For Immediate Release
Chicago, IL – November 12, 2019 – Zacks Equity Research Ultra Clean Holdings UCTT as the Bull of the Day, EnPro Industries NPO as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Cisco CSCO.
Here is a synopsis of all three stocks:
Bull of the Day:
Ultra Clean Holdingsis a Zacks Rank #1 (Strong Buy) and it saw plenty of strength last week. The market was grinding higher, not in leaps and bounds but small moves up and some even smaller moves down. What stood out to me was the big number of stocks that were hitting new highs throughout the week. This tells me that a part of the market is steadily moving higher with the broader market is clawing for even small gains.
UCTT was one of the stocks that made new highs last week and I want to dive deeper into the story to see if the stock is likely to continue to show us strength.
Ultra Clean Holdings is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries. Ultra Clean offers its customers an integrated outsourced solution for gas delivery systems and other subassemblies, improved design-to-delivery cycle times, component neutral design and manufacturing and component testing capabilities. Ultra Clean's customers are primarily original equipment manufacturers for the semiconductor capital equipment, flat panel, solar and medical device industries. Ultra Clean is headquartered in Menlo Park, California.
As I look at the last four quarters for UCTT, I see a positive picture. Three of the last four reports have topped the Zacks Consensus Estimate and not by a little. When the lone miss (a negative earnings suprise of 8%) is factored in, the average for the last four reports is still a positive 25%.
That means the three beats were all pretty big in size. I see positive earnings surprises of 31%, 16% and 61% respectively. That is what investors like to see.
Earnings Estimate Revisions
The Zacks Rank is an algo that looks for the best moves in earnings estimates. The consensus estimates for UCTT is doing just what investors want to see, its moving higher.
I see small increases for this quarter, next quarter, this year and next year.
The Zacks Rank cares the most about the full year number and for 2019 that number has moved from $0.77 to $0.87 over the last 30 days.
The 2020 number has moved from $1.09 to $1.29.
These are big moves... and investors that believe that fundamentals matter know that higher EPS results lead to higher stock prices.
Last quarter topline growth was only 8%, but that number is expected to increase as demand for UCTT services increases. The stock trades at 26x forward earnings estimates and has a price to book mulitple of 2x. Those are pretty low numbers for the chip industry.
Bear of the Day:
EnPro Industriesis a Zacks Rank #5 (Strong Sell) and today it is the Bear of the Day. Let's take a look at why this stock has the lowest Zacks Rank and if there are any good reasons to keep this stock on your radar screen.
EnPro Industries, Inc. is a diversified manufacturer of proprietary engineered products used in critical applications. EnPro Industries are a leader in sealing technologies, metal polymer and filament wound bearings, components and service for reciprocating compressors, diesel and dual-fuel engines and other solutions that meet the needs of industries worldwide. EnPro Industries commitment to innovation, quality and value has propelled our brands to wide recognition and leading positions in their markets. EnPro businesses manufacture high quality products and provide high quality services to the customers. These products and services are sold into more than 40 distinct industries with thousands of applications, ranging from jet engines to chemical plants, oil wells to semiconductor clean rooms and Navy ships to tractor-trailer trucks. EnPro operates manufacturing facilities in North and South America, Europe and Asia.
The most recent earnings report was a miss of $0.22 or a negative 16% earnings surprise. When that happens, analysts tend to take down their estimates for the full year ... and sometime the outlook for next year is lowered as well. This is part of the reason the stock slipped to a Zacks Rank #5 (Strong Sell).
Estimate revisions are the primary driver behind the Zacks Rank, as they move up and down the Rank follows right behing. For NPO, the Zacks Consensus Estimate dropped for this quarter, this year and next year.
The annual numbers carry more weight for the Rank, so the moved from $4.48 to $4.21 for this year really hurt.
Next year saw a move from $4.87 to $4.45 and that is not a good sign.
When estimates fall, the stock tends to follow along, and often times, multiples fall as well. The forward PE for NPO is sitting at 16x while the price to book is at 1.6x. Both of those metrics are on the low side, but I see the topline contracting, not growing. The price to sales of 0.93x is less than 1 which means the market doesn't value incremental sales as much as it does for other companies.
Does Cisco (CSCO) Look Like a Buy Ahead of Q1 Earnings?
Cisco is set to report its first quarter results after market close on Wednesday, November 13. The tech giant has seen its shares rise 11.5% in 2019 thus far, lagging behind the broader computer office equipment market’s over 44% run.
Cisco is coming off a fiscal year that sent the stock retreating after the company’s forward guidance exacerbated worries about a potential slowdown in the tech sector. The company is looking to report a quarter that can set the tone for a strong fiscal 2020. Let’s take a closer look at Cisco and what to expect from its first quarter performance.
Weak Guidance Taints Fiscal 2019 Performance
Cisco reported fourth quarter results that beat our estimates on both the bottom and top-line fronts, helping the company bolster its overall fiscal 2019 figures. The firm’s Q4 metrics brought the company's full-year revenue to $51.7 billion, which was up roughly 7% annually, and its adjusted EPS for the period to $3.10, up roughly 20%.
Despite the encouraging top and bottom line performances from the tech giant, the forward guidance management provided for Q1 2020 sent shares lower as investors weren’t satisfied with the company’s expected trajectory.
The company expects sales to come in between 0% to 2% growth year over year in Q1, and its midpoint guidance for adjusted EPS of $0.81 represents Y/Y growth of 8%. Investors felt that the projected growth didn’t justify the $4.5 billion the company spent on stock buybacks last year, as well as the billions spent in efforts to bolster Cisco’s position in fields like cloud services, cybersecurity, analytics, and low-power wide area networks.
As the general market has tried to weigh the macroeconomic impact that the US-China trade war has had on the tech sector, Cisco’s Q1 guidance did little to spur an assuring sentiment which prompted the selloff. Management's statements about macro-level shifts in key markets contributing to softer demand in its service-provider category could be cause for concern, especially when considering the sales decline in Q4 in that category.
Management suggests that much of the slowdown is due to enterprises ramping up spending on radio equipment for the transition to 5G. It also said that it will see a sales resurgence in the category once these businesses have the foundation-level tech equipment in place to support their transition to the new networking technology.
Our Q1 consensus estimates forecast 8% bottom line growth to $0.81 per share and a tepid increase in net sales to $13.08 billion. Product revenue is projected to slip 0.81% to $9.81 billion and services are estimated to bring in $3.25 billion for a 2.13% gain. Looking ahead to fiscal 2020’s figures, our estimates predict a 1.79% top-line jump to $52.83 billion and a 7.42% bottom-line climb to $3.33 per share.
Cisco is currently facing a number of issues within its operations that have worried investors about a growth slowdown. In addition, the trade war has casted macroeconomic headwinds on Cisco that have weighed on the firm’s operations, making it all the more difficult for the company to sustain its growth levels.
However, despite stock buybacks, fast dividend growth, and a big push to acquire businesses and assets, Cisco still boasts a net cash position of roughly $8 billion. The recent pull back in the stock has brought Cisco’s forward multiple down to a discounted level that it often doesn’t stay at for too long. For investors who may believe that Cisco can turn things around in the long-run, the stock’s current valuation is at an opportunistic level.
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