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For Immediate Release
Chicago, IL – August 11, 2020 – Zacks Equity Research Shares of PulteGroup, Inc. PHM as the Bull of the Day, SP Plus Corporation SP as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Apple Inc. AAPL, United Parcel Service, Inc. UPS and Barrick Gold Corporation GOLD.
Here is a synopsis of all five stocks:
Bull of the Day:
PulteGroup is a big winner from the coronavirus pandemic as American's focus on their home. This Zacks Rank #1 (Strong Buy) is expected to see earnings growth by double digits this year.
PulteGroup is the third largest homebuilder in the United States with developments in 23 states and in 42 major markets. Its brands include Centex, Pulte Homes, Del Webb, DiVosta Homes, American West and John Wieland Homes and neighborhoods.
It's product mix includes 29% first-time buyers, 45% in move-up and 26% in active adult communities.
Huge Beat in the Second Quarter
On July 23, PulteGroup reported second quarter earnings and crushed the Zacks Consensus by 36.9%, or $0.31. Earnings were $1.15 versus the consensus of $0.84.
After weakness in mid-March through April, new homes sales accelerated throughout the rest of the quarter. By June, net orders were up 77% for first time buyers, 48% for move-up and 21% for active adults.
Sales were so strong, Pulte was able to raise prices at about 50% of its communities in the quarter and use less incentives.
The company saw only limited COVID disruptions. It was an essential business so construction continued.
All of its communities were running at full capacity by July.
Closings rose 6% to 5,937 homes but average sales price fell 3% to $416,000. The decline in sales price was due to a shift in their buyers with more first-time buyers in the mix. They usually buy at a lower price.
Gross margin rose to 23.9%, an increase of 80 basis points year-over-year and up 20 basis points from the first quarter.
This is an industry-leading gross margin.
New orders for the second quarter fell 4% to 6,522 homes.
But unit backlog rose 12%, or 1,421 homes, year-over-year to 13,214 homes with a total value of $5.8 billion.
Momentum Continued into Q3
PulteGroup gave strong full year gross margin guidance of between 23.8% to 24.1%. That's industry leading.
The company saw continued momentum in sales into July.
It shouldn't be surprising that the analysts are bullish on Pulte for Q3 and 2020 as well.
5 estimates were revised higher since the earnings report which pushed the Zacks Consensus for 2020 up to $4.26 from $2.94 just 30 days previously.
That's 2020 earnings growth of 22.1% as the company made just $3.49 in 2019.
Strong Cash Flow
PulteGroup got conservative in March, when the pandemic hit. It cut costs, suspended its share buybacks and tapped its revolver so it would have cash on hand.
But after strong cash flow in the second quarter, it repaid $700 million of the revolving credit facility it took out in March 2020.
And even with that, it's cash balance still remained $1.7 billion at the end of the quarter.
PulteGroup is still paying a dividend, currently yielding 1.1%.
Shares Surge But Should You Be Buying?
PulteGroup shares are up 16% year-to-date as the home builders remain hot.
But Pulte is still attractively valued.
It has a forward P/E of just 10.4 and a P/B of just 2.0. A P/B ratio under 3.0 usually indicates value.
If you're looking for a way to play the focus on the home in the age of coronavirus, PulteGroup is stock to keep on your short list.
Bear of the Day:
SP Plus took it on the chin during the height of the coronavirus pandemic in the second quarter. This Zacks Rank #5 (Strong Sell) is expected to see sales decline 56.2% in 2020.
SP Plus provides professional parking management, ground transportation, remote baggage check-in and handling, facility maintenance, security, event logistics, and other tech-driven solutions to aviation, commercial, hospitality, healthcare and government clients across North America.
Big Miss in Q2
On Aug 6, SP Plus reported its second quarter results and missed on the Zacks Consensus by 514%. Earnings were a loss of $0.86 versus the consensus of a loss of $0.14.
