For Immediate Release
Chicago, IL – April 1, 2019 – Zacks Equity Research Astronics Corp ATRO as the Bull of the Day, Ichor Holdings ICHR as the Bear of the Day. In addition, Zacks Equity Research provides analysis on JP Morgan Chase JPM, Bank of America BAC and Goldman Sachs GS.
Here is a synopsis of all five stocks:
Bull of the Day:
Astronics Corp is a Zacks Rank #2 (Buy) that has a B for Value and a C for Growth. The Zacks Industry Rank is among the top coming in at 21 of 256 placing it in the top 8%. That alone has to spark your interest in this stock. That solid Zacks Rank coupled with a strong Industry
The company makes lighting and electronics that are used in cockpits. They sell in both the military and commercial markets as well as to private business jet aircraft. I did check to see their exposure to the Boeing 737MAX line, and they are not in the cockpit on that plane, but they do service the exterior lighting on that plane.
I see a good earnings history here, with the company beating the Zacks Consensus Estimate in 3 of the last four quarters. The most recent beat was a positive earnings surprise of 5.7%. Prior to that, the beats were 10.6% and 44%. So the level of beat is coming down, but still on the right side of the equation.
The current quarter and next quarter have not seen any estimate revisions that would cause the Zacks Rank to change. There is some movement in the full year 2019 number as that has moved from $1.67 60 days ago to $1.71 at the current level. This implies that the second half of the year has seen some recent increases in estimates.
The 2020 number has held still at $1.94, but that implies some healthy earnings growth which is just what investors need to see.
I really like the valuation here for ATRO. I see a forward PE of 18.5x and sales growth of the exact same level versus last year. The price to book of 2.6x is still keeping the value investors interested as they like that number below 3x. The price to sales of 1.28x shows there is some premium on their product, but really it shows plenty of room to grow.
Net margins have improved in each of the last three quarters, moving from 2.5% to 3.7% and were 5.8% after the most recent quarter. If ATRO can keep that number moving higher along with topline growth of 18% or more, then this stock will likely be reaching new highs in the not too distant future.
Bear of the Day:
Ichor Holdings has slipped to a Zacks Rank #5 (Strong Sell) after it missed earnings back in early February. The stock is right around the same price, but estimates have fallen in a meaningful way. Since that hasn't really impacted the stock, it has moved the valuation metrics.
ICHR's last report had EPS at $0.32 but the Zacks Consensus Estimate was calling for $0.35. That three cent miss translates into a 8.5% negative earnings surprise. This was the only miss of the last 4 quarters, so its not like there has been a very poor earnings history.
The key to the Zacks Rank is the revision to earnings estimates. As the estimates fall, so does the Zacks Rank, and that is just what we have in the case of ICHR.
60 days ago, the Zacks Consensus Estimate for this quarter was $0.42, but that was slashed to the current level of $0.26.
The estimate for the next quarter fell from $0.57 to $0.33 over the same time period.
Full year 2019 estimates slipped from $2.45 to $1.80. The Zacks Rank tends to weight the full year number more than the current quarterly numbers. This is the main reason the Rank fell to the lowest level.
2020 estimates have also dropped, moving from $2.83 to $2.68.
Normally I would be excited to see a stock at 12x forward earnings multiple for a tech stock like this would excite me. Problem is, growth is contracting at 22% from last year. The price to book multiple of 2.5x is good for value investors, while a 0.6x price to sales multiple isn't that great for growth investors. Margins have been moving in the wrong direction, and until they turn around, this is a good stock to avoid.
Fed Analysis: How Financial Stocks Are Affected
Interest Rates Hit Financials
Interest rates have taken a tumble since there high last October, with the 10 yr Treasury bond yield down almost a full percentage point. The 10 yr is trading at its lowest yield since 2017 and could have more room to fall. It is becoming an unfavorable credit environment for lenders, and financial stocks are taking a hit because of it.
Interest income makes up a considerable portion of our favorite bank stocks’ income: JP Morgan Chase’s revenue is 50% driven by interest, Bank of America relies on interest income for over 50% of revenue, Goldman Sachs, whose focus is investment banking, still relies on interest for about 40% of its income. Since the Fed started their dovish campaign at the end of 2018, bank stocks have taken a hit. You can see this in the 1-year performance chart below. These banks have far underperformed the broader equity market, all having negative 52-week returns.
Federal Reserve Overview
The Federal Reserve has two ways of controlling interest rates in the US: one is through their balance sheet, and the other is the Fed Fund rate (monetary policy). The Fed uses their almost $4 trillion balance sheet to influence interest rates by buying and selling fixed income instruments (quantitative easing and tightening).
When the credit market fell apart in 2008, the Fed was forced to buy up the toxic assets in order to keep the credit markets afloat. Mortgage-backed securities aka collateralized debt obligation (CDOs), which started to see defaults in 2008, were quickly losing value and requiring higher and higher yields. These defaults caused a domino effect in the markets. The initial reaction was for people to get out of the riskier equity market and into safer fixed-income assets (flight-to-quality) which caused an initial spike in bond prices and drop in yields. This didn’t last long. Investors quickly started requiring higher yields for fixed income assets because of the perceived systemic concern in the credit markets caused by the CDOs. The Fed had no choice but to start buying up a substantial number CDOs to keep credit markets from restricting too much cash flow. By buying these assets the Fed effectively lowered interest rates. This method of monetary policy is called quantitative easing.
The Federal Reserve stopped growing their balance sheet at the end of 2014 hitting an all-time high of $4.5 trillion (up from the $800 billion before the credit crisis). At the end of 2017, the Fed started rolling fixed-income assets off their balance sheet, driving interest rates up. This is a method of monetary policy called quantitative tightening. Below is a chart showing the size of the Feds balance sheet since the financial crisis (from the Federal Reserve’s site).
The Fed Funds rate is the overnight rate the Federal Reserve charges banks to meet their cash reserve requirements. The Fed Funds rate is the benchmark interest rate for all fixed income assets in the US and is the principal way in which the Fed controls interest rates.
The Federal Reserve has a dual mandate of keeping unemployment low and controlling inflation. Recently though the Fed has been taking cues from the stock market.
Feds Most Recent Move
The equity market took a tumble at the end of 2018, and the Fed responded with dovish policy. They recently announced that they wouldn’t hike rates for the foreseeable future and that they would be stopping their balance sheet roll-off (stop quantitative tightening). These announcements both knocked yields down and caused a surge in prices in both the equity and bond markets.
Unfortunately, bank stocks and their substantial interest income, are heavily impacted by the Federal Reserve’s monetary policy. Currently the market isn’t just pricing in no more rate hikes but a potential rate cut. The Fed Watch Tool, created by the CME, illustrates that the markets have priced in a 2/3 chance that there will be a rate cut in 2019.
All this dovish news makes me very hesitant to get into any banks stocks right now. Although, if these rate cuts are already priced into the financial sector and they don’t come to fruition we could see some larger gains from our bank stocks this year. JPM, BAC, GS – Zacks Rank #3 (Hold)
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