For Immediate Release
Chicago, IL – October 1, 2019 – Zacks Equity Research Shares of Micron Technology MU as the Bull of the Day, Palo Alto Networks PANW as the Bear of the Day. In addition, Zacks Equity Research provides analysis on City Office REIT CIO, L3Harris Technologies LHX and National Fuel Gas Company NFG.
Here is a synopsis of all five stocks:
Bull of the Day:
Earnings estimates for Micron Technology had already been heading higher before its Q4 fiscal 2019 report last week. And after a nearly 17% EPS beat, the stock is now a Zacks #1 Rank again.
Micron reported non-GAAP EPS of 56 cents, which surpassed the Zacks Consensus Estimate of 48 cents. This is significantly lower than the year-ago quarter’s figure of $3.53 and that explains the rebound in shares in Q3 as investors and analysts did the math on the memory demand slow-down and trade war impacts and priced-in a potential trough and turnaround.
Micron’s revenues of $4.87 billion in the quarter under review exceeded the Zacks Consensus Estimate of $4.52 billion but dropped around 42% on a year-over-year basis.
Although the company suffered a drastic year-over-year fall in revenues and earnings, its better-than-expected fourth-quarter fiscal 2019 results coupled with an improved 2020 outlook for DRAM are making investors hopeful.
DRAM and NAND prices had fallen substantially in the past year as customers built up inventory levels and demand dried up. Many analyst who track the prices of memory products and demand have been plotting out the slowly-forming bottom and recovery.
However, the uncertainty hovering over trade and the economy is a major overhang on the company. Restriction on sales to Huawei negatively impacted the Micron's revenues in their final quarter of FY19.
Further, the company fears a worsening decline in sales to Huawei over the coming quarters in case it fails to secure the license to ship additional products to Huawei or if the trade ban is not removed.
Notably, the company’s weak earnings and gross margin guidance for fiscal 2020 is a point of concern. The company projects earnings in the range of 39-53 cents per share for the fiscal first quarter. The mid-point of 46-cents is significantly below the current Zacks Consensus Estimate of 52-cents.
So far, the EPS consensus for the current quarter ending in November has only been notched down from 52-c to 51-c.
But the full year FY20 consensus has risen from $2.68 to $2.75, representing a 57% earnings decline from last year. That sounds drastic, but the top line is only expected to fall 16% to $19.6 billion from last year's $23.4 billion.
DRAM revenues of $3.1 billion, accounting for 63% of total revenues in the quarter under discussion, plunged 48% year over year. However, it inched up 1% sequentially. With improvement in customer inventories, bit shipments surged nearly 30% sequentially and in the mid-teens percent range year over year. On a sequential basis, ASP declined 20%.
Management mentioned that a significant depletion in customer inventories for DRAM led to strong sequential growth in demand for server solutions in both cloud and enterprise markets. Moreover, new processor platforms are boosting demand for higher-density and higher-performance DRAM modules.
In graphics market, increasing demand for graphics cards and gaming consoles aided solid sequential DRAM bit growth. Further, with CPU shortages subsiding, growth in DRAM module and SSD shipments was a positive in the PC market. Additionally, in automotive sector, the company continued to boost revenues on a year-over-year basis, despite waning auto industry unit sales and a tough DRAM industry environment.
NAND revenues of $1.5 billion, representing 31% of the total top line, were down 32% on a year-over-year basis but up 5% quarter over quarter. While NAND ASP decreased in the upper single-digit’s percentage band, shipment quantities improved in the low-to-mid teens percent range sequentially.
However, management mentioned that NAND prices are starting to surge. Moreover, the company is also seeing restrained supply in specific portions of the market.
Business unit wise, revenues of the computing and networking business (CNBU) unit deteriorated 56% from the year-ago quarter and 8% sequentially to $1.9 billion. Weak pricing across most market segments remained a dampener.
