Wingstop and HP have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – October 12, 2022 – Zacks Equity Research shares Wingstop WING as the Bull of the Day and HP HPQ asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on MPLX LP MPLX, DCP Midstream LP DCP and Delek Logistics Partners DKL.
Here is a synopsis of all five stocks.
Bull of the Day:
Wingstop is a Zacks Rank #1 (Strong Buy) that franchises and operates restaurants under the Wingstop brand name. Its restaurants offer cooked-to-order, hand-sauced and tossed chicken wings.
The stock has been volatile this year, but it bottomed in June and has almost doubled from the lows. Inflation for restaurants has been a big fear for investors this year, as costs hit margins and the bottom line. However, Wingstop is seeing deflation in chicken wings, which will be a tailwind for the company over the next few quarters.
Additionally, the stock is holding up well technically as it trades above its moving averages. If the overall market can find some footing into the end of 2022, WING could be looking at all-time highs at some point next year.
About the Company
Wingstop was founded in 1994 and is headquartered in Addison, Texas. At the end of 2021, the company had 1,695 franchised restaurants and 36 company-owned restaurants in 44 states and 7 countries worldwide.
Wingstop has a market cap just under $4 Billion and has a Forward PE of 83. This high valuation has scared some investors away and gives the stock a Zacks Style Score of “F” in Value.
Wingstop is down 20% in 2022 and considering most stocks with high valuations have been crushed this year, the valuation is not a top concern. Clearly the smart money expects Wingstop to grow into this valuation at some point. One way to do that is to keep beating earnings expectations.
Q2 Earnings Beat
In late July, the company reported an earnings beat of 28%. Revenues came in just below expectations, but the company affirmed FY22 at a range of $1.55-1.57 vs the $1.51 expected.
Domestic Same Store Sales were down 3.3%, but three-year SSS saw an increase of 30.7%. This tells us that the company has done very well since the beginning of the pandemic.
Wingstop also increased their dividend to $0.19 from $0.17. At current trading levels this dividend yields about 0.6%.
One of the biggest surprises for the company this year is that they have not seen commodity inflation with their product. In fact, they have actually seen deflation, which will help their margins.
CEO Michael Skipworth had the following comments on the that topic:
"We are in a unique position for the back half of 2022 where we are benefiting from meaningful deflation in bone-in wings, have a proven playbook, along with sales-driving levers that give us confidence in our ability to deliver on our outlook for 2022."
The stock surged on the earnings news, moving from under the $100 level to $140 in just under a month. Since then, the stock has meandered sideways as estimates have flatlined.
Analyst Estimates
The stock would likely be much higher if not for analysts’ hesitation to raise estimates in the short-term. With a market filled with uncertainty surrounding inflation, it's hard to blame them.
For the current quarter estimates have fallen from $0.36 to $0.35 over the last month, or 2%.
But for the current year, we see estimates trending higher. Over the last 90 days, analysts have taken their numbers from $1.53 to $1.57 or 3%.
While estimates are mixed, price targets for the stock have been taken higher since earnings:
Wedbush reiterated its Outperform and lifted its price target to $135 from $105.
CitiGroup reiterated with Buy, raising price target to $145 from $118.
Barclays reiterated its Overweight with a new price target at $144, up from $101.
The Technicals
While most stocks are just getting clobbered, WING has held up well. This was not the case earlier in 2022, as the stock fell apart in May, dropping all the way to $67.
From there, it rallied into the August market highs and then hit levels not seen since February after that solid earnings report.
Even over the last few weeks, the stock continues to hold up, despite the S&P dropping to new 2022 lows.
Looking at moving averages WING is currently trading right at its 50-day MA at $130. If this level gives way to market pressure, the $124 level would be an area of interest as it is the 61.8% retrace from August low to recent highs.
If we get a larger sell off, look for the 200-day moving average at $117.
The stock has seen some selling at a very important Fibonacci level at $140. This area is the 61.8% retrace from all-time highs to 2022 lows. If the bulls can get prices above this area, long-term targets for the stock would be the 161.8% extension or $250.
Bottom Line
While the valuation is scaring off some investors, Wingstop is seeing its stock hold up very well during the market sell off. This should tell investors that the smart money sees something here and that could be deflation in chicken wings.
If costs continue to go down, Wingstop will benefit by higher margins. With that, if the restaurant continues to see growth and beat earnings expectations, it will not take long to grow into that valuation.
Bear of the Day:
HP is a Zacks Rank #5 (Strong Sell) that provides personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services.
The stock is trading near 2022 lows after a disappointing earnings report led analysts to slash estimates. Investors will be attracted to the dividend and valuation, but might want to stay away for now.
About the Company
HP is headquartered in Palo Alto, CA. The company was founded in 1939 and was formerly known as Hewlett-Packard, until it changed its name to HP in 2015.
HP employs 51,000 people and operates through three segments: Personal Systems, Printing, and Corporate Investments.
