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Illinois Tool Works, HNI, CVS Health, Aetna and Amazon.com highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research
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For Immediate Release

Chicago, IL – October 30, 2017 – Zacks Equity Research highlights Illinois Tool Works Inc. ITW as the Bull of the Day and HNI Corporation HNI as the Bear of the Day. In addition, Zacks Equity Research provides analysis on CVS Health CVS, Aetna, Inc. AET and Amazon.com AMZN.

Here is a synopsis of all five stocks:

Bull of the Day:

Illinois Tool Works Inc. manufactures and markets a variety of products that are used worldwide.  The company’s products are found in cars, wind turbines, deep-sea rigs, healthcare, aerospace technology, food equipment, mobile devices, and many other items that you use on a daily basis.  ITW is a well-diversified company who has been a world leader in innovation for decades.  The company generates just over 50% of their revenues in the United States, and has operations around the world.  

Recent Earnings Report

Illinois Tool Works, who currently carries a Zacks Rank #2 (Buy) announced earnings last Monday where they easily beat both the Zacks consensus earnings and revenue estimates.  Moreover, management increased their FY 2017 EPS outlook by $0.25 (+16% year over year growth), and raised their 2017 revenue guidance by $100 million to $14.3 billion (+5.2% year over year growth).  Overall, the company saw increasing revenues, improving margins, organic growth, and EPS expansion during their most recent quarterly report.    

Further, the overall outlook for global growth is improving faster than previously expected.  This was reinforced when International Monetary Fund’s (IMF) increased growth expectations for both 2017 and 2018 (2017 was lifted by 0.1% to +3.6%, and 2018 was revised by +0.1% to +3.7%).  This improved global economic outlook is very beneficial to ITW as it sells industrial products and equipment in 57 different countries.

The company has beaten the Zacks consensus earnings and revenue estimates in 7 out of the last 8 quarters.   Further, due to the strong quarterly performance and increased EPS guidance, analysts have positively revised their estimates for both 2017 and 2018.  

Management's Take

According to E. Scott Santi, Chairman and CEO, "In the third quarter, the ITW team continued to execute at a high level and, as a result, delivered another quarter of strong financial results.  I continue to be very pleased with our progress in positioning the company to leverage ITW's differentiated business model and high quality diversified business portfolio to deliver consistent top tier performance."

Bear of the Day:

HNI Corporation, a Zacks Rank #5 (Strong Sell) company has two reportable core operating segments: office furniture and hearth products. They are the second largest office furniture manufacturer in the United States and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces.

Recent Earnings Data

Last Monday, HNI posted Q3 17 earnings where they beat both the Zacks consensus earnings and revenue estimates.  On a year over year basis the company saw gains in net sales +2.5%, operating income +11.7%, and diluted EPS +13.5%.

Negative Future Outlook

In the earnings report, management lowered their 2017 non-GAAP EPS guidance from $2.35-2.55 to $1.88-1.95 for several reasons.  First, the company is expecting lower volumes in Q4 in the supplies driven business (office furniture).  Second, increased costs in operating expenses; which is expected to continue into the first half of 2018.  Third, management is expecting an unfavorable environment for business and product mix in the near term.  These issues are expected to negatively impact both the top and bottom lines into 2018.

Management’s Take

According to Stan Askren, Chairman, President and CEO, “We are expecting a significant decline in our fourth quarter profit as we work through two major challenges.  First, we continue to confront highly dynamic conditions in our supplies-driven office furniture business, resulting in increased investment and lower near-term sales.  Second, our operational transformations have been more difficult than anticipated, resulting in higher costs.

"We are confident in our ability to meet these challenges.  Our supplies-driven business has market access, brands, and scale unmatched by its competition, even in this new environment.  We are establishing direct service capabilities which will provide economic advantages to our dealer partners with improved responsiveness and delivery.  We are confident we will stabilize our transformations and return to driving cost improvements and continue to grow the top line

Additional content:

Is a CVS-Aetna Deal in the Cards?

Pharmacy giant, CVS Health, has reportedly made an offer to acquire the nation's third-largest health insurer Aetna, Inc. for more than $66 billion. According to the Wall Street Journal, the companies are in talks and CVS has proposed to pay more than $200 per share for the acquisition.

Why Aetna – the Rationale Behind the Deal

CVS is one of the key players in the pharmacy benefit management ("PBM") business in the United States. Pharmacy benefit managers (PBMs) provide formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management.

They negotiate prices with drugmakers looking for additional rebates and discounts so as to lower out-of-pocket costs for consumers. Formulary coverage and exclusion lists are issued by PBMs to keep consumers aware of drugs that are covered without extra out-of-pocket costs being incurred.  

Clients include insurance companies with the focus being on providing drugs that are beneficial as well as cost-effective. By merging with Aetna, CVS would be able to expand coverage to the full ambit of healthcare including the medical benefits space. The merged company would also be in a better position to negotiate discounts with drug manufacturers. Moreover, Aetna’s insurance plans could help boost coverage and diversify CVS’s business.

The potential Amazon.com threat could be another reason for CVS’s interest in acquiring Aetna. Amazon, which is rumored to be preparing to enter the pharmacy supply channel, would be a formidable competitor for PBMs. While there is not much visibility on how Amazon plans to enter the prescription drugs business, its potential entry poses a major threat for retail pharmacy chains like CVS. By merging with Aetna, CVS would be able to strengthen its position in the PBM business with a wider coverage.

Changing the Healthcare Industry

The merger, if it goes through, would change the healthcare industry the way we know it today. Of late, insurers and PBMs have been coming together especially if one keeps in mind the UnitedHealth-OptumRx combination. Given the changing healthcare scenario, the efforts to repeal and replace Obamacare, the uncertainty faced by insurers as the “repeal and replace Obamacare” scenario plays out and the demand for more transparency where drug pricing is concerned, there could be more such mergers round the corner.

Of course, it eventually remains to be seen whether the deal actually goes through. The insurance industry has seen quite a few failed deals recently including Aetna’s attempts to acquire Humana and Anthem’s plans to acquire Cigna with both deals running into regulatory roadblocks.  

While CVS is a Zacks Rank #3 (Hold) stock, Aetna is a Zacks Rank #1 (Strong Buy) stock. You can see the complete list of today’s Zacks #1 Rank stocks here.

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About the Bull and Bear of the Day

Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.

About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous analyst coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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HNI Corporation (HNI) : Free Stock Analysis Report
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