For Immediate Release
Chicago, IL – April 25, 2019 – Zacks Equity Research Cadence Design Systems CDNS as the Bull of the Day, Red Robin Gourmet Burgers RRGB asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on PepsiCo PEP and Coca-Cola KO.
Here is a synopsis of all four stocks:
Bull of the Day:
With the stock market pushing equities up near all-time highs, it may feel like every stock is going to rocket higher. It’s times like this when investors should actually be more cautious. Stocks which have strong earnings trends are the ones most likely to continue higher as the market breaks out. This way, investors have the peace of mind in knowing that they are buying a strong underlying business, not just a stock on the move.
One way to identify stocks like this is by leaning on the Zacks Rank. Zacks Rank #1 (Strong Buy) stocks like today’s Bull of the Day have strong underlying earnings trends. The trend is very strong here in Cadence Design Systems. Cadence Design Systems, Inc. provides software, hardware, services, and reusable integrated circuit (IC) design blocks worldwide. The company offers functional verification services, including emulation and prototyping hardware. Its functional verification offering consists of JasperGold, a formal verification platform; Xcelium, a parallel simulation platform; Palladium Z1, an enterprise emulation platform; and Protium S1 field-programmable gate array prototyping platform.
Cadence is coming off a strong quarterly report with EPS coming in at 54 cents versus expectations calling for 50 cents. Revenues were strong as well, with the company reporting $577 million in sales versus expectations calling for $560 million. Earnings estimates have been increasing for the current quarter, next quarter, current year and next year. Over the last ninety days, next year’s Zacks Consensus Estimate has gone up from $2.10 to $2.21. The current year consensus has shot up from $1.95 to $2.05.
Bear of the Day:
With the market up near all-time highs, you may be tempted to load the boat on every stock you see. That may sound like a great idea during a market melt-up but could prove to be very costly. The stock you’re looking at could have a deep, dark secret like a very negative earnings trend. One way to avoid this sort of trap is to lean on the power of the Zacks Rank. Stocks which are Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong Sell) stocks have earnings trends moving in the wrong direction. While that may not grenade a stock in the short-term, it could set investors up for long-term disappointments.
One such stock with an unfavorable Zacks Rank is today’s Bear of the Day, Red Robin Gourmet Burgers. Red Robin Gourmet Burgers, Inc., together with its subsidiaries, develops, operates, and franchises full-service and casual-dining restaurants in the United States and Canada. The company's restaurants primarily offer burgers; various appetizers, salads, soups, seafood, and other entrees; and desserts, milkshakes, alcoholic and non-alcoholic specialty drinks, cocktails, wine, and beers. As of December 31, 2018, it operated 484 company-owned restaurants located in 39 states and 2 Canadian provinces; and had 89 casual-dining restaurants operated by franchisees in 16 states.
Not only is Red Robin a Zacks Rank #5 (Strong Sell), it’s also in an industry which ranks in the Bottom 24% of our Zacks Industry Rank. The reason for the unfavorable Zacks Rank lies in the recent earnings estimate revisions to the downside. Over the last sixty days, seven analysts have cut their earnings estimates for the current year, while four have followed suit for next year. The bearish moves have dropped the Zacks Consensus Estimate for the current year from $1.71 to $1.23. Next year’s number has come down from $2.15 to $1.37.
The Cola Wars: Coke vs. Pepsi
Over the past 5 trading days PepsiCo and Coca-Cola both posted strong Q1 results pushing these stocks higher. KO just released its Q1 earnings report this morning beating both EPS estimates and revenue expectations, reporting $0.48 and $8 billion respectively. Revenue grew over 5% year-over-year and earnings per share saw 2% growth from Q1 2018. KO closed the day up 1.7%.
Last week PepsiCo beat EPS estimates by over 5% demonstrating year-over-year growth on both top and bottom-lines. PEP hit its all-time high of $128.26 this week following the solid earnings, jumping just north of 3%.
KO plummeted almost 10% in mid-February with weaker than expected Q4 earnings and management’s adjusted guidance to the downside. KO has been recovering since then and just turned positive for 2019 last week. On the other hand, PEP has seen 16% return YTD and over 29% returns in the past 52 weeks, outpacing the S&P 500 by roughly 17 percentage points. Over the last 5 years PepsiCo investors have been able to reap 43% higher returns than KO investors; PEP (blue) & KO (red).
PEP vs. KO
The “Cola Wars” between PepsiCo and Coca-Cola have been waging for over a century. Each of them aggressively building their brand at the expense of the other. This fight has extended beyond just Cola and now includes all consumer packaged goods (CPG). Both of these firms have been swiftly acquiring smaller firms attempting to stay ahead of the consumer curve. Pepsi has been able to expand its portfolio beyond just beverages acquiring Frito-Lay in 1965 and Quaker in 2001. Coke has kept its focus on its core competency, beverages, but has expanded its pure play portfolio extensively.
Pepsi report approximately $65 billion in revenue for 2018 more than double the $31 billion top-line that Coke reported. But somehow Coca-Cola was still able to post a 10% larger adjusted bottom-line than PepsiCo. Although the margins for Coke are much more attractive than Pepsi’s, their recent financial performance is something of concern to investors. Coke has seen consistent negative sales growth since 2012, being down over 33% in 7 years. While PEP has had a steady top-line over the same time frame. Below is a side-by-side comparison of PEP and KO.
Analyzing past performance, ROE, FCF and Zacks Ranking it appears that PEP would make a better investment if you had to make a decision today. It has had significantly better performance over the past 5 years both in the books and in the markets. PEP’s return on equity (ROE) substantially outperforming KO, being driven by its more efficient asset turnover illustrating operational excellence. Free-cash-flow (FCF) illustrates a company’s financial flexibility and KO wasn’t even able to pay its dividends without completely depleting its FCF.
Unfortunately both of these firms are trading at very high multiples for being in a mature-to-declining industry. I would be hesitant to put a long position on either of these CPG leaders until they start trading at more reasonable multiples or until some industry shift propels these companies back into growth.
Consumers are shifting their preference to healthier options and this has been evident in these CPG companies’ financials. Millennials, the now largest consuming generation, are renewing a focus on healthy living and associate Pepsi and Coke with over-processed and unhealthy products. KO and PEP have both been attempting to modify consumers' perception of their brands. Seeking to penetrate the new health trend, PEP has acquired Naked, Kevita and just recently bought Soda Stream. KO has acquired Honest Tea, Costa Coffee, MOJO Kombucha, and just bought a minority stake in the growing Gatorade competitor Body Armor.
I have a very limited amount of confidence in the CPG space. These companies tend to be extremely reactionary, always behind the curve. They are ostensibly unable to successfully innovate internally and are forced to acquire trendy products externally, which won’t be feasible when the easy money dries up. Their attempts to penetrate the health trend is bordering futile. The small marginal growth in these segments won’t even close to cover the losses that their largest soda brands are expected to see. In the battle between PEP and KO, I would consider them both to be losers at their current valuation.
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Pepsico, Inc. (PEP) : Free Stock Analysis Report
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Red Robin Gourmet Burgers, Inc. (RRGB) : Free Stock Analysis Report
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