For Immediate Release
Chicago, IL – September 23, 2022 – Zacks Equity Research shares Huron Consulting Group Inc. HURN as the Bull of the Day and Toll Brothers, Inc. TOL asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Prologis, Inc. PLD, First Industrial Realty Trust, Inc. FR and Terreno Realty Corp. TRNO.
Here is a synopsis of all five stocks.
Bull of the Day:
Huron Consulting Group Inc. is a global consulting firm that operates in an array of areas. Huron executives have set the company up for success as the U.S. and many other countries and regions around the world face economic challenges amid persistently-high inflation.
HURN shares have surged in 2022 even as the market tumbles. And its highly-ranked consulting industry is poised to remain resilient during an economic downturn.
Huron is a consulting firm that, like every company in the field, aims to help its clients optimize their performance to run stronger, more successful businesses and organizations. Huron boasts that it’s focused on thinking outside the box and challenging the status quo, with a concentration on creating sustainable long-term change, success, efficiency, and beyond.
Part of Huron’s core focus is helping clients who are attempting to figure out ways to adapt and succeed when “facing disruptive and regulatory” challenges and changes. HURN works with clients across healthcare, education, life sciences, financial services, energy, manufacturing, the public sector, and other parts of the economy.
Huron is designed to help its clients “accelerate their strategic, operational, digital, and cultural transformation.” The firm’s core areas of expertise includes broader concentrations such as business operations, digital, consumer transformation, research enterprise, and more.
Huron posted another strong quarter at the end of July, topping our Q2 estimates. The firm has now beaten our bottom-line projections in the trailing five periods.
Huron executives also felt confident enough to boost their FY22 guidance in the face of macroeconomic unknowns as its digital transformation offerings continue to attract clients. Huron’s digital segment jumped 47% in the second quarter and 42% for the first six months of the year.
Huron’s positive FY22 and FY23 earnings revisions help it land a Zacks Rank #1 (Strong Buy) right now. Zacks estimates call for its revenue to jump 18% this year and another 9.4% higher in FY23 to reach $1.2 billion to outpace inflation.
HURN’s bottom-line outlook is even stronger, with its adjusted earnings projected to climb 26% and 20%, respectively, to hit $3.92 per share in 2023.
Huron shares have climbed roughly 28% in the past 12 months. This includes a 33% run in 2022 to crush the S&P 500’s 20% downturn and the larger Zacks Business Services Sector’s 30% drop. HURN’s 95% jump in the past five years matches its Consulting Services industry.
HURN shares are trading not too far off from the 52-week highs they hit in August. Plus, the current average Zacks consensus price target offers over 15% upside to the roughly $66 per share Huron trades at right now.
Despite outperforming its Zacks Econ sector, Huron trades at a discount of 18.1X forward 12-month earnings vs. 22.1X. The stock is also trading at a 30% discount to its own decade-long highs and not too far off from its median. And it offers 15% value compared to its highly-ranked industry.
Huron’s Consulting Services industry sits in the top 9% of over 250 Zacks industries. This is potentially crucial for investors looking to outperform the market in the fourth quarter and beyond because it’s proven that being part of a strong industry leads to better price performance.
On top of its Zacks Rank #1 (Strong Buy), all four of the brokerage recommendations Zacks has for Huron are “Strong Buys.” Huron also has a solid balance sheet and operates a business that should be able to hold up well during the current macro backdrop.
It’s worth stressing once again how key it is to find companies that have been able to buck the market’s downtrend in 2022. And Huron’s ability to lift its guidance when most sectors outside of energy have lowered their outlooks is impressive.
Bear of the Day:
Toll Brothers, Inc. is one of the top luxury homebuilders in the country. Toll Brothers has been on an impressive run of revenue growth for the last 10 years, but its outlook is fading as the housing market cools on the back of soaring mortgage rates and economic downturn fears.
TOL shares have tumbled off their December 2021 highs, and its earnings outlook for FY23 has plummeted since Toll Brothers reported its quarterly results on August 23.
Victim of Its Own Success?
Toll Brothers is a diversified luxury housing builder that operates its own architectural, engineering, mortgage, title, and land development subsidiaries, as well as other offerings that fit into its high-end offerings such as golf course development. TOL also operates its own lumber distribution, house component assembly, and manufacturing segments.
