For Immediate Release
Chicago, IL – February 1, 2019 – Zacks Equity Research Northrop Grumman Corporation NOC as the Bull of the Day, BlackRock Capital BKCC asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Facebook FB, Netflix NFLX and Google GOOGL.
Here is a synopsis of all five stocks:
Bull of the Day:
With an annual budget north of $4.4 trillion, The U.S. is the largest single consumer of virtually everything it purchases. The defense portion of U.S. expenditures naturally rises in time or war, but with conflict in Iraq and Afghanistan greatly reduced, had settled into a range between $560 and $600 billion annually during the second term of the Obama administration.
As of 2016, the United States accounted for more than a third of global defense spending and it’s been on the rise since then.
President Trump campaigned on a promise to “rebuild our depleted military” and in office, he’s living up to that promise.
In August 2018, Trump signed into law the 2019 National Defense Authorization Act, committing $716 billion to defense spending during the fiscal year. Even when other budget consideration remain unresolved, Congress and the President have an easy time agreeing on defense spending.
Northrop Grumman Corporationsupplies a wide range of Military systems to the U.S and also other countries. The business is broken down into four main categories – Aerospace Systems, Mission Systems, Technology Services and the newly acquired Innovation Systems.
In the Aerospace division, Northrop produces aircraft, spacecraft, high-energy systems and microelectronics. Mission Systems makes military radar, sensors and related products. Technology Services works on the entire lifecycle of civil and defense platforms through a wide range of services, including logistics, security, network operations and integrated air and missile defense serving not only the U.S government and other Sovereign nations, but also municipalities like the state of Virginia. Finally, Innovation Systems was borne from the acquisition of Orbital ATK and is a leader in space, defense and flight systems.
Defense stocks are also generally defensive stocks, providing stable earnings regardless of the state of the overall stock market. With a beta of 0.76, NOC shares tend to move considerably less than the broad markets, especially during times of turmoil. In fact, periods of armed conflict – which cause significant uncertainty for most stocks – are actually the best times for defense companies as nations expand their offensive capabilities and refresh depleted resources.
Another positive aspect of the defense sector is that these companies generally have an easier time passing along cost increases to their customers than other industrial companies. When rising steel, oil or labor costs increase the price of finished goods, ordinary consumers can much more easily choose to delay the purchase of an automobile or even a tractor, but the government can’t necessarily put off defense purchases. Defense companies are also naturally resistant to trade wars and tariffs, because governments are unlikely to enact tariffs on goods and services of which they themselves are the purchasers.
Despite outstanding earning performance, Northrop Grumman shares declined in 2018, making the military and aerospace giant a legitimate value opportunity. NOC at an extremely attractive forward P/E ratio of just 14.4X - lower than the industry average of 16.3X.
Bear of the Day:
BlackRock Capital is a class of investment known as a “Business Development Company” (BDC) which were created by a 1980 amendment to the Investment Company Act of 1940. BDCs are unregulated closed-end investment companies that invest in small and mid-sized businesses. They are similar to Private Equity or Venture Capital Funds, except that they are usually traded on an exchange like a stock, instead of being open only to very wealthy investors.
BlackRock Capital provides middle-market companies with flexible financing solutions, including senior and junior, unsecured and subordinated debt securities and loans and equity securities. Unlike a traditional private equity firm, BlackRock Capital makes non-control investments in middle-market companies.
The goal of a BDC is to invest in non-public companies that investors would not otherwise have access to and to provide cash distributions based on the cash flows of its investments. Taxed as a Regulated Investment Company (RIC), BlackRock Capital pays little or no corporate income tax as long as it passes through at least 90% of taxable income as dividends to investors.
Unfortunately, credit quality across the middle-market lending space has been declining lately and BDCs like BlackRock Capital have seen a smaller pool of poorer performing loans than in the past. In their most recent earnings press release, Chairman and interim CEO James Keenan commented, "In the current market conditions of compressed credit spreads, higgher leverage levels and weaker structures, we remain highly selective in new investment opportunities and focused on opportunities with strong underlying credit metrics."
