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Dominion, Michaels, International Business Machines, Alphabet and Microsoft highlighted as Zacks Bull and Bear of the Day

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Zacks Equity Research
·11 min read
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For Immediate Release

Chicago, IL – April 22, 2020 – Zacks Equity Research Shares of Dominion Energy D as the Bull of the Day, Michaels MIK asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on International Business Machines IBM, Alphabet GOOGL and Microsoft MSFT.

Here is a synopsis of all five stocks:

Bull of the Day:

In this period of unprecedented uncertainty, there is no safer equity sector than utilities. Dominion Energy is a dynamic utility company that offers a wide range of essential energy services primarily on the east coast. Dominion has been driving growth through acquisitions, growing synergies, as well as organic expansion. This stock offers both a capital growth opportunity and a healthy dividend yield. Analysts have been upwardly revising their EPS estimates for the next 3 years, despite the global pandemic, propelling D into a Zacks Rank #1 (Strong Buy).

Utility stocks have flight-to-safety characteristics due to the sector’s consistent cash-flows, low beta (low market risk), and healthy dividends. People will continue to need gas and electricity no matter the economic conditions, which gives utility companies relatively consistent cash-flows through economic slowdowns.

With the US working from home, the demand for residential utilities is going to grow, which should offset the decline in commercial utility.

The Business & Pandemic Impact

Dominion is split up into 5 segments, with 47% of its guided 2020 EPS being derived from Dominion Energy Virginia, followed by Gas Transmission & Storage, which is anticipated to make up 24% of 2020 EPS. Its other segments, Gas Distribution, Dominion Energy South Carolina, and Contract Generation are generating the remaining 29% of this year’s expected EPS.

According to Dominion’s most recent investor presentation on April 6th, the company is in excellent health. The only segment that is sizably exposed to the uncertain economic conditions is Dominion Energy Virginia, with a 1% change in residential sales impacting EPS by roughly 1.5 cents, and a 1% change in commercial sales will impact 2020 earnings by about 1 cent. 30% of its commercial demand is derived from datacenters, which will continue to hum throughout this slowdown to keep cloud-computing abilities accessible to the surging US population that is working from home.

I believe that this shelter-in-place order may have a positive impact on the company’s earnings, with an anticipated increase in residential energy demand. Analysts agree with a slue of upward revisions to EPS estimates over the past 3-months.

Financials

According to the Dominion’s most recent investor update (April 6th), they now have access to $7.2 billion in liquidity. The firm doesn't have long-term debts due until the second half of 2020, where the firm has a robust plan and flexibility to meet its $2 billion in debt obligations.

D offers shareholders a juicy 5% dividend at its current share price, and this payout is expected to grow by 9% annually for the next 5 years.

Looking To The Future

Dominion closed its deal with SCANA in January of 2019. According to CEO Thomas Farrell, “Dominion Energy is pleased to add SCANA’s fast-growing, high-performing Southeastern businesses to our 18-state footprint. Together, we are committed to providing safe, dependable, affordable and clean energy to the communities served by SCANA and to maintaining its excellent record of reliability and customer service.”

This acquisition attributed to the 24% topline growth that Dominion experienced in 2019, but steady growth is expected to continue through 2020. Dominion's management guidance for its top 3 segments illustrated high single-digit to low double-digit growth, with regulated investments being the key catalyst.

Dominion continues to invest in alternative energy sources like wind & solar, getting ahead of the curve for the universal shift toward renewable energy.

Take Away

Dominion provides investors with a double-edged sword during this time of uncertainty with its capital growth potential combined with its cushy 5% yield. D may be a stock to start putting your money to work if you are a long-term investor. 

These shares may still experience some short-term volatility, but I would say that any price below $80 would be reasonable for a long-term investment.

Bear of the Day:

The ‘retail apocalypse’ is hitting the fan amid this global pandemic, and bankruptcies are on the horizon as antiquated, overleveraged retailers see how long they can survive with limited foot traffic. Michaels is one of the unfortunate victims of the brick-and-mortar retail decline. Analysts have been increasingly pessimistic about the business’s ability to turn a profit in 2020 and have pushed this stock into a Zacks Rank #5 (Strong Sell).

The ‘retail apocalypse’ has been brewing ever since Amazon launched its first online bookstore in 1995. The e-commerce space gave consumers the ease & convenience they didn’t even know they were looking for. Amazon has been the trailblazer of online shopping with 25 years of remarkable innovation.

