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Lockheed Martin, Rite Aid, Avid Technology, NeoPhotonics and EXFO highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – May 8, 2019 – Zacks Equity Research Lockheed Martin LMT as the Bull of the Day, Rite Aid RAD as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Avid Technology, Inc. AVID, NeoPhotonics Corp. NPTN and EXFO Inc. EXFO.

Here is a synopsis of all five stocks:

Bull of the Day:

Lockheed Martin just reported its most profitable quarter on record when they released earnings April 23rd. LMT’s EPS results beat estimates by 40% illustrating 49% year-over-year growth. Revenues beat estimates by 13% up 23% from the same quarter last year. Since the earnings release Lockheed is up 4.9%.

This quarter’s profits were driven primarily by the growth in LMT’s Aeronautics division, making up 39% of sales, which was able to deliver 26 F-35s this past quarter almost doubling the deliveries from Q1 last year. This segment grew 27% year-over-year. Lockheed Martin’s Missiles and Fire Control segment grew 40% from the March quarter last year, still LMT’s smallest segment but helping to further diversify their portfolio of products.

The firm has improved operational efficiencies across the board. Expanding operating margins from 14.8% Q1 last year to15.9% it reported this past quarter.

The $133 billion backlog that Lockheed Martin disclosed this last quarter is the largest since the firm’s inception. This is illustrating a significant amount of locked in future income. This backlog is expected to produce mid-single digit sales growth over the next 2.4 years, according to Jefferies Equity Research.

This firm is expected to improve earnings by 15.3% for 2019 and sales are expected to increase by 7.24%. Sell-side analysts have adjusted earnings up for 2019 and 2020 based off of the great performance that they demonstrated to investors in Q1, propelling LMT into a Zacks Rank #1 (Strong Buy).

Lockheed Martin derives most of its income from government military contracts which allows investors to be more confident about sustainable sales.

Valuation

Even with Lockheed Martin’s outstanding Q1 performance its valuation multiples are still looking favorable. LMT (blue) is trading at 15.24x forward P/E compared to the aerospace & defense industry’s (red) average forward P/E of 17.42x.

LMT has been able to boast an astounding return on equity (ROE) of 415%. This ROE is being driven by a high asset turnover, above average net profit margins, but unfortunately its huge amount of financial leverage is also driving this ROE. The more levered a company is the more volatile the stock typically is but since LMT is able to lock in sales through military contracts it allows the volatility to be somewhat muted.

LMT is currently trading 8.5% off its high in early 2018 but the fundamentals driving this stock have never looked better. I expect this stock will make new highs this year if the economy is able to stay afloat.

Bear of the Day:

Rite Aid has had a devastating past 3 year, having lost 95% of its total market value in that time frame. RAD continues to fall with no bottom in sight and an inability to remain profitable for any length of time. The entire drug-retail market has far underperforming the S&P 500 both year-to-date and over the last 52-weeks perpetuating RAD’s losses.

In September of 2017, Rite Aid sold “1,932 Stores, three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4.38 billion,” to Walgreens in a cash deal. Ever since this deal, RAD has been unable to be profitable, posting full-year losses for fiscal 2018 and fiscal 2019 (ending 2/28/19). I believe this could be due to their inability to achieve the same economies to scale that they previously were able to with a larger operation.

Retail pharmacy revenues have dropped over the past three years by 6%. Pharmacy Service revenue is down over the last 3 years, but costs are up causing operating profits to be down 16% over the same time frame.

Rite Aid has had a growing number of store closures over the past 3 years with 82 in 2018, 57 in 2017, and 40 in 2016, representing a 6.2% store decrease over this period. The company has seen continuous declines in every part of the business and sell-side analyst are continuing to lower their EPS estimate outlooks, pushing this stock into a Zacks Rank #5 (Strong Sell).

RAD is currently the most shorted stock in America today, with 390% of free-floating shares being held short. Based on this sentiment and the 75% loss RAD has already demonstrated over last 52-weeks, I am estimating that these short sellers are just waiting for this firm to go bankrupt. Some analysts are predicting that Rite Aid has an up to 50% chance of bankruptcy this year.

Best case scenario for any long investor in RAD (if there are any more) is that they get bought out by a larger firm, giving investors and this stock one last spark. This is unlikely considering this space has been quickly declining, and competitors’ multiple continue to shrink.

RAD will likely continue to breakdown down with the industry. Reimbursement rates have deteriorated over the past few years which has led to a decline in the retail-drug store market. RAD has seen a more significant decline than the industry because of recognizable systemic issues with management.

I have very little confidence that this company will recover and recommend you sell this stock before it’s too late.