TOL builds in roughly half of U.S. states and in over 60 markets from Arizona and California to New York and North Carolina. Despite being in the luxury market, Toll Brothers caters to nearly every aspect of the industry, including first-time, move-up, empty-nester, active-adult, and second-home buyers. Toll Brothers also operates in the rental market in both urban and suburban areas.
The higher-end homebuilder has posted a rather solid run of sales and earnings expansion during the last roughly 10 years and it befitted from the covid housing boom. But the once-soaring housing market is slowing as mortgage rates jump off historic lows.
Mortgage rates recently climbed above 6% for the first time since 2008, up from 2.9% this time last year. The higher rates make buying homes far more expensive. Plus, the covid and low rate-boosted market saw so many people buy homes so quickly that it was due for a slowdown at some point.
Fresh data out earlier this week showcased that the U.S. housing market slowed for a seventh straight month in August. This marked the longest stretch of declining sales since 2007. The higher rates and economic downturn fears are hitting the luxury housing market particularly hard.
Zacks estimates call for Toll Brothers to post another strong year of top and bottom-line expansion, with 10% sales growth expected and 41% higher adjusted earnings. The company’s FY23 sales are projected to dip 9% against these levels, with its earnings expected to slip 11%.
TOL’s downward earnings revisions help it land a Zacks Rank #5 (Strong Sell) right now. And Wall Street doesn’t appear ready to touch home builder stocks until there are some signs of mortgage rates leveling off or coming back down, which won’t happen until the Fed backs off.
Toll Brothers could benefit from long-term demographic trends and the ongoing undersupply of single-family homes. Still, it might be best for investors to stay away from TOL and other home builders for now.
Forget Rate Hikes, Bet on 3 REITs to Survive Market Volatility
As anticipated, the Federal Reserve has raised the benchmark interest rate by three-quarters of a percentage point to 3.00%-3.25%. Further to tame inflation, the Fed has indicated more rate hikes ahead, with officials’ median projection for rates reaching 4.4% by the end of this year and a peak of 4.6% in 2023.
However, if you believe that this latest rate hike and the projections for this year and the next have put REITs on the back foot, then you need to reconsider and focus on Prologis, Inc., First Industrial Realty Trust, Inc. and Terreno Realty Corp.
This is because this hybrid asset class not only provides protection against inflation but also benefits from the improving fundamentals of the underlying asset categories and the location of properties. A number of the asset categories are presently showing strength.
Particularly, the industrial real estate market is still firing on all cylinders with robust demand, rents and occupancy growth. In addition to the fast adoption of e-commerce, a rise in the inventory levels of companies as a precautionary measure for any supply-chain disruption is expected to lead to long-term growth momentum for this sector, offering scope to industrial landlords.
Despite economic headwinds in the second quarter, demand in the U.S. industrial market outpaced supply for the seventh straight quarter, per a report from Cushman & Wakefield (“CWK”). There was a net absorption of 120.4 million square feet (msf) of space in the June quarter and 236.3 msf through the first half of the year. Per the CWK report, this robust demand for industrial space is anticipated to continue, with net absorption projected to surpass 400 msf in 2022 and 250 msf in 2023.
Moreover, over the past decade, not only have the REITs made their balance sheets less leveraged, they have locked in the low rates by borrowing at a fixed rate and extending the average maturity of their debt outstanding.
In the second quarter of 2022, the weighted average term to maturity of REIT debt was more than seven years or 87 months. This is up from 85.5 months in the prior quarter, per a NAREIT media release. Net interest expense as a percent of net operating income (NOI) fell to a record low of 16.8% in the second quarter from 17.7% in the prior quarter. Also, leverage ratios remained low compared to the historical average.
After managing their balance sheets efficiently, REITs are now well prepared for a rising rate environment. Instead of looking for debt to finance the portfolios, these companies have strategically resorted to equity capital over the past decade.
Moreover, REITs provide natural protection against inflation. Particularly, rents and real estate values tend to move north with prices increasing, thereby aiding dividend growth. In fact, the majority of leases are tied with inflation, which leads to rent increases as inflation goes up. Therefore, even amid the inflationary period, investment in the REIT industry can offer a steady income stream.
