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Kraft Heinz, IMAX Corp, Activision Blizzard, Take-Two Interactive Software and Electronic Arts highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research
·13 mins read

For Immediate Release

Chicago, IL – August 6, 2020 – Zacks Equity Research Shares of The Kraft Heinz Company KHC as the Bull of the Day, IMAX Corporation IMAX asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Activision Blizzard, Inc. ATVI, Take-Two Interactive Software, Inc. TTWO and Electronic Arts Inc. EA.

Here is a synopsis of all five stocks:

Bull of the Day:

The effects of Covid-19 and the related shutdowns continue to ripple through the economy, affecting industries in drastically different ways – many of which have been far from what seemed obvious before the crisis.

One relatively bright spot has been packaged food companies, who have been experiencing sales that are at least at the level they were before the crisis. One such company is very much a household name – Kraft Heinz. It’s virtually guaranteed that you have the products of several familiar Kraft Heinz brands in your refrigerator and cabinets right now.

With seven upward revisions since last week’s earnings report, KHC earns a Zacks Rank #1 (Strong Buy).

In most times, the big food companies tend to be a fairly boring topic as far as investment opportunities go.  Their business is stable and consistent and their revenues and earnings releases don’t tend to include large surprises. Stable (if unspectacular) low single digit growth generally also allow modest dividend yields.

Though consumer tastes shift over time, people don’t tend to drastically change the amount of food they eat. Economies of scale allow the giant producers a great deal of control over raw materials prices and competition on the shelves keeps retail prices fairly consistent as well.

Snooze, right?

Well it’s become at least a little bit more interesting story in the era of the Covid outbreak. First, we saw huge increases in sales at grocery and big-box stores as consumers hoarded large amounts of packaged food in anticipation of long quarantines in their homes. Bare shelves at the supermarket meant big sales for producers.

It wasn’t actually all that great. The cost of ramping up production and packaging facilities and rushing replacement goods to the marketplace consumed at least some of the windfall. Plus, pretty much all industry observers knew that at some point, all the panic buying meant you couldn’t find a box of macaroni on the supermarket shelf for a while, but it also meant many customers wouldn’t be heading back for more anytime soon.

Now that the original panic is past and consumers are comfortable with their ability to buy food whenever they choose and in more normal quantities, sales have largely stabilized.

There has been an important shift for Kraft Heinz, however – the widespread closure of restaurants and resulting shift to retail sales. In the most recent quarter, management noted, “increased retail demand that more than offset lower foodservice related sales.”

Net sales growth of 3.8% and organic sales growth (excluding the costs of divestitures and currency impact) of 7.4% are pretty big gains for a company that’s more accustomed to something more like 0-2%. Even better, prices were up 2.2% over the prior-year period which the report attributed to “reduced promotional activity” – less discounting and coupons.

There’s also another possible reason for the price increases – container size. Retail consumers buy different quantities of goods during a trip to the store and KHC would rather sell 8 squeeze bottles of ketchup than the 7 pound cans that go primarily to restaurants. Though KHC didn’t specifically mention that effect in the report, we’ve seen the opposite effect in some liquor sales. Retail customers stock up on 1.75L liquor and 1.5L wine while restaurants buy more 750ml bottles.

Sure it’s still not a really exciting story, but during uncertain times, owning a $43 billion US company that’s seeing better than expected sales growth during the crisis - and pays a 4.5% dividend yield might be just the right kind of boring.

Bear of the Day:

Life lately has unfortunately been filled with severe restrictions (or outright prohibitions) on scores of activities that millions of people love to do. With the prevailing public health and safety recommendations advising against crowds, indoor activities and encouraging social distancing, seeing a motion picture in a movie theater is basically impossible.

While many businesses have been able to keep at least some semblance of their regular operations running – like restaurants with outdoor dining or retail locations with curbside pickup – there’s virtually no way to make a traditional trip to a theater safe. Though drive-ins are making a nostalgic comeback in some places, there’s simply enough infrastructure to replace more than a tiny portion of lost revenue in that format.

Imax Corporation has been around since 1967 and was the pioneer of the proprietary process that used larger film, running horizontally to allow higher resolution and more realistic images, and displayed on a huge curved screen in front of stadium audience seating.

For decades, IMAX productions were mostly shown in Museums and Planetarium and had been filmed exclusively for the Imax format (originally called “Multivision.”) The screen was 7 stories tall.

In 2008, the company introduced “Digital IMAX” – which allowed for the conversion of regular-sized movie buildings to the format. Though a few purists argued that resolution suffered when compared to the original giant screens, most of the moviegoing public loved it.

Audiences loved new blockbuster releases that were shot in IMAX format as well as encore presentations of films that had been converted. The company’s fortunes soared, leading to a 2010 IPO (and the spinoff of the Chinese subsidiary in 2015.)

Prior to the pandemic, IMAX was generating roughly half of its revenues from the operation of theaters and half from remastering, other production services and equipment sales. That means that beginning in March 2020, as much as half of sales disappeared overnight, and it could be much worse.

Revenues for the next two quarters and full-year 2020 are forecast to be off by 48-66%. Though some costs have been reduced somewhat during the shutdown, many remain in effect even with theaters closed, leading to a 2020 Zacks Consensus Earnings Estimate for a loss of ($1.38)/share – down 231% from 2019.

