For Immediate Release
Chicago, IL – May 7, 2020 –
Zacks Equity Research Shares of BJ’s Wholesale Club ( BJ Quick Quote BJ - Free Report) as the Bull of the Day, Polaris Industries ( PII Quick Quote PII - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Abbott Laboratories ( ABT Quick Quote ABT - Free Report) , Eldorado Resorts, Inc. and Apple Inc. ( AAPL Quick Quote AAPL - Free Report) . Here is a synopsis of all five stocks: : Bull of the Day
The effects of Covid-19 and the subsequent business shutdown in the US have already been exhaustively documented. Most traditional retail businesses have seen revenues drop to near zero as Americans shelter in place and reduce shopping trips to essential items.
A small handful of businesses have been the fortunate beneficiaries of the forced shift in shopping habits. The world’s largest online retailer Amazon saw a 26% increase in gross revenues in the first quarter, yet saw profits fall short of expectations and warned that Q2 profits would likely be spent entirely on efforts to dramatically expand capacity and protect the health and safety of employees and customers.
Big box wholesale stores have also seen dramatic increases in business because they sell the items that nearly all consumers continue to need even in lockdown. They also sell them in the larger quantities favored by customers who want to stock up with the least possible number of trips to the store.
Some of the sales increases can be attributed to stockpiling of non-perishable commodity items – meaning that the timing of those purchases has simply been shifted forward and is likely to be followed by a slump at some point in the future. A lot of those sales however, are replacing consumable items that would otherwise have been purchased at restaurants, bars or other businesses that have been shuttered. Those sales gains are real, significant and permanent.
Walmart and Costco will both report results later this month for the quarter that includes the lockdown and both are expected to show revenue increases - but with relatively small earnings growth of 2% and 6%, respectively. In this environment, even modest growth is still pretty attractive and both stocks remain in positive territory in 2020 even as the Dow and S&P 500 remain down double digits.
There’s also smaller warehouse store that’s relatively unknown to those who don’t live on the East Coast, but which enjoys a fiercely loyal following among its customers –
BJ’s Wholesale Club.
With just $3.65B in market capitalization, BJ’s is a tiny fraction of the size of Costco at $35B and Walmart at $353B, but it's enjoying the same increases in sales. In many respects, it is a more attractive investment.
5.5 million members of 218 BJ’s club locations appreciate an atmosphere that’s closer to a traditional neighborhood store than a typical Costco or Sam’s Club, yet offers similar deals on food staples, general merchandise and gasoline.
Just like it’s larger competitors, BJ’s is expected to show mid-single digit sales growth when it reports quarterly results later this month, but the Zacks Consensus Estimate for net earnings predicts an increase of 27%.
Six positive earnings estimate revisions in the past 30 days earn BJ’s a Zacks Rank #1 (Strong Buy).
With a forward P/E ratio of just 15.5X, BJ’s also looks to be a significantly better value than Walmart at 25X and Costco at 35X.
Forward P/E is somewhat of a moving target these days. With many companies suspending guidance and analysts guessing at just how broad and deep the downturn will be over the next year, the range of forward earnings estimates for many companies has been unusually wide. We can accurately observe the numerator “P” (price), but picking the midpoint or average of disparate estimates makes for significant uncertainty in the denominator – the “E”.
So it's worth noting that the range of estimates for BJ’s net earnings in 2020 and 2021 are both less than 10% wide – much less than most stocks and indicating that we’re unlikely to see any big surprises at BJ's.
Just a few months ago, a company like BJ’s would have been viewed as a very boring investment. In the current environment, boring feels awfully comfortable. With steadily growing, predictable revenues and earnings, BJ’s Wholesale is worth a look, especially as an alternative to Walmart or Costco.
Bear of the Day:
While sales of motorcycles and other recreational equipment had recently been on the rise in the U.S. thanks to a strong economy and record-low unemployment, the nationwide shutdown has thrown the industry into a tailspin.
Polaris Industries manufactures and sells Powersports equipment primarily in the U.S. including Motorcycles, Off Road ATVs, Snowmobiles and a wide range of parts and accessories. Through its brands Polaris, Ranger RZR and Indian motorcycles, Polaris is far and away the leader in sales of powersports equipment in North America.
In Q2 2019, Polaris earned $1.73/share - and until two months ago, the Zacks Consensus Estimate for the second quarter of 2020 was expected to be 19% higher at $2.06/share.
Then the lockdown hit.
Motorsports equipment is a quintessentially cyclical industry. When the economy is humming along, unemployment is low and wages are rising, Americans love to buy new toys – especially loud, fast toys. Along with recreational boats, motorsports equipment is one of the most popular “splurge” purchases when consumers begin to feel wealthy.
With more than 30 million Americans filing for unemployment over the past six weeks and more claims expected – along with stock market indices that are still more than 10% off recent highs – few potential consumers are feeling particularly rich right now.
As they stretch to make their savings and perhaps some government assistance cover basic day-to-day expenses like food, housing and health care, those consumers are extremely unlikely to splurge on a luxury purchase like a snowmobile or ATV.