Revenues from the Mobile Business Unit (MBU) of $1.4 billion softened 26% on a year-over-year basis. The metric improved 20% sequentially though. A firm uptick in both DRAM and NAND bits owing to seasonality and persistent content growth in smartphones is a positive. The company’s reinforced product portfolio helped its mobile business gain shares.
The Embedded Business Unit revenues logged $705 million, down 24% from the year-ago quarter but up 1% from the previous quarter.
Revenues from the Storage Business Unit (SBU) comprising SSD NAND components and 3D XPoint totaled $848 million, down 32% on a year-over-year basis but up 4% sequentially.
Micron’s non-GAAP gross profit of $1.45 billion slumped 71% from the prior-year period. Non-GAAP gross margin fell from 61.3% in the year-ago quarter to 30.6%, attributable to lower pricing of both DRAM and NAND. Moreover, IMFT related underutilization charges had a negative impact of nearly 200 basis points.
Micron’s non-GAAP operating income of $694 million declined from $4.4 billion in the year-ago quarter. Non-GAAP operating margin contracted 38 bps to 14%.
Balance Sheet and Cash Flow
The company exited the quarter with cash and short-term investments of $7.955 billion compared with $6.689 billion at the end of the preceding quarter.
Micron’s long-term debt increased to $4.541 billion from $3.563 billion in the prior quarter.
The company generated operating cash flow of $2.2 billion compared with $2.7 billion in the previous quarter. Adjusted free cash flow during the reported quarter was $260 million, down from $500 million in the sequential quarter.
Guidance for Q1
For the first quarter of fiscal 2020, the company guided revenues of $4.8-$5.2 billion. The mid-point of $5 billion is above the current Zacks Consensus Estimate of $4.7 billion.
For the fiscal first quarter, Micron expects non-GAAP gross margin of 26.5% (+/- 150 bps). Higher mix of NAND, which has lower gross margin, coupled with falling memory prices and minimal decline in manufacturing cost is likely to keep margins under pressure.
Operating expenses on a non-GAAP basis are likely to be $780 million (+/- $25 million).
DRAM and NAND Outlook
For calendar 2019, DRAM bit demand is still envisioned to climb in mid-teens percentage with bit supply exceeding demand. While for calendar 2020, Micron expects the industry to see bit demand growth from high-teens to 20% range, higher than supply growth of only mid-teens.
Coming to NAND, demand elasticity and lower industry supply are leading to an improvement in market conditions and reducing industry inventory.
For 2019, NAND bit demand is assumed to grow by a low-to-mid 40s percentage range, up from mid-30s percentage increase assumed earlier.
On the supply side, cutting down on CapEx and wafer start across the industry is leading to supply reductions. Given this, Micron now expects industry bit supply growth of approximately 30% comparing with high-30s percentage rise expected earlier.
For 2020, the company expects industry’s NAND bit demand to grow in the high 20s to low 30 percentages with supply growth “somewhat below demand”.
Further, in order to draw a demand-supply balance, the company is trimming its fiscal 2020 front-end equipment CapEx by more than 30% year over year. Moreover, to tackle the market clog, the company announced that it will continue to idle 5% of its DRAM wafer starts and 10% of its NAND chip wafer starts.
Bottom line:As Micron remains an important player in memory solutions for so many emerging technologies beyond the PC -- from data centers and cars to AI and medical IT -- as long as the trade war doesn't derail the bull market, the stock is probably a buy in the low $40s.
Bear of the Day:
Palo Alto Networksis the $20 billion provider of a network security platform to enterprises and government. The core of its platform is the company's firewall that delivers natively integrated application, user, and content visibility and control through its operating system, hardware, and software architecture.
On September 4, PANW delivered top and bottom beats but guidance that was below analyst projections.
Palo Alto reported Q4 fiscal 2019 (ended July) non-GAAP earnings of $1.47 per share, which not only improved 14.8% year over year but also surpassed the Zacks Consensus Estimate of $1.45.
Moreover, the company’s revenues of $805.8 million increased 22% year over year, outpacing the consensus estimate of $803 million.
