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Guardant Health, Gap, GameStop, Microsoft and Sony highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – December 9, 2019 – Zacks Equity Research Shares of Guardant Health GH as the Bull of the Day, Gap GPS asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on GameStop GME, Microsoft MSFT and Sony SNE.

Here is a synopsis of all five stocks:

Bull of the Day:

Guardant Healthis a $7 billion provider of diagnostic tests for early detection of cancer in high-risk populations and recurrence monitoring in cancer survivors.

With sales expected to break above $200 million this year, representing over 125% annual growth, their commercially available tests provide information that helps advanced cancer patients get the right treatment and helps drug companies get new therapies to market faster.

Conquering Cancer with Data

Examining cancer reappearance is widely expected to be a $15 billion market in the United States in the near term, while detecting patients with the risk of cancer is poised to be an $18 billion annual market.

Using specialized blood tests and liquid biopsy (examination of tissue) to detect cancer, Guardant has grown fast after launching the LUNAR DNA test for early detection. Along the spectrum, the company’s Guardant360 and GuardantOMNI products have played a significant role in identifying late-stage cancer.

The LUNAR assay is also used for research and for use in prospective clinical trials, including initial studies related to screening and early detection in asymptomatic individuals.

In pursuing what the company calls "precision oncology," Guardant has made a name for itself in matching cancer patients with customized treatments.

Q3 Earnings Inspire Analysts to Raise Estimates

On November 7, Guardant reported a third-quarter 2019 revenue of $60.8 million, an increase of 181% over the prior year period. The company also surprised investors with a quarterly loss of only 14-cents when the Street consensus was looking for a loss of 39-cents, thus delivering a 64% positive surprise.

Here were some of the highlights of the quarter as reported by the company...

**Reported 13,259 tests to clinical customers and 5,280 tests to biopharmaceutical customers in Q3, representing year-over-year increases of 89% and 111%

**Initiated ECLIPSE, a large-scale registrational study designed to support the performance of the company’s LUNAR-2 blood test in colorectal cancer screening in average-risk adults

**Submitted Premarket Approval Application package for Guardant360 to the U.S. Food and Drug Administration

**Launched CLIA-version of the LUNAR Assay for use in prospective clinical trials

“During the quarter, the Guardant team continued to make significant progress across our business,” said Helmy Eltoukhy, PhD, Chief Executive Officer. “We are especially excited by the recent initiation of our ECLIPSE study. If successful, we believe this registrational study will pave the way for a blood-based test to address the significant unmet need of physicians and their patients who seek an alternative to the current tools for colorectal cancer screening.”

After the 25-cent EPS surprise, Wall Street analysts raised their full-year 2019 consensus by 39-cents from a loss of $1.27 to a loss of 88-cents.

They also boosted next year's outlook from a loss of $1.29 to a loss of $1.18. On the top line, Guardant is expected to grow revenues by 30% to $267.4 million.

Race to the Future of Preventive Medicine

Genetic diagnostics is an exciting field full of innovative companies providing everything from full genome sequencing to specialized cancer tests. 

Not only are people everywhere becoming more curious about their genetic ancestry, they're also getting more proactive about their genetic predisposition for health issues.

A peer of Guardant's in the space is Invitae, the $1.7 billion provider of medical-grade genetic testing whose sales are also expected to eclipse $200 million this year.

Challenges for these companies include making money when the cost of testing is coming down so quickly and making sure that insurance reimbursement is available. Invitae has a head start in this arena after being selected by UnitedHealth (UNH) as one of only 7 key providers in their Preferred Lab Network, which includes the Mayo Clinic.

Plus, Invitae is creating a bigger brand footprint by offering many tests for free to those in need. In July, the company announced their Detect programs to provide no-charge genetic testing for conditions in which testing is underutilized and can improve diagnosis and treatment.

According to Invitae, research has shown no-charge testing programs result in earlier diagnosis and treatment. Enrollment was opened for Detect programs in four conditions: muscular dystrophy, prostate cancer, cardiomyopathy and arrhythmia and lysosomal storage diseases.

And in September, Invitae expanded the Detect program by announcing the availability of Detect Hereditary Pancreatic Cancer, a testing program that offers no-charge genetic testing and counseling to patients with pancreatic cancer. Genetic testing is recommended by clinicians for all pancreatic cancer patients to guide treatment choices and evaluate eligibility for clinical trials.

While the Detect no-charge programs are a net cost for the company, they create a wider data set for research in addition to fostering good will throughout public and medical communities.

In the neighborhood of innovation, Invitae announced in November the launch of Invitae Discover, a clinical research platform that leverages biometric data available through Apple Watch to provide better understanding of the genetic causes of disease. The first study on the platform will evaluate genetics in cardiovascular disease and was announced in conjunction with the American Heart Association's Scientific Sessions where researchers are presenting data on genetic screening in familial hypercholesterolemia.

While Guardant is a unique leader in its specialties, Invitae may be the better buy right now with a sub-$2 billion market cap. But both midcaps should remain on your radar if you want exposure to the exciting arena of genetic diagnostics.

Disclosure: I own NVTA shares for the Zacks Healthcare Innovators portfolio.

