revenues), reflecting a 7% decline on a year-over-year basis.
For the first quarter of fiscal 2020, Analog Devices expects revenues to be $1.30 billion (+/- $50 million), representing a 15.6% decline from the year ago quarter. Prior to this disappointing guidance, the Zacks Consensus Estimate for Q1 was pegged at $1.41 billion.
Non-GAAP earnings are expected to be $1 (+/- $0.07) per share, reflecting a 24% y-o-y drop. The consensus mark for the same was $1.16 per share.
The company anticipates non-GAAP operating margins to be approximately 36.7% (+/- 100 bps).
Clearly ADI is not going out of business despite being a leader of analog solutions in a digital world.
But until the estimates stop going down and start heading back up, it may be best to stand aside. The Zacks Rank will let you know.
D.R. Horton (DHI - Free Report) Up Over 50% in 2019; Will the Bull Run Continue?
D.R. Horton, Inc.’s shares have jumped 50.2% over a year compared with the Zacks Building Products - Home Builders industry’s 45.4% rally. Also, it has outperformed the S&P 500’s 30.7% rise in the said period. The price performance was backed by the company’s robust earnings surprise history, having surpassed the Zacks Consensus Estimate in six of the trailing eight quarters. Its revenues surpassed the consensus mark in seven of the trailing eight quarters.
The bull run is likely to continue, courtesy of impressive earnings growth rate, industry-leading market share, solid acquisition strategy, affordable product offerings across multiple brands and solid housing market fundamentals.
Earnings estimates for fiscal 2020 have moved 6.5% north in the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let us delve deeper into other factors that make this stock a profitable pick.
What Makes the Stock an Attractive Pick?
Solid Underlying Housing Market Fundamentals:Improved U.S. housing market fundamentals on the back of lower mortgage rates, Fed’s dovish stance, solid economic growth and favorable demographics are expected to provide a major boost to the demand for homes in the upcoming quarters. Also, a 50-year low unemployment rate and increased wage growth make the picture rosier.
The recent housing data also reveals encouraging market prospects. The recently released housing starts data for the month of November showed a 13.6% year-over-year jump. Building permits increased 1.4% to the rate of 1.482 million units in November, the highest level since May 2007. Moreover, a survey showed that homebuilder confidence in December jumped to the highest level since June 1999.
This positive momentum is evident from the company’s strong fiscal 2019 results. Earnings per share increased 13% from a year ago and revenues grew 9.4% during the year. Notably, with 56,975 homes closed in fiscal 2019, D.R. Horton completed its 18th consecutive year as the largest homebuilder in the United States. In fiscal 2019, homes closed increased 10% year over year to 56,975 units and 9% in value to $16.9 billion. Additionally, homebuilding cash flow from operations was $1.4 billion.
Accretive Acquisitions & Increased Capital Investments in Land: D.R. Horton — which shares space with Lennar Corp. and NVR, Inc. in same industry — remains proactive in acquiring homebuilding companies in desirable markets. Over the past five years (through fiscal 2019), the company has invested approximately $1 billion on acquisitions.
Its strong cash position and low debt/capital ratio allowed it to make strategic land purchases even during the downturn, in turn giving it a significant competitive advantage. The company has selectively invested in attractively-priced land and lots over the past few years, allowing it to bring new attractive communities in desirable markets. D.R. Horton’s well-stocked supply of land, plots and homes provides it with a strong competitive advantage to meet the demand in the coming quarters. This will in turn lead to growth in sales and home closings.
The company invested $3.7 billion in lots, land and development in fiscal 2019, almost on par with the year-ago level of $3.8 billion. It has plans to boost investments to replenish the land and lot supply in 2020 for supporting revenue growth.
Superior ROE & Solid Prospects:D.R. Horton’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 16.6% compares favorably with the industry average of 12.1%, implying that it is efficient in using its shareholders’ funds.
Meanwhile, D.R. Horton has solid prospects, as is evident from the Zacks Consensus Estimate for fiscal 2020 earnings of $4.89 per share, which indicates 13.9% year-over-year growth (higher than the industry average of 9.3%). Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A. On a further encouraging note, this homebuilder is expected to register 11.8% earnings growth in three-five years.
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