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Skechers, Sunrun, Alphabet, Microsoft and IBM highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – July 25, 2019 – Zacks Equity Research Skechers Inc. SKX as the Bull of the Day, Sunrun RUN as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Alphabet GOOGL, Microsoft MSFT and IBM IBM.

Here is a synopsis of all five stocks:

Bull of the Day:

Manhattan Beach, California-based Skechers Inc., designs, develops and distributes a wide range of athletic and casual footwear. Its products are available in 170 countries around the world and business is booming.

In fact, it’s the international business that’s driving Skechers rapid growth of late, now accounting for better than 55% of total sales. In the most recent report, the company cited increasing popularity in India, the Middle East and China for it’s all-time high quarterly revenues of $1.26B and a big earnings beat, with the company netting $0.49/share – almost 50% higher than the Zacks Consensus Estimate of $0.33/share.

Skechers CEO Robert Greenberg explained that the company has been strategically viewing their business “through a global lens as trends travel faster (now).” The company introduces key product styles simultaneously around the world, streamlining supply chains and allowing them to replicate the same success they’ve had in the US in the developing world.

In the most recent quarter, domestic sales were up 1.5%, but international sales grew by a whopping 19.8%.

Skechers operates its own retail outlets, including 474 company stores in the US, 284 company-owned stores internationally, 227 joint venture stores and 2,075 licensee and franchised locations. The company also operates its own e-commerce websites.

Although most manufacturing is outsourced to lower cost international firms, Skechers handles all other aspects of the business from the design table all the way to customers’ feet, providing near-total vertical integration. Building on recent success, the company is aggressively expanding its global distribution footprint.

Same store comp sales in company-owned stores were up 4.9%, allowing Skechers to increasingly cut out the retail middle man and retain excellent gross margins.

Though those gross margins slipped a bit in the most recent quarter due to promotional efforts to clear seasonal merchandise, at 48.5%, they remained well above the apparel industry median.

Thanks to the strong sales growth, positive earnings guidance and rising analyst estimates, Skechers shares are up 73% so far in 2019, considerably higher than the S&P 500 and the Shoes and Apparel industry which are both up roughly 18%.

Even after the recent runup, Skechers still trades at a forward P/E Ratio of just 18X, roughly in line with the S&P 500 and considerably lower than the industry average of 27X.

The strong guidance has led to 5 positive upwards earnings revisions and a Zacks Rank #1 (Strong Buy). The Zacks Consensus Earnings Estimate now stands at $2.21/share for 2019 and $2.48/share for 2020.

The apparel and retail industries can be a fiercely competitive space, with fickle consumer tastes and trends toward discounting often pressuring margins, but right now, Skechers has the products consumers around the world demand and the operational efficiency to deliver those products profitably. With a reasonable valuation and a Momentum Style Score of “A”, these shares have plenty more room to run.

Bear of the Day:

Just a little less than 3 months ago, residential solar provider Sunrun was the Zacks Bull of the Day and also featured on our Top Stocks video segment.

What a difference 3 months makes…

After an increase of nearly 30% during that period - even as analyst earnings estimates have been revised sharply downward - Sunrun shares now carry a lofty valuation and a Zacks Rank #5 (Strong Sell).

It seems to be a case of Sunrun coming too far, too fast.

The company had been a favorite on the street due in no small part to truly impressive sales growth and the opportunity created by a mandate from the state of California to have solar electricity installed on all new homes by 2020.

In December of 2018, the California Building Standards Commission approved the measure, requiring all builders of new homes to include solar panels and generation hardware as part of the purchase price of every new home built. It seemed like a home run for Sunrun, who pioneered the use of the Power Purchase Agreement (PPA), which allows homeowners to spread the cost of solar energy over a longer period of time.

The skies started to cloud over however, as investors came to realize that including solar energy would add approximately $8,400 to the purchase price of a new home.

A recent study from the National Association of Homebuilders found that each $1,000 increase in the price makes a home unaffordable for approximately 53,000 households. At $8,400, the California mandate would leave almost 450,000 households priced out of the new home market.

Sunrun had also been the beneficiary of the retreat of Teslafrom the home energy market. Tesla cited the high cost of customer acquisitions as the main driver for its decision. Though Sunrun stands to gain additional market share left by Tesla, they have the same basic economic problem with acquisition costs that the rest of the industry has.