At the start of the pandemic, it put into place substantial cost reductions which enabled it to cut its second quarter adjusted G&A by 30%. It also had some contract re-negotiations and concessions from clients which allowed it to deliver free cash flow in the quarter of $13 million despite the COVID crisis.
Adjusted gross profit fell to $3.9 million from $61.9 million in the year ago quarter. The decline was due to the pandemic's impacts on the business as well as a $10.1 million provision for credit losses and legal settlements taken during the quarter.
In good news, it saw a progressive pick-up in activity throughout the quarter as businesses re-opened as restrictions eased. Clients also required their expertise with safety and social distancing mandates.
Earnings Estimates on the Decline
The analysts have been bearish on both 2020 and 2021.
The 2020 Zacks Consensus estimate has fallen to $1.25 from $1.89 in the last 3 months. That's a decline of 54.2% from a year ago as SP+ made $2.73.
For 2021, the Zacks Consensus has also declined, and one analyst has cut in the last week, which has pushed the Zacks Consensus down to $1.76 from $2.27 over the last 3 months. But that is a rebound in earnings of 41%.
Sales are also expected to decline in 2020 with the analysts looking for $645.3 million. That's a decline of 56.2% from 2019 when sales were $1.47 billion.
Shares Still Down Big in 2020
Shares initially sold off in the March coronavirus sell-off and tried to recover but that recovery has stalled. Shares are still down 62% year-to-date.
They are now trading under what the March low was.
Are they a deal?
SP Plus didn't give any guidance. It did give an outlook and said that while it has seen improvement, it's unclear what the future impact of COVID-19 will have on its clients and on the nationwide economic recovery.
SP Plus now trades with a forward P/E of 12.9. But with those earnings on the decline, you have to be careful of value traps.
For those interested in investing in the parking business, it may be time to wait on the sidelines for more clarity.
Will Summer Doldrums Show Up? Global Week Ahead
It is August.
Late summer is a doldrums time of year.
The "doldrums" is a popular nautical term that refers to the belt around the Earth near the equator where sailing ships sometimes get stuck on windless waters.
With the month of September next in line, stock markets just entered what is typically a seasonally weak trading period.
With many growth stock momentum trades working so well, does anybody care about valuations?
Well, if you do, here they are—
The forward 12-month P/E ratio for the large-cap S&P 500 index resides at 22.3. This well above the 5-yr average at 17.0 and even further above the 10-yr average at 15.3.
That valuation data speaks. Market sentiment seems durably bullish, day-after-day.
But sentiment could start to change.
CNBC put up a good quote on this. It is from Julian Emanuel, head of equities and derivatives strategy at BTIG.
“The seasonals are starting to shift negatively. We all know September is a poor month and the degree of the escalation of the tensions between the U.S. and China is not a surprise, but the degree of the escalation over the last 48 hours is,” he said last Friday. “It’s not changing psychology, but it’s challenging bullish psychology.”
In the Global Week Ahead, there are some reports hailing from the Q2 earnings season to keep track of:
· On Monday, pay attention to hotelier Marriott and cruise ship Royal Caribbean
· On Tuesday, food distributor Sysco matters
· On Wednesday, focus on tech stock Cisco
· On Thursday, look at Tapestry, NetEase and Applied Materials results
· On Friday, Draft Kings will be interesting, in this age of betting on everything
In the week after, big U.S. retailers roll out their Q2 reports, in a final burst of earnings season.
Next are Reuters’ five world market themes, reordered for equity traders—
(1) Does the “Buy Everything” Rally Have Still More Gas?
We will soon learn if the “buy everything” trade has legs.
Congress’ dithering over approving more stimulus has pushed gold to record highs, above $2,000, while U.S. Treasury yields have lurched lower.
But equities too are riding high — clearly the powerful backstop of central bank stimulus is holding firm.
The rush for everything — risk as well as safety — has lingered.
But positioning on most markets is stretched and such good news as there is, from earnings to vaccine trials, seems priced in.
