For Immediate Release
Chicago, IL – June 6, 2023 – Zacks Equity Research shares Toll Brothers, Inc. TOL as the Bull of the Day and Comstock Resources, Inc. CRK as the Bear of the Day. In addition, Zacks Equity Research provides analysis on NVIDIA NVDA, Meta Platforms META and Caterpillar CAT
Here is a synopsis of all five stocks:
Bull of the Day:
Toll Brothers, Inc. is still seeing strong demand for new homes in 2023 despite higher mortgage rates. This Zacks Rank #1 (Strong Buy) is now expected to actually grow earnings in 2023 over 2022's strong year.
Toll Brothers builds luxury homes in the United States for first-time, move-up, empty-nester, active-adult, and second-home buyers. It also serves urban and suburban renters.
It builds in 24 states, in over 60 markets.
Another Beat in the Fiscal Second Quarter
On May 23, Toll reported its fiscal second quarter 2023 results and blew by the Zacks Consensus Estimate by 50.8%. Earnings were $2.85 versus the consensus of just $1.89. That's a $0.96 beat.
It has an amazing earnings surprise track record, especially when accounting for a pandemic which put the freeze on housing, at least initially. It has beat 13 quarters in a row and has only missed once in the last 5 years, and that was in early 2020.
Home sale revenue was up 14% compared to the prior year, to $2.5 billion. Delivered homes were also up 4% to 2,492.
Signed contract value declined 26% in the fiscal second quarter, however, to $2.3 billion from last year. Contracted homes also fell 19% to 2,333 as higher mortgage rates made buyers more cautious.
However, the adjusted home sales gross margin, which excludes interest and inventory write-downs, was 28.3%, up from last year's adjusted home sales gross margin of 26.1%.
As mortgage rates stabilized this year, the buyers finally returned. Starting in Jan 2023, buyer demand returned and Toll Brothers said it has continued through the fiscal second quarter, and into the third quarter.
Toll Brothers also had a strategy to increase its spec homes in the spring to meet rising demand, especially as existing home inventory, it's normal competitor, remained low. If you want to buy a home, new homes may be your only choice. Buyers can close on spec homes quickly.
“Importantly, with 71,300 lots owned or controlled, we continue to have sufficient land under control to increase community count in FY 2023 and beyond. Our financial position and liquidity remain very strong, and we expect to generate significant cash flow from operations in FY 2023," said Douglas C. Yearley, Jr., CEO.
"In the second quarter, we retired $400 million of senior notes, extended our term loan and revolving bank credit facilities out five years, repurchased $84 million of common stock and paid $23 million in dividends."
"At quarter end, our net debt to capital ratio was 23.5%. We expect to continue to invest in the growth of our business while reducing debt and returning cash to stockholders for years to come," he added.
Earnings Estimates for Fiscal 2023 Jump Higher
Toll Brothers was bullish and so were the analysts.
5 estimates were revised higher for fiscal 2023 over the last 30 days pushing the Zacks Consensus up to $10.08 from $8.66. That's earnings growth of 1.4% as the company made $9.94 last year.
While that may seem like small growth, just a few months ago, analysts were expecting a double digit earnings decline.
Shares Hitting New 52-Week Highs
Toll Brothers shares have been red-hot even before the recent earnings report. Shares have gained 42% year-to-date and are at new 52-week highs.
But it's still dirt cheap. Toll trades with a forward P/E of just 7.1 and a PEG ratio of 0.6. A PEG under 1.0 indicates a company has both value and growth.
It also is shareholder friendly and pays a dividend, currently yielding 1.2%.
If you are looking for a way to play the return of demand to the new home market, Toll Brothers is one that should be on your short list.
Bear of the Day:
Comstock Resources, Inc. was supposed to be flying high in 2023 on higher natural gas prices. Instead, earnings are expected to fall 73.7% year-over-year and it's a Zacks Rank #5 (Strong Sell) as natural gas prices have plunged.
Comstock Resources is a leading independent natural gas producer with operations focused on the development of the Haynesville Shale in North Louisiana and East Texas.
2022 Looked Good
In 2022, with natural gas prices soaring, Comstock generated free cash flow from operations of $673 million, including $129 million in the fourth quarter.
Oil and gas sales, including realized hedged losses, jumped 58% in 2022 to $2.3 billion.
Comstock also retired $506 million of debt and conversion of preferred stock.
Everything was looking so good, that Comstock resumed its quarterly dividend, which is now $0.125 per share, or $0.50 annually, and is yielding 5.2%.
Earnings Estimates Slashed for 2023
But as natural gas prices have fallen to multi-year lows, the analysts have turned bearish. Earnings estimates have been cut several times this year.
The 2023 Zacks Consensus Estimate has now fallen to $0.98 from $2.28 in the last 90 days, with 2 analysts cutting in the last 30 days, although one also raised in that time. That's a 73.7% decline from last year when Comstock made $3.73.