In fact, for someone who has recently found themselves unemployed with an uncertain timeframe for when they might expect to begin getting a paycheck again, they’re much more likely to try to sell their existing equipment to raise cash than to buy something new.
In tough times, that market actually works against the company because the variety of used equipment available allows potential customers to pick up their desired machine in lightly-used condition and at a significant discount to MSRP.
It could be a long time until those customers are back in the showroom with a checkbook in hand.
That $2.06/share net earnings estimate for Q2 has tumbled all the way to just $0.63/share. The consensus estimate for full-year 2020 fell from $6.96/share to $3.50/share over the past 60 days.
Polaris is a Zacks Rank #5 (Strong Sell).
Polaris shares had been down more than 60% YTD, hitting a closing low of $39/share in early April. Those shares rallied on some surprise growth in motorcycle sales in the first quarter, despite sales contraction across all other divisions and a big miss of net earnings estimates, closing at $75.07 on April 29
th - but settling back to near $68/share recently.
The first quarter included only a small portion of the Covid-19 panic. In the luxury motorsports industry, things are almost certainly going to get worse before they get better. Polaris is a company you want to own in the boom times, but there are a lot safer places for your investment dollars in the face of what could be a deep recession.
Additional content: 3 Stocks to Pop Once America Is Back in Business
President Trump has acknowledged that there may be more deaths from the coronavirus outbreak but the economy needs to reopen or else it would impact people in many other ways like drug overdoses and suicides.
An increasing number of states are expected to reopen their economies in the first two weeks of May. New York, in particular, aims to ease restrictions on manufacturers, builders and certain retailers in the near term. California too will permit apparel stores, bookstores and flower stores to reopen for curbside pickup as soon as this week.
But such moves are a huge gamble given that tens of thousands are infected by the pandemic, and things are getting worse by the day. Needless to say, stay-at-home orders did flatten the curve in hotspots like New York and California. However, though the economy is set to reopen, it’s going to be an uphill to get back to business as usual.
One thing that is for sure is that the spread of the infection won’t subside anytime soon and it won’t be a V-shaped economic recovery, as some analysts were predicting.
With social distancing measures likely to stay even after the economy reopens, restaurants may begin business with limited seating capacity. Few people will be going to theme parts or book air tickets. And sports events will likely be conducted without spectators, or at least with very few in attendance. What’s more, lesser number of people will be willing to go to work after having realized the time value of working from home.
Though the situation will be far from normal, there are stocks that will flourish once the economy reopens. Take a look –
As the world waits for a coronavirus vaccine, reopening of the economy is majorly depends on rampant testing. In other words, a simple blood test will be conducted to recognize individuals who have recovered from the virus. And Abbott Laboratories is in the forefront of this initiative. Needless to say, the company will be conducting tests, both before and throughout the reopening process of the economy.
Notably, the company has launched two COVID-19 tests — the ID NOW COVID-19 molecular test and the RealTime SARS-CoV-2 molecular test — which run on Abbott’s m2000 RealTime System in hospitals and laboratories.
But its not that testing is the only driver for Abbott Laboratories. The company’s branded generics and international diabetes businesses continue to drive growth, and new product launches and acquisitions should boost revenues in the near future.
The company has also been in the limelight for development in its flagship, sensor-based continuous glucose monitoring system, FreeStyle Libre System. The company’s expected earnings growth rate for the next year is a superb 28.5%. In fact, the company’s projected earnings growth rate for the next five years is a steady 8.1%.
Eldorado Resorts, Inc. is a casino entertainment company. It provides casino and entertainment services, primarily in Nevada and Louisiana, United States.
Admittedly, casinos may be the last to open in the U.S. economy. But once the casino business starts to operate, it should provide a nice boost to Eldorado Resorts.
To top it, Eldorado Resorts is about to buy Caesars Entertainment Corporation to gain access to the latter’s network of sports books in nearly 29 U.S. casinos.
Eldorado Resorts’ expected earnings growth rate for the current quarter and year is 79.2% and 24.5%, respectively. The company’s projected earnings growth rate for the next year is also a promising 62.8%.
Things were not looking up for Apple Inc. at the beginning of this year. Apple had to close all 42 of its stores in China due to the coronavirus outbreak. As a result, the company’s revenues were impacted in the March quarter. After all, the iPhone maker is heavily dependent on Chinese factories and consumers.
Apple also assembles products in China. For instance, a Taiwanese company named Foxconn makes iPhones and other gadgets on behalf of Apple. However, concerns regarding the impact of the virus on the global economy and subsequently on corporate profits have been escalating.
Recently, Beijing reopened its economy and Apple stores are up and running in China. Similarly, investors can rest assured that Apple will be the first one to open stores once the U.S. economy reopens.
However, the story of Apple is beyond iPhones. The company is doing strong business in its services division. Apple’s second-quarter fiscal 2020 results reflected continued momentum in the Services segment, driven by robust performance of App Store, Apple Music, Video, cloud services and App Store search ad businesses.
The company’s expected earnings growth rate for the current and next year is 2.9% and 24.5%, respectively. Projected earnings growth rate for the next five years is 10.7%.
Abbott Laboratories, Eldorado Resorts and Apple have a Zacks Rank #3 (Hold). You can see
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