Additional content:

3 Tech Stocks Under $10 to Buy Now

At Zacks, we try to avoid labeling stocks as “cheap” or “expensive.” Instead, we opt to look beyond a stock’s face value, and our system puts an emphasis on earnings estimate revisions to find stocks that will hopefully be winners for investors.

With that said, low-priced stocks can still be attractive to investors as they present the chance to take a larger position in a company, which they might not be able to in higher-priced stocks. 

When searching for these low-priced stocks, we still look for similar trends in growth, value, and momentum. Then we apply the Zacks Rank to properly analyze the potential that these companies have. We are also aware of the latest sector trends and make sure to cover all of the hottest industries.

Today we’ve highlighted three stocks that fall into the broad “technology” sector. Each of these three stocks is currently trading for less than $10 a share and holds a Zacks Rank #1 (Strong Buy) or #2 (Buy) at the moment.

1. Avid Technology, Inc.

Prior Close: $9.30 USD

Avid is a multimedia technology firm that specializes in digital audio and video editing software, including ProTools and MediaComposer. Some of the biggest and most popular movies and music in the world were made and edited on Avid’s software, which competes with offerings from the likes of Apple and Adobe. Avid just reported its first-quarter fiscal 2019 financial results on Monday, May 6. The firm’s revenue jumped 5%, while operating expenses fell 5%. Meanwhile, Avid’s adjusted quarterly earnings soared from a loss of $0.06 per share in the year-ago period to positive $0.11 in Q1.

Both Avid’s top and bottom-line results beat our Zacks Consensus Estimates. Looking ahead, the company’s adjusted full-year 2019 earnings are projected to soar 148% on the back of 3% revenue growth. The Burlington Massachusetts-based firm also currently boasts a price/sales ratio of 0.93. This marks an impressive discount compared to its industry’s 4.1 average, which includes peers such as Progress Software and MicroStrategy. Avid is currently a Zacks Rank #1 (Strong Buy) and rocks “A” grades for both Value and Growth in our Style Scores system. Shares of Avid have also soared 115% in 2019 as they race out of the under $10 range.

2. NeoPhotonics Corp.

Prior Close: $6.41 USD

NeoPhotonics makes components for high-speed communications networks and is coming off a worse-than-projected Q1 2019 on both the top and bottom lines. Shares of NPTN slipped following its recent earnings release, with NeoPhotonics stock now up roughly 5% over the last 12 months. Despite the San Jose, California-based company’s recent stock price movement, its outlook appears strong as it races toward positive earnings.

Our Zacks Consensus Estimates call for NeoPhotonics’ adjusted full-year 2019 earnings to surge over 93% from a loss of $0.45 per share in the year-ago period to a loss of just $0.03 on the back of nearly 12% revenue expansion. Peeking even further ahead, the company’s 2020 EPS figure is expected to skyrocket well over 1,000% above our 2019 estimate to reach $0.33 per share on 14% sales growth. Investors should also note that NPTN’s price/sales ratio rests at 0.89, which easily marks a discount compared to its industry’s 2.76 and peers such as Marvell Technology. NeoPhotonics is currently a Zacks Rank #2 (Buy) that sports a “B” grade for Momentum.

3. EXFO Inc.

Prior Close: $4.49 USD

EXFO offers test, monitoring, and analytics for fixed and mobile network operators, webscale companies, and equipment manufacturers. Shares of EXFO have soared 60% in 2019, and the company just recently saw its Q2 fiscal 2019 revenue jump 14.2% to reach $73.9 million. Looking ahead, the communications company’s adjusted current-quarter earnings are projected to soar 600% from a loss in the year-ago period to earnings of $0.05 per share. On top of that, EXFO’s adjusted full-year earnings are projected to surge 133% from $0.09 per share in fiscal 2018 to $0.21 this year, on over 8% revenue growth.

EXFO has also seen its longer-term earnings estimate revision activity turn more positive recently. This helps EXFO earn a Zacks Rank #1 (Strong Buy) right now. The company also boasts “A” grades for Value and Growth in our Style Scores system. Meanwhile, EXFO’s price/sales ratio sits at 0.87 at the moment, which marks a discount compared to its industry’s 1.3. Furthermore, the company’s forward P/E of 21.9X falls below the Communication – Components’ 25.6X average.

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NeoPhotonics Corporation (NPTN) : Free Stock Analysis Report
 
EXFO Inc (EXFO) : Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
Avid Technology, Inc. (AVID) : Free Stock Analysis Report
 
Rite Aid Corporation (RAD) : Free Stock Analysis Report
 
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