For Immediate Release
Chicago, IL – January 27, 2020 – Zacks Equity Research Shares of Arcosa Inc. (ACA - Free Report) as the Bull of the Day, Deere and Company (DE - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on McDonald's Corp. (MCD - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and Denny's Corp. (DENN - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
2019 brought many of the most highly anticipated initial public offerings in recent memory. A huge number of well-known brands hit the public equity markets for the first time and the term “unicorn” – referring to a company that achieved more than a billion dollars in value before its IPO – became frequently used in the financial press.
With a crop of new stocks like Uber, Lyft, Peloton, Beyond Meat, Pinterestand many more suddenly available to ordinary retail investors, it’s understandable that less exciting names didn’t end up getting a whole lot of attention.
Many of the most popular IPOs struggled coming out of the gate. Big private valuations and concerns about a path to profitability have investors cautious of buying up the shares in the secondary market, even for companies with well-known goods and services that those same investors frequently use.
Debuting on the public stage at the end of 2018, Arcosa Inc. has been quietly beating analyst estimates and growing shareholder value. Unlike some of the big new-stock names, Arcosa is consistently profitable even as it grows. After nearly doubling in its first year, Arcosa shares still trade at a thoroughly reasonable 12-month forward P/E Ratio of 17.4X – lower than the S&P 500.
Infrastructure has been a hot industry for years with a strong economy and help from big-spending Federal, state and local governments who are finding it easy to appropriate huge sums to projects intended to shore up the nation’s roads, bridges and energy capital.
Arcosa’s business is split into three separate units – Construction, Energy and Transportation and all of those lines have been booming.
Construction provides huge amounts of aggregate and specialty materials as well as the know-how to guide clients through every stage of enormous projects.
Energy creates wind towers, utility transmission structures and storage tanks. The company’s focus on clean, renewable energy leaves it well positioned to capitalize on global trends toward environmentally sustainable sources.
Transportation provides barges and marine hardware and a wide variety of equipment for the rail industry. Barges may not exactly sound like a very exciting business line, unless you consider that during just the past quarter, Arcosa's order backlog bacjlog for barges increased to $364 million.
Construction and Transportation each make up just about 25% of revenues with energy filling in the other half. That diversification of revenue sources means Arcosa is well-insulated from a temporary downturn in any given segment. All three divisions showed quarterly and YoY revenue increases.
In the first three quarters that Arcos has been reporting results as a public company, they’ve beat the Zacks Consensus Earnings Estimates by 81%, 41% and 51%, bringing the average surprise to almost 58%.
Sales are expected to grow 16.5% in 2020 and net earnings are forecast to increase by 14.5%. Recently rising estimates earn Arcosa a Zacks Rank #1 (Strong Buy).
While the infrastructure industry doesn’t have the cache of high-tech offerings like ride-sharing, food delivery, fitness and internet apps, that can actually be good news for careful investors who are more concerned about profitability and valuation metrics than they are about hype.
Everyone loves an interesting story, but for the long term health of a portfolio, consistently profitability in a growth industry is much more important.
Bear of the Day:
Sometimes the Zacks Bear of the Day is a company with truly dismal prospects – possibly even a stock that’s so bad that not only should investors avoid owning it, but aggressive traders might want to consider initiating a short position.
Deere and Company is not one of those stocks. It’s an iconic American heavy equipment manufacturer with truly global reach and solid plans for both cutting costs and expanding product offerings. Unfortunately, it’s also been on the wrong side of several global economic trends that threaten to weigh on results in the immediate future.
Recent reductions in company revenue guidance and subsequent negative earnings estimate revisions have landed Deere at the bottom of our rankings – a Zacks rank #5 (Strong Sell).
The trade disputes between the US and China – and to a lesser extent, Europe – have really put a squeeze on sales of agricultural equipment. US producers who had grown accustomed to exporting a huge amount of agricultural products abroad saw many of those international purchases drop off to near zero basically overnight.