Upcoming data, election news plus Sino-U.S. trade talks might show the difficulties of having one’s cake and eating it.
(2) The U.S. Presidential Election Will Matter to Stocks. Really!
The U.S. election has yet to have much traction on markets, but that may change soon.
Presumptive Democratic nominee Joe Biden will announce a running mate before the Aug. 17th Democratic convention.
President Trump, meanwhile, is intensifying his campaign against mail-in voting, which he says encourages fraud.
Some investors are moving to hedge portfolios against volatility around the Nov. 3 election. That shows up in futures on the Cboe Volatility Index, which shows a bump in expectations for market swings around then.
The implied volatility rise looks especially steep, given the VIX itself has eased to 5-month lows. The spread between August and October VIX futures is at 5.5 points, the widest since the contracts began trading.
The focus may be less on the outcome and more on possible delays in tallying results, due to the widespread use of mail ballots this year.
Volatility and legal challenges remain risks.
(3) Will Holidays in August Help the Battered Tourism Sectors?
August conjures up images of beaches and sunshine. But it may not bring much respite to travel and tourism stocks.
Battered by lockdowns, tourism has lagged a broader market recovery, with airline, hotel and leisure shares 20%-50% lower year-to-date.
After an uptick since the start of August — Europe’s travel and leisure index has risen 7% — the lifting of a U.S. advisory against foreign travel and initiatives, such as Spain’s offer to cover travelers’ health costs, could provide some support.
But more is at stake than share prices: shrinking tourism may shave 3%-11% off countries’ GDP.
And as stricken airlines and hotels lay off staff, mass unemployment is a potent threat.
(4) August 15th: Time to Videoconference with China on the Trade Deal
Bob Lighthizer and Liu He will have some catching up to do on Aug 15th, when they dial into a video conference to review the U.S.-China trade deal.
The review coincides with deteriorating ties. Following Mike Pompeo's combative speech and tit-for-tat consulate closures, Chinese tech firms TikTok and Tencent are in Trump's crosshairs.
A planned health secretary visit to Taiwan is raising Beijing's hackles.
So far, the markets remain confident in the trade relationship. But Beijing is behind on purchase targets for U.S. goods and its surplus with the United States rose by 10% last month.
The yuan has backed off five-month peaks ahead of what may prove an awkward video conference.
(5) Turkey’s Lira in Trouble Again
Turkey’s central bank is acting to limit the lira’s plunge, using backdoor tools that bankers estimate could tighten policy by up to 300 basis points.
But tricks, such as changing the composition of funding, only buy time. Previous crises suggest only big interest rate hikes are effective. That’s what markets are betting on.
When and how the central bank acts bear watching. More lira weakness will worsen inflation, and compromise companies’ ability to repay external debt. And if citizens’ confidence in the lira and local banks evaporates, authorities will be powerless to stop a currency collapse.
Top Zacks #1 Rank (STRONG BUY) Stocks—
This week, let’s investigate the big ‘story’ stocks of the current moment.
(1) Apple: Yes. It made it to our #1 Rank list this week. The stock has a $1.9 Trillion market cap now, at $444 a share.
But pay heed to these long-term Zacks scores. I see a Zacks Value score of F, a Zacks Growth score of C, and a Zacks Momentum score of F.
(2) United Parcel Service: With a home-bound, remote-working solution in place for the nation, it should be no surprise to see this stock on our #1 Rank list.
This is a $122B market cap stock at $156 a share.
Long-term scores are just mediocre here. I see a Zacks Value score of C, a Zacks Growth score of B, and a Zacks Momentum score of C.
(3) Barrick Gold: With a catchy ticker like that, and gold pricing at $2,000 an ounce, again, it is no surprise. This stock is on our #1 Rank list.
But once again, pay heed. The Zacks long-term Value score is F, the Zacks Growth score is C, and the Zacks Momentum score is C.
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