Like Tesla, Sunrun also invested heavily in an energy storage device that allows customers to store excess energy generated during daylight hours to be used overnight or during inclement weather. Unfortunately, just as has been the case with Tesla’s Powerwall, sales have been slow and residential battery storage has been relegated to an expensive toy on high-end homes.

Though the Zacks Consensus Estimates still show enormous growth over the year ago figures, those estimates have been slashed, with the full year 2019 consensus falling from $1.37/share 90 days ago all the way to $0.71/share.

2020 estimates have fallen even more, from $1.48/share to $0.48/share.

What to Expect from Alphabet (GOOGL) Earnings?

Earnings season is hitting the peak of its excitement with 3 out of the 4 FANG stocks reporting this week. The market has had been responding relatively positively to Q2 earnings thus far with the S&P 500 hitting new all-time highs today. Alphabet AKA Google, the search engine that runs the internet for 90% of humans, is reporting its earnings after the bell Thursday, July 25th.

GOOGL has been a relatively big mover on earnings reports, with the last 6 reports having a 4.5% average price impact. Sell-side analysts are estimating an EPS of $11.50, which would represent an over 2% decline. GOOGL has beaten that last for EPS estimates by double-digit percentages so it wouldn’t surprise me if this upward surprise trend continued.

Revenues are estimated at $30.9 billion for Q2, which would illustrate a 17.8% topline expansion. Revenue growth is GOOGL investors’ biggest concern with its most recent deceleration having a significant adverse effect on the company’s share price.

Changes in paid clicks is also a key metric to evaluate when examining Alphabet’s 2nd quarter 10-Q. This quarter is expected to see a 38% increase in paid clicks on Google properties compared to Q2 last year. The big miss on this metric last quarter was one the catalysts that led to the sharp stock price decline.

Q1 Earnings Recap

Google’s Q1 results were released at the end of April, beating EPS estimates by 12.5% but missing on revenue. GOOGL fell over 6% following this release and has continued to fall since. Investors are concerned with the deceleration of topline growth, specifically ad revenue.

Year-over-year (YoY) revenue growth for Q1 was 16.7%, the first time this figure has been below 20% in 3 years. Ad revenue dropped to 15.3%, lower than it has been in over two years.

Alphabet’s paid clicks grew only 39% YoY for Q1, down from the 50 to 60 percent growth range it attained in the prior year. CFO Ruth Porat commented on the matter, explaining that the “vast majority of total clicks” are from YouTube and that the growth slowdown is due primarily to this subsidiary.

YouTube is still not represented in Alphabet’s financial statements as a separate entity, making it difficult to quantify its deceleration. Alphabet is quite taciturn when it comes to specific segment data. They only quantify segments under broad group umbrellas.

Google Cloud

“Google Cloud Platform remains one of the fastest growing businesses in Alphabet, with strong customer momentum, reflected in particular in demand for our compute and data analytics products,” says Alphabet’s CFO Porat. Their cloud segment along with Play and Hardware are all within ‘Google other revenues’, which saw 25% YoY growth.

Google has a big bet on its cloud computing segment, which some analysts are predicting could bring anywhere from $17-$20 billion in annual revenue by next year.

Cloud technology is an exceedingly competitive space, and Google is contenting in this space with best in class companies like Microsoft and IBM. Google is behind in market share and will need to continue to invest significant amounts to remain a key player in the space.

Recent Performance

The slowing ad growth illustrated in Alphabet’s Q1 earnings release has investors anxious about priced in growth. The anti-trust probe that’s been haunting the tech industry has GOOGL shareholders concerned as well, with the firm having been investigated in the past.

GOOGL is only up 9% year-to-date underperforming the S&P 500 by a significant amount. The share price is down over 5% since the Q1 earnings release.

With all of the worry surrounding GOOGL, its valuations have been hampered. GOOGL is trading close to the stocks lowest forward P/E multiple which it had just bounced off of last month.

Take Away

Google has been under fire since its Q1 earnings report, which illustrated a deceleration in advertising revenue. The plateauing ad sales leave the other business segments to pick up the slack. Google has a big bet on its cloud computing segment, which some analysts are predicting could bring anywhere from $17-$20 billion in annual revenue by next year.

While looking at Alphabet’s 2nd quarter results watch for a topline beat as well as a beat in YoY paid clicks growth, both of which would ease investors’ concerns about slowing ad revenue.

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