With consumers able to satisfy their shopping needs right from their smartphone or computer, the requirement to physically go into a store is plummeting. Michaels has been unable to adapt to the digitalizing age, and its attempts to grow out an omnichannel solution appear to be too little too late. Only 5% of its fiscal 2019 sales came from its e-commerce platform, and 45% of that was instore pickups.

MIK has lost 93% of its value in the past 5 years as the company appears to overextend itself. The business has been making poor investment decisions with its continued investment in new store openings. Management seems to be paying very little attention to the shifting consumer. The firm had a declining topline & bottom-line the past two years, and analysts are expecting this to continue through 2020.

Michaels’ is excessively overleveraged with debt-to-capital exceeding 150%. Its balance sheet is currently illustrating a negative shareholders equity of ($1.45) billion, which means the firm has more liabilities than assets. This is an enormous red flag, especially for a firm with declining profitability.

MIK’s credit rating is deep in junk bond territory and continues to sink deeper as its risk of default surges. People are looking to Amazon.com for their arts and crafts need to alleviate their boredom, not Michaels.com. Only 5% of Michaels’ customers think to go to their online site, and only about half of them are having them delivered directly to their homes, primarily due to the high shipping costs.

To put the icing on the cake, the company has been changing its leadership more often than most people change their sheets, with 3 CEO’s in the last 2 months of 2019, illustrating how dysfunctional the Michaels’ board of directors is.

Take Away

The longer Michaels’ stores are closed, the closer to bankruptcy this company becomes. I would recommend that you stay away from these infected shares.

With a negative book value in equity and decline top & bottom-lines, I see no value in these shares at any price. Management is clearly not making the right investment decisions, and I would not trust any of my money in this antiquated business.

Additional content:

IBM Withdraws 2020 Guidance, What to Do with the Shares?

International Business Machines, one of the first technology companies announcing results, reported a somewhat disappointing quarter, but not unexpected considering the way the pandemic is playing out.

Its revenue of $17.57 billion missed the Zacks Consensus Estimate by 2.2% while EPS of $1.84 exceeded by 3.4%.

Like Alphabet and Microsoft, which have given some indication of how the pandemic is boosting their cloud revenue, IBM too benefited from more users moving to the work from home model. The company’s cloud revenue jumped 19% in the quarter helped by the RedHat acquisition, while the Cloud & Cognitive Software segment, of which it’s a part, grew from 27% to a little under 30% of its revenue. We don’t know how much exactly the cloud contributed.

Arvind Krishna, who headed that division, took over running the company on April 6. This is perhaps the most significant takeaway from the quarter and brings to mind how Satya Nadella also moved from a similar position to start running Microsoft. It therefore also raises positive expectations that there’s finally going to be some material change in the way IBM operates. Maybe this is where things start to turn.

Because Krishna, on his first conference call, indicated that he will be doing certain things differently. With hybrid cloud and AI as focus areas, IBM will look for synergistic acquisitions that may not be immediately accretive but will have a more promising growth profile. IBM’s revenues have been on a more or less steady decline since 2011 and its EPS before non-recurring items followed a similar path, although it appeared to steady between 2016 and 2018. The change in strategy will mean improvement in the quality of earnings, which can only be a good thing.

So what of the withdrawn guidance? The company will revisit this topic at the end of the second quarter, which seems sensible since many are expecting more directional certainty in the pandemic by the end of June.

Because what is about 30% of the business today won’t become 70-80% or even 50% overnight. What’s more likely is, it will become the company’s primary growth engine sooner rather than later.  The pandemic is likely to materially impact the drive toward globalization, which in turn will have repercussions for IBM’s business and technology services units. At the same time, with more people relying on the cloud, there should be positive momentum here.

This takes us to the question of market size, because how many players could this market accommodate after all? We already have players like Alphabet, Microsoft, IBM itself and several others. Won’t the growing number of providers make for a far more complex operating environment where interoperability and communication between different ecosystems become the biggest headaches? The answer is that we are only just getting started in the cloud, so multiple players can easily take part. Moreover, customers need diversity because it keeps prices down. This is all good stuff.

Recommendation

Valuation does become more problematic given the reduced visibility, although the company looks fairly valued on the basis of trailing twelve months’ (TTM) sales, TTM EBIT, book value and enterprise value-to-sales.

Under the circumstances, I’d say there’s no reason to buy the shares right now. At a minimum, it would be better to wait for the guidance at the end of the next quarter. However, if you’re already holding the shares, there is now reason to hang in there for a year or two.  

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