For Immediate Release
Chicago, IL – August 2, 2019 – Zacks Equity Research Shares of Garmin GRMN as the Bull of the Day, Harley-Davidson HOG as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Beyond Meat BYND, Campbell Soup Company CPB and General Mills GIS.
Here is a synopsis of all five stocks:
Bull of the Day:
Garmin reported earnings Wednesday morning and posted stronger than expected results beating both top and bottom-line estimates. Management was very optimistic in the earnings call with Garmin CEO Clifton Pemble asserting that this past quarter’s “strong results give us confidence to raise our full year guidance.” Sell-side analysts have been boosting EPS estimates for GRMN propelling this stock into a Zacks Rank #1 (Strong Buy).
A company that started as a pure-play GPS business was able to survive the smartphone revolution and now operates a diverse portfolio of recreational technology. Garmin produces a wide breadth of tech from smartwatches for golfing to marine trolling motors. The company is separated into 5 segments: fitness, outdoor, auto, aviation, and marine with revenue share being in that order.
Garmin is expected to post its strongest annual sales figures since the inception of the business in 2019, proving its ability to evolve to meet consumer demands successfully.
Garmin just posted a record high Q2 sales, its most robust quarterly revenues since 2009 demonstrating a 7% increase. The firm is dialing back its low margin auto segment, and if you adjust revenue for that decline, the firm exemplified 12% year-over-year sales growth. Since 2016 Garmin has been able to grow its topline year-over-year every quarter consistently.
Gross margins have continued to expand as the business realizes economies of scale. I believe this trend will continue as Garmin grows and focusses on higher margin production. As the firm dials back on its low margin auto segment, it focuses on growing its highest margin aviation division which grew 20% this past quarter and management is estimating that its full-year growth will be around 17%.
Garmin is now attempting to enter the commercial aircraft space, which would significantly increase demand for its high margin aviation products. If it can penetrate this market successfully, I believe Garmin’s share price will skyrocket.
Performance and Valuation
GRMN has grown 21% thus far in 2019, outperforming the broader market by 3.5% percentage points. I am confident that this stock has much more room to appreciate. Below is a 52 week performance chart for GRMN.
Bear of the Day:
Harley-Davidson just posted its worst 2nd quarter sales figures since 2011 as this firm continues its descent into the abyss. HOG has lost over 35% of its value in the past 5 years, and sell-side analysts continue to lower EPS estimates pushing this stock into a Zacks Rank #5.
The primary issue with Harley-Davidson is its aging demographic. Millennials are now the largest consuming generation they are not interested in the archaic gas-guzzling chopper. Millennials are much more likely to buy a smaller crotch rocket that is likely electric because this generation is saving the planet from the devastating climate change.
Harley is attempting to pivot with the shifting consumer. The firm has an electric motorcycle in their product line that is being marketed to the millennial, but the issue is the Harley brand. It is not easy to shift a brand image that has been instilled in Americans for as long as Harley-Davidson has.
Harley hit its peak levels of profitability in 2006 with its net income exceeding $1 billion. This year its bottom-line could be less than half of that figure as demand slows substantially. Gross and net margins have been falling quickly as the firm’s economies of scale start to reverse with decreasing volume. The company is expected to continue to decelerate. This year is expected to see a double-digit EPS decline along with a roughly 7% drop in sales.
Harleys and bulkier motorcycles have entered the declining phase in their products long cycle. There is not a lot that Harley can do short of completely revamping its image, which would take a significant amount of capital. An economic downturn would further deteriorate this consumer-discretionary company’s financials. Harley is highly leveraged, which adds volatility to this already declining security.
At best, Harley will be forced to discount its vehicles to drive more demand. In the long run, I see this stock falling further as its products decline deepens.
Beyond Meat (BYND) Has a Good Problem. Too Bad Investors Don’t Like It
Beyond Meat shares took a beating this week as the alternative protein supplier made the most of its soaring valuation to raise some more capital.
