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Bloomin' Brands, Mesa Laboratories, Intuit, Target and Microsoft highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research
·14 min read

For Immediate Release

Chicago, IL – September 28, 2020 – Zacks Equity Research Shares of Bloomin' Brands, Inc. BLMN  as the Bull of the Day, Mesa Laboratories, Inc. MLAB as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Intuit Inc. INTU, Target Corporation TGT and Microsoft Corporation MSFT.

Here is a synopsis of all five stocks:

Bull of the Day:

The outbreak of the novel Coronavirus and the resulting shutdown orders have been devastating for the restaurant industry. Despite the efforts of Congress to provide fiscal stimulus – especially the PPP loans that allow small business owners to continue paying their employees - thousands of restaurants have shut their doors permanently and many of those remaining are in dire straits financially.

What hasn’t changed is Americans’ desire to eat their favorite foods from their favorite restaurants. In fact, the shutdown has people longing for a sense of normalcy and a restaurant meal is high on the list of things those people look forward to when they are once again able to go out in public as they please.

Bloomin’ Brands is positioned to thrive as businesses reopen for business and could even be the beneficiary of the fact that many smaller restaurants may not be around when those customers reemerge – hungry for a meal as well as the experience.

Most consumers will know Bloomin’ Brands as the operator of the popular Outback chain of Australian-style steakhouses. They also own Fleming’s Prime Steakhouse, Carraba’s Italian Grill and seafood restaurant Bonefish Grill. They operate the fast-casual Aussie Grill by Outback and the Abbrocio chain outside the US.

Since the first outlet opened in 1988, the Outback formula has been enormously successful, offering a steakhouse experience in a more casual, accessible and affordable format. On busy nights, it’s not uncommon for customers to wait in line for an hour or more for their favorite Outback favorites, including the fried onion appetizer that lends its name to the corporation – the Bloomin’ Onion.

Typically, meat items are a restaurant’s lowest margin items, but Outback (and its corporate cousins) avoid that norm by having the economies of scale to order ingredients in bulk and also pad the bottom line with higher-margin appetizers, deserts, draft beer and wine by the glass.

The company adapted quickly to the unfortunate circumstance that saw the closure of in-person dining in the majority of their 1,450 restaurants, providing curbside pickup of individual items and complete family meal packages. They also scrambled to provide delivery options which have been a surprise hit.

Bloomin’ Brands provides investors and analysts with weekly sales data on their investor relations website, broken down by in-person and off-premise transactions. As you would expect, sales have declined quite a bit from the year-ago periods – especially same store sales at restaurants with no on-premise sales – but they’re not terrible.

Many diners have one or more favorite independent local restaurants that they prefer to frequent and will be disappointed if those businesses don’t survive the pandemic. It’s reality however that an operator with over 1,000 outlets has a big advantage in negotiating supply contracts, leases and employee schedules that the average neighborhood restaurant.

Bloomin’ Brands ended the second quarter of 2020 with $181 million in cash on the balance sheet, more than double the figure from the end of 2019 and a formidable war chest for implementing the changes necessary to survive the pandemic. You may or may not like it as a dining consumer, but as an investor, you have to appreciate that bigger chains like Bloomin’ will be around long after more specialized small competitors cry “uncle” and go out of business.

A look at earnings projections going forward fleshes out that idea. As expected, the remainder of 2020 looks pretty ugly with double-digit drops in revenue and triple digit declines in earnings.

Earnings in 2021 are expected to snap back however, and recent upward estimate revisions have reduced the expected losses this year and increased the expected profits next year, earning Bloomin’ Brands a Zacks Rank #1 (Strong Buy).

It’s inevitable that the events of 2020 will reshape the landscape for many industries and restaurants are chief among them. Demand for their food certainly won’t go away, but a lot of the competition will. During times of radical change, it’s important to keep an eye on who the eventual winners might be. In chain restaurants, Bloomin’ Brands is an excellent candidate to come out the other side stronger than ever.

Bear of the Day:

Mesa Labs is a $1.2 billion provider of quality control monitoring and validation instruments serving niche markets in healthcare, industrial, pharmaceutical, medical and food processing applications.

