NVR and United States Cellular have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – June 14, 2023 – Zacks Equity Research shares NVR NVR as the Bull of the Day and United States Cellular USM as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Carnival CCL and Carnival rival Royal Caribbean RCL.
Here is a synopsis of all four stocks:
Bull of the Day:
NVR is a homebuilder operating in 32 US metropolitan markets that is experiencing strong stock appreciation thanks to earnings upgrades, superior business economics, and housing supply tailwinds.
NVR utilizes a unique lot acquisition strategy, which limits risk in the cyclical housing market and improves Return on Equity (ROE). Additionally, the structural undersupply of housing in the US provides for an environment where NVR’s homes are a scarce product and thus in very high demand.
To the surprise of most analysts, homebuilder stocks have been on a tear this year and the Building Products – Home Builders industry currently sits in the top 2% of the Zacks Industry Rank. Over the last 10 years NVR stock has far outperformed the broad market, compounding at an annual rate of 20%.
NVR is up 29% YTD and still has bullish catalysts on the horizon. With strong earnings revisions, and a convincing technical chart pattern, NVR makes for a compelling investment.
Earnings Revisions
NVR boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Although current quarter earnings estimates have been mixed, all other timeframes have seen significant upgrades. FY23 earnings have been boosted by 4% over the last two months, and FY24 earnings have been revised higher by 10%.
Lot Acquisition Strategy
In contrast to many other homebuilders, NVR specializes in selling and constructing high-quality homes through a unique approach. Instead of owning and developing land, NVR focuses on acquiring finished building lots from third-party land developers at market prices.
This strategy minimizes the company's financial obligations and risks, as the legal obligation and potential economic loss are limited to the deposit amount in the event of failure. By avoiding direct land ownership and development, NVR gains operational efficiencies and a competitive advantage over its peers, enabling the company to deliver quality homes while mitigating the uncertainties associated with the cyclical nature of the industry.
This strategy decreases the capital intensity of the business and thus increases the Return on Equity. NVR’s ROE currently stands at 49%, which is much higher than the industry average of 21.3%.
Secular Trends in Housing
Amidst a dramatic surge in interest and mortgage rates in the past 18 months, initial expectations pointed towards a potential crash in the housing market. Surprisingly, the correction in housing prices remained modest, with only the most overheated markets experiencing notable markdowns.
The underlying reason for this resilience lies in the significant shortage of new housing supply. Even with a notable decrease in demand, the scarcity of available homes prevented a substantial correction in housing prices. The haunting memories of the early 2000s housing bubble have left a lasting impact on home developers, restraining the growth of new housing supply. While this scarcity poses challenges for homebuyers, it presents a promising opportunity for homebuilders like NVR and others in the industry, as their products are in high demand.
Technical Setup
The price action in NVR is very encouraging for the bulls. After finding support at pre-Covid highs late last year, the stock has rallied considerably. Over the last two months, NVR has built out a convincing bull flag, which it is in the midst of breaking out from.
Above the $5,900 level and the stock is going to be gunning for new all-time highs. Above that and there is no upside resistance. If the price reverses back below $5,900 then the pattern may need more time to develop, however below $5,600 and investors should be weary as the pattern will be invalidated.
Valuation
NVR is trading at a one-year forward earnings multiple of 14.3, which is below the market average of 20x, and below its 10-year median of 16x. The company also enjoys a stable balance sheet with a huge cash position of $2.8 billion, limiting the downside risk in the stock.
Bottom Line
NVR currently demonstrates several promising factors that make it an attractive investment option. From a technical trade setup to a strong earnings revisions trend, investors can confidently consider NVR as a viable trade.
Moreover, NVR prioritizes its investors by actively returning cash. Over the past two decades, the company has demonstrated its commitment to shareholder value by reducing shares outstanding through significant share buybacks, amounting to a 66% reduction.
Adding to its appeal, with the Federal Reserve nearing the completion of its interest rate hiking cycle, prospective homebuyers can anticipate a downward trend in interest rates. This favorable development will effectively lower the cost of obtaining a mortgage and ultimately make homeownership more affordable.
Bear of the Day:
United States Cellular is the fourth largest full-service wireless carrier in the US. However, USM is being edged out by its larger rivals, who can out-compete with aggressive pricing for their service plans. Additionally, USM suffers from a high debt burden, downward trending earnings revisions, and stagnant market share in the industry.
United States Cellular has been a poor performing stock over the last decade, declining by -50% over that time. Unfortunately for USM, it doesn’t look like things are improving anytime soon, and thus the stock should be avoided by investors for now.