The dilution to existing shareholders notwithstanding, this was a really good move to raise a neat $40 million by issuing just 250,000 additional shares. The IPO price of $25 a share fetched just $240 million.
Some early investors also took profits, which is one of the concerns people seem to have because usually, insider sales are a red flag that means the company isn’t headed in the right direction.
But honestly, there doesn’t appear to be reason for fear, not on this count anyway. Because first, they are offloading just a teensy bit of their holdings (totaling 3 million shares) and second, the company is putting up towering growth numbers that really makes it look like they underpriced the shares at the IPO. The insiders were released from their legally required six-month long lock-in period, which must count for something!
And as far as growth is concerned, which number would you rather pick?
Revenue growth in the just-reported quarter was 67.3% and 287.2% from the previous and year-ago quarters, respectively. Take your pick.
The Fresh platform (by far its larger segment) grew 74.5% sequentially and 347.9% from last year.
The emerging Frozen platform grew 25.0% sequentially and 25.1% year over year.
Retail (50.7% of sales) was up 74.3% sequentially and 192.0% year over year.
Restaurant & Foodservice (49.3%) was up 60.6% and 483.0%, from the two periods, respectively.
It’s hard to find a weak spot, but one does wonder why the company needs to offer such a hefty discount, which grew 96.3% sequentially and 170.6% year over year (more on this in a minute). The company still managed to expand its gross margin, which went from 15.0% a year ago to 33.8% in the last quarter.
Moreover, positive EBITDA (earnings before interest, tax, depreciation and amortization) is not just in sight, it’s a reality today. So in the last quarter, adjusted EBITDA came in at $6.9 million compared to -$5.6 million last year.
We can’t even complain about the net loss, which at 24 cents a share, shrank from $1.22 last year. The pro forma profit of a penny was better than the Zacks Consensus Estimate of an 8 cent loss.
The company even raised its full-year guidance.
To sustain such high growth rates, it’s only natural that the company would need to invest in capacity. And this is actually value creation, because if numbers are to get anywhere close to justifying the sky-high valuation, the company has got to keep the growth rates up. And there are opportunities both in the domestic market and internationally, because soy-free, gluten-free, plant-based, responsibly-sourced processed stuff is just so much in demand! The company just can’t seem to sell enough, which is a good problem to have.
We should of course consider competition, which will no doubt intensify somewhere down the line, from both existing fresh/frozen/processed meat producers and vegan suppliers like Beyond Meat. This will pressure supplier sources for inputs (it recently expanded suppliers, which is another positive) on the one hand and prices on the other.
For many, the vegan burger is a novelty and they’ll just go back to what they were eating earlier, or it’ll be more like a once-in-a-while sort of thing. So the $1.4 trillion meat market, which is what alternative meats are looking to eat into, is also part of the competition.
Producing plant meat is more expensive than traditional meats, which is likely the main reason for the heavy discount on its products. But that day may not be far away when the benefits of scale reduce/eliminate the difference.
While the gross margin expansion looks attractive now, it’s an obvious indication of improving utilization. So when the company adds capacity sometime next year, those numbers aren’t going to look as good. But it wouldn’t be something to panic over either.
For a company with the kind of solid fundamentals that Beyond Meat is displaying and more importantly, the kind of growth it is seeing, there shouldn’t be so much concern. In fact, we should probably not look at the numbers from a quarter-to-quarter perspective, other than to see that it remains on track directionally.
The volatility in share prices is because of the high valuation with many investors expecting the shares to tank (this is a heavily shorted stock). The new shares will increase the float, there could even be more volatility with prices receding to a more realistic level, where it could be worth a buy. So it’s all good.
Since we can’t recommend BYND at the current valuation and therefore have a Hold rating (Zacks Rank #3) on it, there are other buy-ranked stocks in the space such as Campbell Soup Company, General Mills and others. If you’d like a more varied exposure, head over to the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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