Unfortunately, this remains a familiar sentiment in the middle-market lending sector. As large investment vehicles like Pensions, Public Retirement Funds and Endowments - with cumulative trillions of dollars that need to be invested - reach for yield in a low interest rate environment, loan quality is getting squeezed, with less-deserving issuers getting more attractive deals.
BlackRock Capital Shares have declined nearly 40% over the past 4 years as the company has missed quarterly estimates, even as the consensus has steadily declined. Due to declining earnings estimates, BlackRock Capital is a Zacks Rank #4 (Sell).
Breaking Down Facebook's Q4 Earnings Report
Facebook shares soared over 13% in morning trading Thursday after the embattled social media giant posted better-than-expected Q4 revenue and earnings after the closing bell Wednesday. Mark Zuckerberg’s company also helped dispel worries that users would leave Facebook’s platforms amid privacy concerns.
Shares of Facebook have soared since Christmas. Still, despite Facebook’s Thursday jump, FB stock rested at roughly $169 a share through morning trading, which marked over a 22% downturn from its 52-week high of $218.62 per share. This likely indicates that FB stock has some more room to run.
Overall, Facebook showed investors and Wall Street that much of the backlash surrounding its privacy scandals and other controversies have had little impact on real Facebook users. Facebook also proved that it simply reaches too many people in an entertainment age that will soon be dominated by non-ad supported streaming platforms like Netflix and others, for it not to remain a digital advertising juggernaut, along with Google, for years to come.
Facebook stock tanked in 2018 on the back of margin and profit concerns more than almost anything else. The firm announced on its second-quarter earnings call that it plans to spend billions of dollars on cybersecurity and cleaning up its platforms. Facebook said these initiatives would likely cause its operating margin to fall into the mid-30s on a percentage basis over a more than two-year period.
The social media company’s operating margin fell from 57% in the year-ago period to 46% in Q4 2018. Last quarter, FB’s operating slipped from 50% to 42%. Facebook’s fiscal 2018 operating margin dipped 5% from 2017 to 45%. So clearly it doesn’t seem that we have gotten anywhere close the mid-30s yet. With that said, Facebook posted an impressive bottom-line beat and stronger-than-projected revenue.
Top & Bottom Line
Facebook’s adjusted Q4 earnings soared 65% from $1.44 a share in the prior-year quarter to $2.38 per share. This crushed our Zacks Consensus estimate that called for FB’s adjusted Q4 EPS figure to slip slightly to $2.17.
Meanwhile, Facebook’s quarterly revenues climbed 30.4% from $12.972 billion to $16.914 billion, which topped our $16.37 billion estimate. We should, however, note that this marked a slowdown from Q3’s 33% top-line expansion, which at the time broke Facebook’s streak of 12 straight quarters of growth rates above 40%.
More specifically, Facebook’s revenues in the U.S. and Canada, which accounts for roughly 50% of total revenues, climbed 32% to $8.43 billion. The key region saw its monthly active users climb just over 1% from the year-ago period, which fell pretty much in line with estimates and marks the continuation of slowing user growth in FB’s most maturate and saturated market. But the revenue growth shows that advertisers cannot get enough of Facebook and its other platforms such as Instagram.
Europe, like North America, is very saturated and accounts for roughly 25% of the firm’s revenues, saw its MAUs pop nearly 3% from the year-ago period to 381 million. This region also experienced an impressive 6 million sequential climb, which is a great sign after three straight quarters of sequential declines.
Overall, Facebook’s global MAU total jumped roughly 9% from 2.13 billion in Q4 2017 to reach 2.32 billion, with much of this growth driven by the Asia-Pacific and “Rest of World.” This did mark a slowdown from Q3’s 10% climb, Q2’s 11% jump, and Q1’s 13% surge. But this is to be expected for a company that reaches roughly 30% of the global population.
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