The impressive results were mainly driven by several deal wins and the increasing adoption of the company’s next-generation security platforms. Growing traction in newer Prisma and Cortex offerings was another tailwind.
In a parallel announcement, Palo Alto clarified its intent to acquire the IoT security start-up Zingbox for $75 million.
Guidance Hits Estimates
For the first quarter of fiscal 2020, Palo Alto anticipates revenue growth of 16-17% year over year. Billings growth is anticipated between 15% and 17% year over year.
Non-GAAP earnings per share are estimated in the range of $1.02-$1.04, which includes expenses related to the acquisition of Zingbox. The Zacks consensus prior to this reveal was for $1.34.
For fiscal 2020, the company expects billings to increase in the range of 17-19% year over year. Revenue growth for the fiscal is envisioned to grow within 19-20% year over year. The company expects billings growth of its next-generation security business (Prisma and Cortex) at 77-79%.
Non-GAAP earnings per share are estimated in the band of $5-$5.1 for fiscal 2020. The FY 2020 Zacks consensus (started August) was calling for full-year EPS of $6.23. The fresh guidance for the year would indicate a 7% decline in annual earnings.
Still a Force, But Needs Time
Palo Alto Networks is a premier security platform for enterprises with a majority of Fortune 500 companies as customers. The company is projected to growth sales at over 19% this year and next.
But until this earnings hiccup is sorted out, it's best to stand aside. Next quarter will offer more clarity on the outlook. And the Zacks Rank will let you know which way estimates are moving.
3 Great Dividend Stocks Investors Should Consider for October
Q3 earnings season is almost upon us, as the big banks are set to officially kick-off the season in mid-October. Many investors are keeping a watchful eye on this upcoming earnings season for any indication of what may lie ahead in the economic picture of the US and abroad. With many market watchers gauging an economic downturn in the near future, investors are searching for solid stocks that can fortify their portfolio against rough economic climates. Let’s take a look at three dividend stocks that can help bolster a portfolio in the closing months of the year.
City Office REITis a solid move to make for someone looking to cash in on dividend payouts. The office property REIT boasts a hefty 6.54% dividend yield and beta ratio of 0.42, making it a stock that can quell any jitters investors may feel about broader market implications. City Office shares have been on a tear in 2019. The stock is up 40.1% YTD, outperforming the broader REIT market’s 24.6% gain.
Our current quarter consensus estimates forecast the company’s FFO to jump 7.14% to $0.30 per share and revenue to climb 17.72% to $39.49 million. Earning revisions have trended higher for the firm, giving CIO a Zacks Rank #1 (Strong Buy).
L3Harris Technologiesis an aerospace company that sports a solid 1.44% dividend yield that has steadily risen over the past five years. The aerospace giant’s shares have surged 56.2% in 2019 thus far, easily outpacing the aerospace market’s 29.6% gain. Our current quarter consensus estimates are projecting for sales to skyrocket 186.02% to $4.41 billion and for earnings to climb 29.78% to $2.31 per share.
Superb Y/Y sales growth is anticipated to continue in the next quarter with consensus estimates forecasting revenue to surge 184.88% to $4.75 billion and for earnings to hike 22.45% to $2.40. Estimates have been revised higher over the past 90-days, earning LHX a Zacks Rank #1 (Strong Buy).
National Fuel Gas Companyis a utility stock with a sound 3.7% dividend yield and 0.76 beta ratio. Many investors flock to utility stocks in times of uncertainty as they are seen as safe investments because the demand for their services doesn’t fluctuate with broader market trends. Current quarter estimates anticipate earnings to come in at $0.63 per share and sales to hit $323.24 million, representing Y/Y gains of 28.57% and 11.77%, respectively. NFG sports a Zacks Rank #1 (Strong Buy) with a Style Score of B in Value.
The stock is currently trading at 13X its forward earnings, which is well below the industry average of 23X forward earnings. The stock’s discounted forward multiple provides a solid entry point for those looking to get into a safety stock early before flocks of investors pour into utilities and inflate their valuation.
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