For Immediate Release
Chicago, IL – October 24, 2019 – Zacks Equity Research Shares of Costco COST as the Bull of the Day, First Solar FSLR asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Uber UBER and Lyft LYFT.
Here is a synopsis of all four stocks:
Bull of the Day:
As we celebrate an historic 11-year bull market, much of the strong economic expansion we’ve seen has been attributed to consumer spending. With record low unemployment and rising wages, the American consumer has been providing strong support for lending services, durable goods and of course, retail.
Last week we saw the first big negative surprise in Retail Sales numbers, a decline of 0.3% versus and expected gain of 0.3%. It remains to be seen whether the shortfall is a temporary aberration or an indication that consumers are reeling in their spending out of fear of a possible recession looming.
One thing is clear however; in good times and in bad, consumers love to shop at Costco.
In good times, Costco customers load up on TVs and electronics, jewelry, durable goods like washing machines and even automobiles through Costco’s partnerships with manufacturers.
In leaner times, those same customers still rely on Costco for their daily needs. They’re attracted to the great deals on high volume purchases of food staples, household supplies, pet food and all the other things everyone buys every day.
This duality is the reason Costco performs so well in a variety of economic environments.
As you can see from the Price, Consensus and Surprise chart below, Costco has been very close to analyst estimates every quarter for over five years. Though the red and green arrows show a series of “beats” and “misses,” the magnitude of each individual result in relation to forecasts is miniscule. The estimates have been quite accurate, with Costco basically matching a series of steadily increasing earnings forecasts.
Bear of the Day:
Most of the developed world agrees that an eventual transformation toward renewable energy sources is both inevitable and beneficial. Reducing our reliance on fossil fuel energy will lower harmful emissions, slow the pace of destructive climate change and provide clean, reliable sources of energy to power the world economy going forward.
No responsible world citizen would root against the proliferation of solar energy sources as a replacement for fossil-fuel energy generation. Solar power is cheaper and more efficient than ever and it will almost certainly play a big part in providing the energy needs of consumers and businesses for a long time to come.
Unfortunately, the short-term trend for solar manufacturers like First Solar is not quite as positive.
First Solar’s stated goal of providing solar electricity "at cost levels that compete on a non-subsidized basis with the price of retail electricity in key parts of the world" is a laudable goal, but over a shorter time frame, the accomplishment of that goal depends on the market prices of fossil fuels - which have been trending downward.
Coal gets a lot of bad press as a relatively “dirty” form of fuel for producing electricity, but it’s really natural gas that constitutes the biggest threat to the widespread renewable energy. Advances in extraction technology have reduced the cost of natural gas to multi-year lows. This is by no means a permanent situation, but for the foreseeable future, it’s going to be difficult for the price of solar technology to keep pace.
WeWork Restructuring: Positive Sign for the Markets
The restructuring of office sharing prodigy WeWork is a painful lesson for early investors – especially Japan’s SoftBank – which had valued the company much higher in recent rounds of venture capital funding, but it’s actually a sign of health for the IPO markets as investors are expressing a very rational preference for more traditional valuations and corporate structure.
After the disappointing performance of highly anticipated IPOs from tech “unicorns” like Uber and Lyft, the markets are apparently demanding profitability (or at least a defined path towards profitability) and a management structure that protects the interests of equity investors.
During the most recent round of funding in January 2019, WeWork was valued at approximately $47 billion, but after a failed attempt at an initial public offering, SoftBank will instead offer $5 billion in debt financing and buy up to an additional $3 billion in equity in a deal that revises the total value of the company to approximately $7 billion.
WeWork founder Adam Neumann – who was already replaced as CEO last month – will receive a short term $500 million loan to repay a loan he previously took against his shares in the company and will also have the opportunity to sell SoftBank up to $1B worth of his shares, along with the voting rights.
Neumann will also resign his seat on the WeWork board of directors.
Depending on the level of share purchases, SoftBank could end up owing an 80% share of WeWork. Another attempt at an IPO is likely to be in the distant future, if ever.
WeWork pulled the S-1 for its IPO in September after potential underwriters learned that investors had a limited appetite for companies with no clear path to profitability and a convoluted management structure that preserved majority voting rights for Neumann and gave a family member the power to choose his replacement in the event he died or became incapacitated.
Typically, underwriters try to price offerings slightly below where they believe market demand to exist so that investors who commit capital to an unproven entity see some immediate return in return for the risks they take.
Valuation becomes considerably more dicey when deep-pocketed venture capital firms have already invested tens of billions of dollars in a young company. Those IPOs tend to be more of a “cash-out” for early investors, rather than a way for the enterprise to gain the capital to expand by selling equity to the public.
While it was painful for SoftBank (and they’ll survive), the revaluation of WeWork is an important signal that even as we approach all-time highs in the equity markets, there’s not so much froth in valuations that investors will blindly head into a raw deal.
It’s an indication that this historic bull market still has legs.
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Costco Wholesale Corporation (COST) : Free Stock Analysis Report
First Solar, Inc. (FSLR) : Free Stock Analysis Report
Lyft, Inc. (LYFT) : Free Stock Analysis Report
Uber Technologies, Inc. (UBER) : Free Stock Analysis Report
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