Here's what it looks like on the chart. You can see the earnings estimates round tripping from last year.
A Buying Opportunity?
Shares of Comstock are down 30.3% year-to-date. It's cheap, even with falling earnings. It trades with a forward P/E of 9.9.
But until natural gas prices rebound, most investors will probably stay away from the natural gas stocks. Energy stocks are still hated. That presents a buying opportunity for those who believe that natural gas will soon bottom.
Remember, the Zacks Rank is a short term recommendation of 1 to 3 months. When natural gas finally turns around, the estimates likely will too.
Investors interested in playing the rebound in natural gas should probably keep Comstock on their watch list.
A Narrow Stock Market Rally: Global Week Ahead
In the Global Week Ahead, the net of macro events gets cast widely. The hefty market weight of tech mega-caps should concern traders.
· OPEC’s leader Saudi Arabia reduced output 1 million barrels per day, from July. Within the Asia-Pacific region? There is likely more pain for consumers and businesses in Australia, in the face of a hawkish central bank head there. These are some of the macro topics preoccupying risk markets, as they approach the halfway point of 2023.
Next are Reuters’ five world market themes, reordered for equity traders—
(1) This is the narrowest stock market rally, so far, in this new century!
Some investors are growing concerned about how gains in the S&P500 have become increasingly concentrated in a handful of mega-cap stocks The combined weight of five stocks — Apple, Microsoft, Google-parent Alphabet, Amazon and Nvidia — now accounts for 25% of the S&P500’s market value, a trend recently supercharged by the AI buzz. Data from Deutsche Bank shows the equal-weighted S&P500 index, a barometer of the average stock, trailing the S&P500 by its biggest margin since 1999. A rally driven by a handful of stocks raises questions about the health of the broader market and risks igniting volatility if investors ditch those mega-cap holdings.
(2) A new bet emerges. What central banks will start rate-cutting first?
Emerging market central banks were quick to tighten policy in early 2021 when price pressures accelerated, front-running major developed central banks, including the Fed now they appear to be once again first out of the starting blocks as rate cuts move higher up the agenda. Hungary became the first European bank to lower rates in May, following Uruguay, which kicked off the Latin American rate-cut cycle in April while Sri Lanka stunned markets with a 250-basis point rate cut on June 1.
But the picture is mixed: Polish policymakers are seen holding rates at 6.75% on Tuesday even if expectations are rising for a cut later in the year. Markets might have to wait until 2024 for India, where the next decision is due on Thursday. Russia is expected to keep its rate at 7.5% on Friday.
(3) Sunday, OPEC members met amid slumping oil prices.
The Organization of the Petroleum Exporting Countries (OPEC) and partners met last Sunday to discuss oil production. Saudi Arabia will reduce how much oil it sends to the global economy, taking a unilateral step to prop up the sagging price of crude after two previous cuts to supply by major producing countries in the OPEC+ alliance failed to push oil higher. The Saudi cut of 1 million barrels per day, to start in July, comes as the other OPEC+ producers agreed in a meeting in Vienna to extend earlier production cuts through next year. The price of oil, meanwhile, is now roughly half what it was in March 2022, after Russia invaded Ukraine, around $72 a barrel.
(4) A Japanese Yen intervention watch is on the front burner.
The yen has fallen over 5% since early March to six-month lows against a resilient dollar. It's enough to make Japanese officials uneasy, with top currency diplomat Masato Kanda warning Japan will closely watch currency moves and won't rule out any options. Currency intervention is viewed as a distant prospect, but traders will likely pay attention to policymaker comments in coming days after officials from the finance ministry, BOJ and Japan's financial watchdog met on Tuesday. Such meetings can be a prelude to further action. And it's not just Japan traders on intervention watch. Sweden's crown is at its weakest against the dollar and euro in over a decade, adding to inflationary pressures. A weak currency is a problem, but intervention would be a last resort, says central bank Deputy Governor Per Jansson. Such resolve could well be put to the test.
(5) The Reserve Bank of Australia (RBA) head remains hawkish.
The Reserve Bank of Australia says the inflation fight is far from won, and the public should brace itself for more pain. That could be as soon as the next meeting on Tuesday, with markets laying about 30% odds for a hike. The economy had been showing signs of cooling until this week, when a reading of consumer prices jumped much more than forecast for April, sending stocks to a two-month trough. Rates are already at an 11-year peak after a surprise hike last month, which RBA governor Philip Lowe justified by saying he wanted to send a clear message to households and businesses that the central bank will do whatever it takes. Policymakers need to keep an eye on top trading partner China too, where a sputtering post-pandemic recovery risks eroding Australian ore and energy exports.