Difficult weather conditions in the US in 2019 further added to the misery.
It’s a basic economic reality that when farmers are experiencing favorable economic conditions, they frequently invest much of the surplus in equipment purchases. When times are tight, they generally curtail or delay big spending plans.
In an strange paradox for Deere, one of their strengths can actually hurt the company in times like these. Deere equipment is renowned for its high quality and durability. Though each new generation of machines adds technological advances that help farmers to work less, increase yields or both, the long useful life of the older equipment means farmers can keep servicing, maintaining and using their aging machinery during periods when they feel the need to tighten their belts.
In fact, it was reported recently that the used market for Deere tractors that are now 40 years old has been firming up lately because that generation of equipment – which lacks many of the modern comfort, convenience and data collection features of newer models – can also be repaired and maintained by even the smallest farmers.
Even though the latest “Phase 1” deal between the US and China will include a significant increase in Chinese purchase of US agricultural products over the next two years, it will take quite a while for those sales to make it to the bottom line for US farmers, meaning they’ll probably be making do with old equipment for the foreseeable future.
Deere management certainly hasn’t been ignoring the issue. In response to falling revenues, they’ve been getting increasingly lean - by cutting staff and unprofitable product lines, and also making strategic investments in new products aimed more at the heavy construction industry rather than just agriculture.
They are also developing “precision agriculture” technologies that allow farmers to plant in ways that decrease costs while increasing yields.
As I mentioned earlier, the current situation is far from a disaster. Deere has been around since 1837 and with more than $32 billion of annual revenues - plus $4.4 billion in cash and over $50 billion in current assets on the balance sheet - they’re certainly not going away anytime soon.
The next year or so could be rough however, so Deere shareholders might want to consider alternatives until the dust settles.
McDonald’s Gears Up for Q4 Earnings: What’s In Store?
McDonald's Corp.is scheduled to report fourth-quarter 2019 results on Jan 29, before the opening bell. In the last reported quarter, the company’s missed the Zacks Consensus Estimate by a margin of 4.1%.
Which Way Are Estimates Moving?
The Zacks Consensus Estimate for fourth-quarter earnings is pegged at $1.96, lower than the year-ago reported figure of $1.97. Over the past seven days, the company’s earnings estimates have remained stable. For quarterly revenues, the consensus mark stands at $5,302 million, suggesting growth of 2.7% from prior-year quarter.
Let’s delve deeper and analyze the factors likely to shape the company’s top and bottom lines.
Factors at Play
Increase in franchise revenues is likely to have driven the company’s fourth-quarter performance. Notably, the Zacks Consensus Estimate for revenues at franchise-operated restaurants stands at $2,989 million, indicating an improvement of 7.1% from the prior-year quarter. Moreover, increase in sales at International Operated Markets and International Developmental Licensed Segments are likely to get reflected in the fourth-quarter results.
The company’s sales-building initiatives and increase in the global guest count are likely to have contributed to the company’s comparable sales (comps) in fourth-quarter 2019. Moreover, introduction of value meals, customizing menu according to local customer tastes, reimaging of restaurants, efficient marketing and promotions, improved service and increased convenience via delivery have been boosting sales.
What Does the Zacks Model Say?
Our proven model does not conclusively predict an earnings beat for McDonald’s this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that's not the case here.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP:McDonald's has an Earnings ESP of -0.23%.
Zacks Rank:The company has a Zacks Rank #3.
Stocks With Favorable Combination
Here are some stocks from the Restaurant space that investors may consider as our model shows that these have the right combination of elements to post an earnings beat in the upcoming releases:
Darden Restaurants, Inc. has a Zacks Rank #3 and an Earnings ESP of +0.83%. You can seethe complete list of today’s Zacks #1 Rank stocks here.
Denny's Corp. has a Zacks Rank #1 and an Earnings ESP of +5.00%.
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