In early August, Mesa reported its Q1 FY21 results (ended June) and came out with quarterly earnings of $1.67 per share, missing the Zacks Consensus Estimate of $1.78 per share. This compares to earnings of $1.94 per share a year ago.


And Mesa posted revenues of $29.94 million for the June quarter, missing the Zacks Consensus Estimate by 5.55%. This surpassed year-ago revenues of $26.29 million by 13.9%, but the company has not topped consensus revenue estimates but once over the last four quarters.

The June quarter represented a negative earnings surprise of -6.18%. For the March quarter, it was expected the company would post EPS of $2.03 when it actually produced earnings of $1.29, delivering a negative surprise of -36.45%. This followed a 69% EPS miss in the December quarter.

This trail of declining profit growth has led analysts to revise their full-year estimates lower. For FY 2021 (ends in March), the Zacks EPS Consensus has fallen 25% from $8.14 to $5.99 in the past month.

Investor and Analyst Reactions

Despite this outlook, investors are not running away from MLAB shares, even after a $135 million secondary offering in June. Mesa priced 600,000 shares at $225 on June 9 and the deal size was increased from $100M to $135M and priced below the last closing price of $235.99. Jefferies, JPMorgan and Evercore ISI are acting as joint book running managers for the offering.

In a September 1 model update from Jefferies, analyst Brandon Couillard and his team wrote about MLAB as "a high-quality small-cap compounder with a defensive growth profile that is relatively insulated from the macro."

The analysts noted that while near-term demand conditions had been impacted by the pandemic, they continue to believe that improved execution under new management, who are former Danaher executives, would offer new stability and organic growth opportunities.

And with over $200 million of cash on hand, they also like the possibility of additional M&A as a likely catalyst for the stock. They maintained their $290 PT.

Growth Stock Growing Pains = Volatility

I was once an investor in MLAB shares in Q4 of 2018 where we bought the stock for my Healthcare Innovators portfolio because I saw it as undervalued near $180 vs its growth rates of sales and profits. We sold at $220 and I've looked now and then at the growth profile for a reason to get back in.

While the stock has offered plenty of trading opportunities between $210 and $250 this year and last, I can't recommend buying the shares now until the estimates have stabilized and started heading back up. The Zacks Rank will let you know.

Additional content:

3 Stocks for Long-Term Investors to Buy Despite Market Turmoil

The market has tumbled since its early September records, with Wall Street yanking its foot off the gas to put on the breaks heading into the upcoming election, which is less than six weeks away. The uncertainty of the current environment is palpable and the market is deciding what to price in when it comes to possible changes in Washington.

Investors have also grown increasingly impatient about the lack of progress on the stimulus front, as the travel and broader hospitality industries remain devastated, alongside many smaller businesses. Meanwhile, the coronavirus is still hampering a more complete economic rebound in Europe, the U.S. and elsewhere.

That said, the political will for a second round of lockdowns likely isn’t there as economies and people have no other logical alternative beyond learning to live with the virus the best they can. Plus, there continue to be signs of a slow and steady economic recovery, while the earnings outlook continues to improve.

Market Movement

The S&P 500 and the Nasdaq have tumbled, as the big tech names fall back down a little closer to earth. The tech-heavy index is down roughly 12% from its September 2 peak, with the proxy index for the broader market 9.7% off the pace—right below the 10% decline that would mark a technical correction.

These moves are common and healthy. In fact, there have been 24 market corrections since November 1974. And only five of them turned into bear markets, including the violent tumble the market experienced in February and March.

There is no way to predict what will happen next, though technical traders currently point to the 200-day moving average as the next big level to watch (nearby chart). Instead, investors must try to remember that someone is always on the other side of a trade. So as the market falls, the big money is likely scooping up stocks. And trying to time the market is very difficult.

Let’s also remember that the Fed plans to keep its interest rates near zero through at least 2023. Like it or not, this creates a sustained TINA effect—there is no alternative—as Wall Street hunts for returns in a yield-starved market.