Recent downward revisions earn IMAX a Zacks Rank #5 (Strong Sell).

CEO Rich Gelfond stressed recently in an open letter to customers that the company would put safety first and foremost and also teased some “dream projects” that the company now has time to pull off the shelf which he hopes will someday make up for the delay in the releases of almost all Hollywood fare.

Unfortunately, no one knows when that day might come. We all wish we could get back to normal, including going to the movies. As investors however, it’s not the right time to bet on a sharp or immediate comeback in the industry.

Additional content:

Coronavirus Takes Video Gaming to Next Level: 3 Stocks to Watch

The coronavirus pandemic has become a big money churner for the video gaming industry. After all, the virus is mostly compelling people to stay at home, with individuals craving for entertainment spending more time on computers and video games.

Notably, video games have now become one of the most affordable entertainment options for those at home, with the gaming market expected to see a compound annual growth rate (CAGR) of 12.9% from 2020 to 2027, per Grand View Research.

By the way, disposable income in the United States, in the near future, is expected to improve on government aid. Thus, millennial and centennial generations are widely expected to spend more of their disposable income on things they love, like video games.

Several companies, thus, are expected to gain from this rare entertainment category. Here’re three of them that are worth a watch in August.

First in the list is Activision Blizzard. With millions of people turning to digital entertainment amid the stay-at-home trend, Activision Blizzard saw its shares jump 72% year to date. In fact, the videogame publisher recently topped Wall Street expectations for the second quarter.

On Aug 4, the company reported second-quarter net income of $580 million, or 75 cents per share, more than $328 million or 43 cents a share, a year-ago. At the same time, revenues increased to $1.93 billion from $1.4 billion in the year-ago quarter. Activision Blizzard’s net bookings also rose to $2.08 billion from $1.21 billion in the year-ago period. Analysts, in the meantime, were expecting earnings of 69 cents a share on revenues of $1.7 billion and bookings of $1.69 billion.

What’s more, Bobby Kotick, Activision Blizzard’s chief executive, confirmed that “the initiatives that drove our growth for the first half of the year should also provide the foundation for long-term growth.” Activision Blizzard now expects third-quarter earnings to come in at 75 cents on revenues of $1.8 billion versus analysts’ expectations of earnings of 41 cents on revenues of $1.4 billion.

Activision Blizzard’s top line is expected to benefit from an expanding user base of Call of Duty: Modern Warfare, Hearthstone, World of Warcraft and King’s Candy Crush Saga, particularly owing to people mostly opting to stay-at-home amid the pandemic. Needless to say, Activision Blizzard’s innovative gaming pipeline, strength in digital business and foray into e-sports do bode well for long-term growth.

Activision Blizzard currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its current-year earnings has moved up 1.1% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 25% and 24%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

The second stock is TakeTwo Interactive Software. The company recently reported fiscal first-quarter results, with net income of $88.5 million or 77 cents a share, compared with net income of $71.7 million or 62 cents a share a year ago. Revenues also surged 54% to $831.3 million from $540.5 million in the year-ago quarter.

Widespread lockdowns boosted TakeTwo Interactive’s performance. And with the stay-at-home trend expected to continue in the near future, TakeTwo Interactive raised its fiscal year adjusted sales forecast. After all, demand for its popular videogame franchises Grand Theft Auto and NBA 2K is likely to pick up.

Nonetheless, the company projected revenues at a range of $2.80 billion to $2.90 billion for its year ending March 2021 versus $2.55 billion to $2.65 billion earlier.

TakeTwo Interactive currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has climbed 0.8% over the past 60 days. The company’s expected earnings growth rate for the next year is 50%. Shares of TakeTwo Interactive have gained a superb 34% so far this year compared with the broader S&P 500’s meager 1% year-to-date increase.

The third stock is Electronic Arts. Recently, the videogame publisher’s fiscal first-quarter earnings topped Wall Street expectations amid COVID-19 shutdowns. For the quarter ended June 2020, the company reported earnings of $1.25 a share, ahead of estimates of $1.02. Revenues of $1.46 billion also topped estimates of $1.05 billion.

Electronic Arts notched a solid quarter, as playing videogames was one of the few leisure activities that people at homes took to. And as such trends are expected continue with fresh spike in coronavirus cases, Electronic Arts’ business will certainly prosper. Blake Jorgensen, who is both chief operating officer and chief financial officer said, “our Stay Home, Play Together initiatives have been a strong tailwind for the business, as players look for safe and social entertainment in these difficult times.”

Electronic Arts has a strong content portfolio of blockbuster games like FIFA, Madden, Star Wars, Battlefield and Anthem that will surely make the most of people’s confinement to their homes. Electronic Arts currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 4.2% over the past 60 days. The company’s expected earnings growth rate for the next year is 10.6%. Electronic Arts saw its stock gain more than 30% year to date.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.


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Activision Blizzard, Inc (ATVI) : Free Stock Analysis Report
 
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Electronic Arts Inc. (EA) : Free Stock Analysis Report
 
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The Kraft Heinz Company (KHC) : Free Stock Analysis Report
 
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