Zacks #1 Rank (STRONG BUY) Stocks
There are three very large sized stocks on the top of our #1 list to look into… (1) NVIDIA : This is a $398 stock. It is found in the Semiconductor-General industry. This company’s stock has a market cap of $982.3B.I see a Zacks Value score of F, a Zacks Growth score of C and a Zacks Momentum score of A.
NVIDIA Corp. is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI)-based solutions that now support high performance computing (HPC), gaming and virtual reality (VR) platforms. NVIDIA’s GPU success can be attributed to its parallel processing capabilities supported by thousands of computing cores, which are necessary to run deep learning algorithms. The company’s GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.
NVIDIA is a dominant name in the Data Center, professional visualization and gaming markets where Intel and Advanced Micro Devices are playing a catch-up role. The company’s partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst. The company's GPUs are also getting rapid adoption in diverse fields ranging from radiology to precision agriculture. The company’s GPUs power the top two supercomputers in the world, located at Oak Ridge and Lawrence Livermore National Laboratories in the United States, as well as the top supercomputers in Europe and Japan. In all, NVIDIA powers 136 of the TOP 500 supercomputers.
Santa Clara, CA-based NVIDIA reported revenues of $26.97 billion in fiscal 2023, slightly up from $26.91 billion in fiscal 2022. Beginning first-quarter fiscal 2021, NVIDIA started reporting revenues under two segments – Graphics and Compute & Networking. Graphics includes GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro GPUs for enterprise design; GRID software for cloud-based visual and virtual computing; and automotive platforms for infotainment systems.
Compute & Networking comprises Data Center platforms and systems for AI, HPC and accelerated computing; DRIVE for autonomous vehicles; and Jetson for robotics and other embedded platforms. Mellanox revenues included in this segment beginning second-quarter fiscal 2021. Graphics and Compute & Networking accounted for 44% and 56% of fiscal 2023 revenues, respectively.
(2) Meta Platforms: This is a $272 stock in the Internet Software industry. This company’s stock has a market cap of $678.4B. I see a Zacks Value score of D, a Zacks Growth score of B, and a Zacks Momentum score of F.
Meta Platforms is the world’s largest social media platform. The company’s portfolio offering evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app owing to acquisitions. Along with in-house developed Messenger, these apps now form Meta’s family of products used by almost 3.74 billion people on a monthly basis as of Dec 31, 2022.
Meta uses metrics like daily active users (DAUs) and monthly active users (MAUs) to measure Facebook’s user base. As of Dec 31, 2022, DAUs and MAUs were 2 billion and 2.96 billion, respectively. A newly introduced metric: the family daily active people (DAP) that measures daily users of its family of products, was 2.96 billion. Headquartered in Menlo Park, CA, Meta generated revenues worth $116.61 billion in 2022. Advertisement accounted for 97.5% of revenues. Marketers buy ads that can appear on multiple platforms including Meta, Instagram, Messenger and third-party applications and websites.
Meta, thanks to its huge user base gained a significant market share in the advertising space wherein it faces tough competition from Google, Twitter, Amazon and Snapchat-parent Snap. Meta also faces significant competition from the likes of Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media).
Meta's core app enables people to connect, share, discover and communicate with one other on mobile devices and personal computers. User engagement on core Meta platform is fostered by News Feed that displays an algorithmically-ranked series of stories and advertisements customized for each user. Instagram is a community for sharing photos, videos and messages, enabling people to discover interests that they care about. People can express themselves through photos, videos and private messaging via Instagram Feed and Stories. Messenger helps people to connect with friends, family, groups and businesses across platforms and devices. WhatsApp is a simple, reliable and secure messaging application, used by people and businesses around the world to communicate in a private way. Meta also offers virtual reality (VR) products through its Oculus division.
(3) Caterpillar : This is a $209 stock in the Construction and Mining industry.
This company’s stock has a market cap of $106B. I see a Zacks Value score of C, a Zacks Growth score of B, and a Zacks Momentum score of C.
Caterpillar, known for its iconic yellow machines, is the largest global construction and mining equipment manufacturer. Given that it serves a gamut of sectors - infrastructure, construction, mining, oil & gas and transportation, the company is considered a bellwether of the global economy.
Since 1925, Caterpillar’s product portfolio has evolved and boasts 20 brands and generated revenues of $51 billion in 2021. It has more than 4 million products with an extensive dealer network of 165 dealers spanning 191 countries. Caterpillar started using telematics in the 1990s and reached its target of 1 million connected assets in 2019. It currently has more than 1.2 million connected assets. The combination of innovation, and cutting-edge technology, coupled with the formidable reputation, set Caterpillar apart from its peers.
Caterpillar is the 68th largest company on the S&P 500 Index, with a market capitalization of around $111 billion. It holds the 8th position in the Dow Jones Industrial Average, with a 4.2% weight. It is also a member of the S&P 500 Dividend Aristocrat Index.
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