For Immediate Release
Chicago, IL – June 6, 2019 – Zacks Equity Research Shares of The Geo Group GEO as the Bull of the Day, Vista Outdoor Inc. VSTO as the Bear of the Day. In addition, Zacks Equity Research provides analysis on CVS CVS and Walgreens Boots Alliance WBA.
Here is a synopsis of all four stocks:
Bull of the Day:
The Geo Group, a private prison REIT, has positioned itself as a buy. Sell-side analysts’ have been significantly adjusting their EPS estimates to the upside, propelling GEO into a Zacks Rank #1 (Strong Buy).
The Geo Group’s revenue is driven primarily by correction & detention facilities, making up 64% of its top-line. Geo Care, the group’s rehabilitation business, drives 25% of revenue, and their international segment makes up the remaining 11%. They operate 134 facilities around the world, representing a 46% increase since the end of 2014.
GEO has beaten EPS estimates every quarter since 2014, with strong double-digit beats the last 8 quarters. This firm is expected to grow its top and bottom-line by high single-digits this year and continue the growth thru next year.
The Geo Group has some political risk involved being a for-profit private prison in the United States. They rely on government contracts for their continued expansion. This upcoming election in 2020 could have a material impact on GEO.
REITs are usually quite sensitive to interest rates because of the nature of the business. REITs are required to pay out a minimum of 90% of their taxable income to its investors through dividends, making these stocks “high-yield”. As interest rates decrease fixed-income options start looking bleak, and the risk to return (Sharpe ratio) of high-yield REITs begins looking more and more attractive.
GEO is boasting an 8.8% dividend yield, while the rest of REITs are only returning investors 3-4% dividend yields. The Geo Group has been growing its dividend per share consistently since 2012, making it a reliable fixed-income alternative.
REITs are typically highly leveraged, meaning that they have a substantial amount of debt financing compared to other industries. This makes REITs even more sensitive to interest rates with their cost of capital highly correlated with the Federal Reserve’s Fed Funds benchmark.
GEO currently has over $1.3 billion financed by a Credit Facility (revolving debt), which makes them quite exposed to the credit markets. According to the Geo Groups most recent 10-Q, every 1% change in their interest rate benchmark would impact interest expense on the income statement by $13 million.
Jerome Powell and the Federal Reserve has been using dovish verbiage as of the last 7 months or so, pushing the US 10 Year Treasury yield down roughly 35%, to its lowest levels in almost 2 years. As of now, the market is pricing in a 98% chance of a rate cut this year, with an over 50% chance of 75 basis points or more being shaved off of the Fed’s universal interest rate benchmark (Fed Funds Rate).
This dovish monetary policy is good news for The Geo Group if the equity market is able to stay afloat during this period of economic uncertainty.
GEO is trading at a forward P/E of 8x, on the lowest end of its 10-year valuation trend, and less than half of the industry average of 17x. The enterprise value (EV) to EBITDA is another reliable valuation tool for a highly leveraged firm because it takes debt into account. The Geo Group’s forward EV/EBITDA is 10.8x, far below the industry average of 18.7x and on the lower end of GEO’s 10-year trend.
These multiples bring me to believe that this firm is substantially undervalued compared to its peers. This could be partially due to political risks involved, but either way, I feel the substantial discount compensates sufficiently for the added risk.
The large degree of leverage in this firm has caused the stock to be somewhat volatile, with two 20% trough-to-peaks already this year. This type of volatility would typically lead me to say, wait for another trough to buy, but the level of EPS upward adjustments has put GEO in the top 1% based on our Zacks algorithm. With its astonishingly favorable multiples, GEO looks like a hard buy to pass up at its current price.
There is no question that GEO is a high-risk stock due to its leverage, credit market exposure, and added political risk. I believe that the heavy dividend payout along with its extremely favorable multiples more than make up for the added risk. Also you have to remember that higher-risk means higher potential returns. Look out for any policy changes having to do with private prisons as well as the polls for the 2020 election considering the next president could make this firm obsolete. Also, keep an eye on the Fed’s next meeting and interest rate outlooks.
Bear of the Day:
Vista Outdoor Inc. has been losing a significant amount of steam on its top-line with year-over-year (YoY) declines the past 9 quarters. Earnings don’t look much better, toeing the line of profitability since 2017. Sell-side analysts have been downwardly adjusting EPS estimates over the past 30 days by a substantial amount, pushing VSTO into a Zacks Rank #5 (Strong Sell).