Bear of the Day:

Gap and its subsidiaries are another victim of the retail apocalypse. This firm is doing so poorly that it is spinning off its only growing brand Old Navy so that it doesn’t sink with the rest of the ship. Gap is down roughly 37% so far this, underperforming the already dismal retail apparel sector. Analysts' pessimism continues towards this falling stock, pushing it into a Zacks Rank #5 (Strong Sell).

The Business

Gap Inc. includes Banana Republic, Gap, Athleta, and Old Navy, which is in the process of being spun off as its own company. This firm has had a very disappointing last year, with the past 4 quarters illustrating a topline decline. This most recent quarter demonstrated the worst Q3 profitability since 2012, as this firm falls into the depths of the retail apocalypse.

Even just looking at this company’s investor relations page, you can tell that there are more significant issues with the company. Everything is disorganized and aesthetically displeasing. It isn’t intuitive, and finding the most recent earnings press release took a hunt. This illustrates this firm’s archaic practices that have led them to where they are today.

Every segment this last quarter declined year-over-year, margins are thinning, and everything is pointing to a dying company. Guidance was further lowered, and comparable sales are expected to be down in the mid-single digits. This negative narrative is only going to decline further once the growing Old Navy is completely divested.

Management’s sentiment was very negative, and the interim CEO Robert Fisher said: “We are not pleased with the third quarter results,” something you rarely see from a company head in an earning press release. This is a sign of major systemic issues within the company that I don’t believe will be easily managed.

Robert Fisher just became Gaps interim CEO one month ago after Art Peck stepped down from his position following a very disappointing last 4.5 years in the job. The company has lost 59% of its value in the previous 5 years, and unless the business makes significant systemic changes to its operations, I fear that the firm will not stay afloat much longer.

Gap and Banana are higher end brands but have been forced to substantially discount their prices in order to get customers in the door. This has set a precedent in the market for these brands, and consumers will now only purchase them when they are severely discounted. This is cutting the firm’s ability to profit.

Take Away

This stock has been a falling knife for some time now, and the continued negative earnings justify its downward trajectory. I would stay away from these shares as they have fallen victim to the retail apocalypse.

Additional content:

GameStop (GME) Q3 Earnings Preview: Will the Free-Fall Continue?

GameStop is set to report its third quarter report after the closing bell on Tuesday, December 10. GME stock has been in a freefall in 2019 and investors have sold the stock into one of its lowest valuations in the past 10 years at around 6.9X its forward earnings, which is well below the industry average of 13.5X forward earnings.

Wall Street has largely dumped the stock because digital marketplaces have started to displace the brick-and-mortar chain. GameStop’s upcoming Q3 report will dictate the momentum the company brings into the holiday season, which it desperately needs to capitalize on.

Financial Declines Steepen

Expectations for the video game retailer were already low going into its past second quarter report, but the company’s Q2 performance still managed to surprise some, after sales dropped 14.3%.

Weakened demand across the retailer's hardware and software offerings, including its pre-owned games segment, caused the downturn. The declines in demand in its pre-owned games is especially detrimental to GameStop as it is its most profitable segment. Comparable store sales fell 11.3% in the second quarter as well.

To make matter worse, GameStop CFO James Bell stated “We expect a percentage decline of comparable same-store sales for 2019 to be in the low teens, which includes a difficult comparable-sales challenge from last year.”

The consumer shift towards the online marketplace for video games is a big factor in the decline. But the decline in hardware sales is largely due to the upcoming release of next generation consoles.

Microsoft and Sony confirmed the timeline of their newest game consoles earlier this year, which is set for the 2020 holiday season. GameStop management said that the announcement came earlier than expected and has caused a pullback in video game and console purchases as consumers await the next generation of gaming.

Outlook 

As part of its turnaround plan, GameStop actively cut its costs in the latter half of Q2 and saw its expenses drop by 4% in the quarter.

Management is now ramping up its cost cutting efforts through a wide variety of moves that includes reducing inventory, closing underperforming stores, and revamping the digital sales channel. GameStop executives forecast the expense managing initiatives will improve the firm’s margins despite the sales declines.

GameStop management has also tried to slash debt, bolster its gross profit margin, and decrease its capital spending. Plus, the firm plans to reduce its sales footprint, especially in markets that have more than one GameStop location. It also plans to refresh its inventory so it can focus on higher margin items like accessories and collectibles.

Our Q3 consensus estimates call for earnings to plunge over 91% to $0.06 per share and for net sales to fall 22.6% to $1.61 billion. US sales are projected to drop 20.2% to about $1 billion and comparable store sales are anticipated to decline 12.8%.

Q4 will be a pivotal quarter for GameStop as the holiday season will be included in the report. Our Q4 estimates forecast sales to come in at $2.8 billion for an 8.62% drop and for earnings to slip 3.45% to $1.40 per share.

Looking ahead to the next fiscal year, estimates predict GameStop’s sales will decline only another 2.8%. However, its bottom line is projected to tumble 18.18% to $0.90 per share.

Bottom Line

GameStop’s stock has been pummeled because the company has not convinced investors how it will address the ongoing consumer shift to buying video games digitally. While management has employed some aggressive restructuring plans that have seen some success, GameStop doesn’t seem poised to grow anytime soon.

GameStop has had its earnings estimates revised lower across the board, helping earn the stock a Zacks Rank #5 (Strong Sell).

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