With all of this in mind, investors with a longer-term horizon of at least a year or more might want to consider adding a few strong stocks right now despite the turmoil…

Intuit

Intuit is part of the growing cloud-based SaaS industry, which includes Adobe, Zoom Video and countless others, that has flexed its muscles during the pandemic. These software firms have become so integral to businesses and consumers that they are hard to replace. INTU offers a variety of financial services and it is most famous for its online tax software, TurboTax. The company also sells software geared toward accounting, small business money management, and personal finance, which include QuickBooks and Mint.

Intuit boasts roughly 50 million customers globally and has seen its annual revenue grow by between 11% and 16% for the last five years. The firm topped our Q4 FY20 estimates in late August, with FY20 revenue up 13%. Zacks estimates call for its FY21 revenue to jump 7%, with FY22 projected to come in over 11% higher. INTU’s adjusted earnings are projected to climb by 8.5% and 13.2% over this stretch.

Intuit’s positive earnings revisions help it land a Zacks Rank #2 (Buy) right now. The stock is also part of a highly-ranked Zacks industry and its 0.76% dividend yield tops the 10-year U.S. Treasury. INTU shares have crushed the tech sector over the last five years, up 250%. And Intuit’s tax-focused offerings are unlikely to go out of style, as the saying goes, with its shares resting 15% off their early September highs.

Target

Target has boosted its e-commerce and direct-to-consumer business, including a variety of same-day offerings. The firm has also invested in a strategic brick-and-mortar approach that will likely continue to pay off, as e-commerce accounted for just 16% of total U.S. retail sales in Q2—up from 10.8% in Q2 FY19. TGT has kept and attracted younger consumers, unlike department stores, through trendy and affordable furniture, home décor, fashion, food, and more.

The Minneapolis-based retailer’s Q1 sales jumped 11%, with Q2 sales up 25%. TGT’s Q2 digital comps soared 195% and it also posted one of its strongest quarters of in-store comps on record, up 10.9%. Meanwhile, its operating margin climbed from 7% in Q2 FY19 to 10%, which comes in well above Walmart and Amazon.

Target shares are up 160% in the last three years to top WMT’s 72%. TGT is also up nearly 30% in the last three months and still rests near its highs, despite the broader selloff. Target also trades at a discount, as it has for years, to its industry and its peer group. And TGT's 1.79% dividend yield tops Walmart and the 30-year Treasury’s 1.42%.

Zacks estimates call for TGT’s adjusted Q3 earnings to jump 10.3% on 10% stronger sales. Meanwhile, its adjusted fiscal 2020 EPS figure is expected to jump 12% on 12.4% higher revenue. Target’s positive bottom-line trends help it grab a Zacks Rank #1 (Strong Buy) right now.

Microsoft

Microsoft’s Office offerings remain vital to businesses, students, and many others, and it has boosted its remote work push to better compete against Zoom and others. Meanwhile, its next-generation Xbox is due out this holiday season and it recently increased its bet on the booming gaming industry. On top of all of that, and perhaps most importantly, Microsoft is a leader in the cloud computing market and its expansion continues to drive top and bottom-line growth (also read: Why Microsoft Paid $7.5 Billion for Gaming Wizard ZeniMax).

MSFT’s revenue has jumped by roughly 14% for three straight years, with its Q4 FY20 (period ended June 30) sales up 13% amid the height of the pandemic. Zacks estimates call for the historic tech firm’s FY21 revenue to climb 9% and another 10% in FY22, with its adjusted earnings projected to pop 11% and 12.5%, respectively. Microsoft lands a Zacks Rank #3 (Hold) right now and it has seen some positive longer-term revisions recently.

Microsoft, which holds “A” grades for Growth and Momentum in our Style Scores system, holds around $137 billion in cash and equivalents. This gives it the ability to continue to make both small and large acquisitions. Plus, MSFT has outpaced Facebook, Google, Apple and Netflix over the last five years. Microsoft’s shares rest roughly 12% below their highs and its 1.09% dividend yield tops the 10-year Treasury and Apple’s 0.75%.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.


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