Vista spun off of Alliant Techsystems and went public in the beginning of 2015. Since their big miss on June quarter results in 2016, the stock has done nothing but tumble. VSTO has lost 84% of its total market value since mid-2016, and this downward momentum doesn’t seem to be slowing as the firm reports more dismal results every quarter.
Over the past 52-weeks, VSTO (blue) has lost investors 50%, way underperforming an already underperforming consumer discretionary industry (red), with the broader consumer discretionary sector losing 21%.
Vista Outdoor has a vast portfolio of outdoor and recreational 40 brands, “including sporting ammunition and firearms, golf rangefinders, hydration products, outdoor accessories, outdoor cooking solutions, and protection for certain action sports”, according to their most recent 10-K. Some of the well-known brands under this umbrella are Camelbak and Bushnell.
Shooting Sports and Outdoor Products are the two segments recognized and both are experiencing declining revenues. Shooting sports makes up the majority of Vista’s revenue and was down 8% in fiscal 2018 (ending in March), while the rest of its outdoor products lost 14%.
Vista Outdoors has been experiencing deteriorating margins since the end of 2015. From 33% gross margins in 2015 to the 20% gross margins the firm is experiencing today. This is a horrible sign for a newly established firm that should be doing just the opposite.
Shootings Affecting Business
Being primarily a gun and ammunition manufacturing company they are under a great amount of scrutiny from US policymakers as well as retailers themselves. Following the Stoneman Douglas High School shooting in the February of 2018, activist made it a point to deter the sales of any Vista Outdoor products and brought these complaints to retailers, and they listened.
Many stores have completely stopped selling all Vista Outdoor products, including major sporting retailers like MEC, REI and Running Room. This has had a large material effect on Vista’s top-line and as more store follow suit, expect revenues to continue to decline.
With the 2020 election fast approaching, gun and ammunition companies are in the crosshairs of a lot of Democratic candidates as they attempt to add more and more regulation to the business, which would further reduce VSTO’s top-line.
This company has formed in 2015 and has done nothing but show declining results. There is clearly a systemic issue with management that will not change unless management does. They have made no efforts to appease gun reform activists which have deteriorated their business even further. The upcoming election is likely not going to turn out in their favor, with democratic candidates firmly against companies like this one. I see Vista’s performance continuing its march south into potential bankruptcy if the firm doesn’t make substantial changes.
Buy CVS Health Stock After Optimistic Investor Day?
CVS stock jumped over 2% upon opening Tuesday morning and ended the day at $54.62, a 2.3% gain on the day. CVS shares did open lower on Wednesday, but confidence in the company’s future growth grew when it made multiple announcements regarding future earnings and projects at its investor day 2019 event.
YTD, CVS is down 17% and has underperformed against the S&P 500, as have peers such as Walgreens Boots Alliance. Historically, these two companies’ stocks tend to move together and the retail-drug store market as a whole has been on a downtrend over the past couple of years.
CVS started its investor day by announcing that it would be opening up 1,500 HealthHUB stores by the end of 2021. These stores are essentially remodeled versions of current locations, but with a heavier emphasis on health services and products rather than its current model that’s nearing that of a convenience store.
CVS also reassured investors that its Aetna acquisition will be a beneficial one. The acquisition will not fully be integrated into CVS’s business until 2020 according to management, but CVS looks to capitalize on the acquisition as soon as possible. Synergies from the acquisition are expected to be between $300-$350 million this year and around $800 million next year.
CVS came across confident at investor day, promising double-digit growth by 2022. Clearly, company executives always try to put a positive spin on the future. So investing in CVS based solely on this promise may not be completely justified, but it’s a good sign that the company has big plans in terms of growth for the future.
That being said, analysts are also optimistic about CVS’ earnings, with earnings estimates for fiscal year 2019 having 14 upward revisions compared to just 2 downward revisions over the past 60 days. Zacks Consensus Estimates for earnings growth are at -3% for fiscal year 2019, but then jump to 5.3% above that for fiscal year 2020.
CVS also holds a Zacks Style Score of "A" for Value. With a P/E of 7.81, which is below the industry average of 8.90. CVS is a stock that currently has a good value compared to its peers. Good value partnered with solid future earnings expectations, increased synergies from the Aetna acquisition, and an expansion of its HealthHUB stores make CVS a good possible addition to a portfolio.
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Vista Outdoor Inc. (VSTO) : Free Stock Analysis Report
Walgreens Boots Alliance, Inc. (WBA) : Free Stock Analysis Report
CVS Health Corporation (CVS) : Free Stock Analysis Report
Geo Group Inc (The) (GEO) : Free Stock Analysis Report
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