Finally, with the roller coaster ride in the stock market this year — thanks to high inflation and a quick rise in interest rates that is weighing on asset prices — the focus has now shifted to investing in quality companies with a consistent track of paying dividends. Obviously, this brings us to the REITs because solid dividend payouts are arguably the biggest enticements for REIT investors as U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. This has enabled the industry to stand out and gain a footing over the last 15-20 years.
San Francisco-based Prologis is a behemoth of the industrial REIT category. It focuses on logistics real estate in high-barrier, high-growth markets. Given its solid capacity to offer modern logistics facilities, the company is well-poised to bank on the favorable trend in the industrial real estate market.
In June, Prologis announced that it will acquire Duke Realty in an all-stock transaction valued at $26 billion, including the assumption of debt. The transaction is expected to be completed in the fourth quarter of 2022.
Prologis’ current cash flow growth is projected at 49.66%, well ahead of the 9.7% growth estimated for the industry. Moreover, this REIT’s trailing 12-month return on equity (ROE) highlights its growth potential. The company’s ROE of 9.85% compares favorably with the industry’s 3.76%, reflecting that PLD is more efficient in using shareholders’ funds than its peers. Given its balance sheet strength and prudent financial management, the company is well-poised to capitalize on growth opportunities and boost shareholders’ wealth.
Based on the dividends paid over the trailing four quarters, PLD’s dividend yield is 2.44%. Also, Prologis has increased its dividend five times in the last five years, and the five-year annualized dividend growth rate is 11.29%. This is attractive to income investors and represents a steady income stream. Check Prologis’ dividend history here.
Prologis, Inc. dividend-yield-ttm | Prologis, Inc. Quote
Analysts seem bullish on this Zacks Rank #2 (Buy) stock. The estimate revision trend in the recent months for 2022 funds from operations (FFO) per share indicates a favorable outlook for the company as it has increased marginally to $5.17. It also suggests a jump of 24.6% year over year on 7.6% growth in revenues. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
First Industrial Realty Trust, a Chicago, IL-based industrial landlord, focuses on the ownership, operations and development of industrial real estate, offering service to multinational corporations and regional customers. FR is engaged in the management, lease, acquisition, (re)development and selling of bulk and regional distribution centers, light industrial and other industrial facility types across major markets in the United States.
Analysts have a bullish view on First Industrial, with the Zacks Consensus Estimate for 2022 FFO per share moving up to $2.20 from $2.18 over the past two months. This indicates an 11.7% increase year over year on 9.4% revenue growth to $521.1 million. FR currently has a Zacks Rank #2.
First Industrial’s current cash flow growth is projected at 22.63% compared with the 9.70% growth projected for the industry. Moreover, this REIT’s trailing 12-month ROE highlights its growth potential. The company’s ROE of 13.84% compares favorably with the industry’s 3.76%, reflecting that FR is more efficient in using shareholders’ funds than its peers.
Based on the dividends paid over the trailing four quarters, the yield is 2.43%. FR has increased its dividend five times in the last five years, and the five-year annualized dividend growth rate is 7.47%. Check First Industrial’s dividend history here.
First Industrial Realty Trust, Inc. dividend-yield-ttm | First Industrial Realty Trust, Inc. Quote
Terreno Realty, based in Bellevue, WA, is engaged in the acquisition, ownership and operation of industrial real estate in six major coastal U.S. markets — Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami and Washington, DC. This industrial REIT is witnessing solid property demand, as evident from its leasing activities. Also, it is banking on its expansion efforts to capitalize on the favorable fundamentals of the industrial real estate market.
The Zacks Consensus Estimate for 2022 FFO per share moved north marginally over the past two months to $1.93, signaling increased confidence of analysts in the company’s solid earnings outlook. It indicates a 12.9% increase year over year on 15.4% growth in revenues.
Currently, TRNO has a Zacks Rank of 2. The company’s ROE of 8.50% compares favorably with the industry’s 3.76%, reflecting that TRNO is more efficient in using shareholders’ funds than its peers.
Based on the dividends paid over the trailing four quarters, the yield is 2.38%. Also, TRNO has increased its dividend six times in the last five years, and the five-year annualized dividend growth rate is 11.66%. Check Terreno Realty’s dividend history here.
Terreno Realty Corporation dividend-yield-ttm | Terreno Realty Corporation Quote
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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