Downgrades
Earnings revisions have been trending consistently lower for the last year, reflected by USM’s Zacks Rank #5 (Strong Sell). Current quarter earnings have been revised lower by -52% and are expected to decline by -50% YoY. FY23 earnings have been downgraded by -78% and are projected to decline by -69% YoY.
Annual sales have been stagnant for the last 15 years, stuck at $4 billion. This isn’t expected to change as current quarter sales are projected to shrink by -2.6%, and FY23 sales are expected to decline by -2.7%.
Valuation
United States Cellular is trading at a one-year forward sales multiple of 0.35x, which is a significant discount to the indsutry average of 1.5x, and below its 10-year median of 0.8x. Yet, there are few if any upside catalyst on the horizon to improve the outlook.
Bottom Line
With declining sales, earnings, and market share, USM is clearly struggling. The cellular network industry is highly competitive, and even the larger incumbents have struggled in recent years.
Even after increasing investment into network advancement in an effort to improve efficiency through cost optimization, market penetration remains around 15%, and sales growth is sputtering. Additionally, with just $154 million in cash and $3.3 billion in debt, the mounting loan obligations are quickly limiting prospects.
Without the involvement of a brilliant activist investor, a major technological breakthrough, or business overhaul, USM is likely to continue to struggle and investors should steer clear of the stock.
Additional content:
Cruise Stocks Climb Amid Strong Booking Demand, Analyst Upgrades
Momentum has begun to swarm in cruise stocks, as pent-up demand following the pandemic has now evolved into sustainable growth. Wall Street analysts have recently turned bullish on the sector, with one stock in particular benefitting from a flurry of upgrades.
With the tide smoothing over for cruise liners, is it time to hop aboard?
The Zacks Rundown
The Zacks Leisure and Recreation Services industry group currently ranks in the top 28% out of more than 250 Zacks Ranked Industries.
Because this group is ranked in the top half of all industries, we expect it to continue to outperform the market over the next 3 to 6 months, just as it has year-to-date with a 25.3% return:
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Carnival Spikes After Analyst Upgrades
Carnival operates a fleet of more than 90 ships that visit approximately 700 ports. The company provides destination services under recognized brand names such as AIDA, Carnival, Costa, Princess, and Seabourn. Carnival sells its cruises primarily through travel agents, tour operators, vacation planners, and websites.
CCL shares surged more than 12% on Monday and were up another 2% early Tuesday morning, trading near a 13-month high following two separate analyst upgrades. Bank of America Securities analyst Andrew Didora raised his rating on Carnival stock to buy, while JPMorgan’s Matthew Boss turned his stance to overweight.
Didora noted that demand is trending higher, even surpassing pre-pandemic levels in certain areas. Improved booking trends, bundled package offerings, and increased advertising activities added to the positive sentiment. Both analysts raised their respective price targets.
CCL is currently a Zacks Rank #3 (Hold) stock. Carnival appears to have turned the corner as it has now surpassed earnings estimates in each of the past two quarters. The company has seen its shares rise more than 80% this year.
The fundamentals are backing up the price movement. Revenues this year are expected to climb 72.2% to $20.95 billion. While Carnival is still expected to show a loss, earnings estimates are on the rise for FY 2024, with analysts bumping up their estimates by 2.7% in the past 60 days. The Zacks Consensus Estimate is now $0.76/share, translating to a 355.83% increase relative to fiscal 2023 projections.
What the Zacks Model Unveils
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. The idea is that this recent information can serve as a more accurate predictor of the future, which can give investors a leg up during earnings season.
The technique has proven to be quite useful in finding positive surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks delivered a positive surprise 70% of the time according to our 10-year back test.
CCL is a Zacks Rank #3 (Hold) and boasts a +2.86% Earnings ESP. Another beat may be in the cards when the company reports its fiscal Q2 results on June 23rd (estimated announcement date).
Carnival rival Royal Caribbean advanced 2.57% on Monday and edged higher early Tuesday. The Zacks Rank #1 (Strong Buy) stock has witnessed its share price rocket nearly 90% higher since the start of the year. RCL has exceeded earnings estimates in each of the past four quarters, sporting an average 26.4% beat during that timeframe.
Analysts covering Royal Caribbean have increased their 2023 earnings estimates by 45.82% in the past 60 days. The Zacks Consensus Estimate stands at $4.71/share, reflecting potential growth of 162.8% relative to last year.
RCL also received a recent price target hike from Bank of America. Make sure to keep an eye on these cruise stocks as the waters appear calm.
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United States Cellular Corporation (USM) : Free Stock Analysis Report
Carnival Corporation (CCL) : Free Stock Analysis Report
Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
NVR, Inc. (NVR) : Free Stock Analysis Report