HP is valued at $25 billion and has a Forward PE of 6. The company holds Zacks Style Scores of “B” in Value, but “D” in Growth. The stock does have a nice dividend paying 4% at current trading levels.
Q3 Earnings
When it comes to earnings, the company does very well beating expectations. HP has not missed in over five years, but when they posted Q3 earnings the numbers came in as expected.
Revenues missed by $800M and the company cut their outlook.
HP guided Q4 in a range to $0.79-0.89m significantly lower than the $1.04 expected. The company also cut FY EPS and FCF. Operating margins were down year over year, personal systems revenue was down 3% y/y and printing revenues were down 6% y/y.
Recently, IT Gartner reported Q3 worldwide PC shipments were down 19.5% year over year. That kind of news is not what investors want to hear. Especially on top of the fact that HPQ estimates have been falling over the last two months
Estimates
Analysts look pretty bearish on future earnings for HP. Since Q3 earnings, estimates have fallen across all time frames.
For the current quarter, estimates have dropped from $1.05 to $0.84 over the last 60 days, or 20%. For next quarter, the numbers have fallen 19% over the same time frame.
Estimates are not looking great over the long-term either. For the current year, estimates have fallen 5% over the last 60 days. For next year, they have been slashed 14% over that same time frame.
Technical Take
HPQ is trading at 2022 lows, so there is not much to like about the chart. The 61.8% retracement drawn from COVID lows to 2022 highs is $23.80, so we could see some technical buying come in there.
If that were to fail, then investors are looking at the $20 level as the next area of support, followed by the COVID lows in the $15 area.
For bulls looking for a turnaround, they should eye the 21-day moving average at $26 as the first step. Then a move above the 50-day MA at $29.50 could signal some improvement. Remember, these levels will change and drift lower as price continues to trade lower.
In Summary
With inventories in the computing space becoming a larger issue, HP might continue to struggle near-term. While the dividend and valuation are attractive, investors need to understand they will likely become much more attractive when the stock drops more.
Additional content:
Get Inflation Protection with These 3 Energy Pipeline Stocks
Despite some moderation from a 40-year high level, inflation in the United States is proving to be much more stubborn than expected. According to the last released Consumer Price Index (CPI) numbers for August, the figure stood at 8.3% — high enough for the Fed to raise its core interest rate by another 0.75% and take its year-to-date increase to 3%. In fact, inflation fears have roiled the market this year, with the S&P 500 losing more than 24% so far. Worse, experts believe that there will be continued upward pressure on most prices in the near-to-medium term.
As the above scenario pans out with upside inflation surprises, investing in high-quality energy infrastructure stocks like MPLX LP, DCP Midstream LP and Delek Logistics Partners might help you earn a decent return.
Inflation & Portfolio Returns: A Negative Correlation
In the United States, several measures of inflation are currently hovering near 40-year high levels. The outbreak of coronavirus has significantly devastated the global supply-chain system in the last two years. Input costs have soared for businesses. At the same time, strong pent-up demand, supported by massive personal savings in the last two years, has resulted in soaring prices.
Market participants are highly concerned that inflation will remain elevated in the near term due to the prolonged war between Russia and Ukraine and the intermittent resurgence of coronavirus in China.
While the cost of going to the supermarket or ordering meals from restaurants has clearly spiked for consumers, another worrying side effect of inflation is that it eats into the returns generated by financial instruments such as equities and bonds by eroding their value.
Mitigating the Risk
A particular asset class that possesses attributes to combat the value destruction from inflation is energy midstream. These entities typically operate transportation services, storage facilities and refined products' terminals. They are often structured as Master limited partnerships (or MLPs), which differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income.
Let’s check out the underlying rationale for owning midstream companies during periods of rising consumer prices.
Why Midstream?
Contracts with Inflation Protection: A salient feature of these entities is that the bulk of their cash flows is under long-term, fee-based contracts, which are indexed to inflation. In other words, midstream operators fix tariff rates in accordance with FERC regulations tied to the Producer Price Index — a measure of changes in prices covering a host of goods and services. Consequently, pipelines can pass on at least a portion of the higher costs to customers.
Exposure to Physical Assets: The properties that these entities own are mostly pipelines and storage facilities or infrastructure systems that help in moving oil and natural gas. Unlike stocks and bonds, midstream firms own real (physical) assets that do not derive their value from a contractual right. Their intrinsic worth has been historically proven to outperform traditional stock and bond instruments in years when inflation is high. This is because the economy is healthier and demand for real assets rises.
Attractive Payouts: Apart from defensive characteristics, investors are typically attracted to MLPs for their reliable distributions. Adjusting costs with the prevailing business activity, the partnerships have focused on the generation of free cash flow (post-distribution payment) to lower debt and strengthen their financial position. The growing free cash flows could be used to boost investor returns through buybacks and distribution hikes. Finally, the distribution growth, which often ranges in double digits, can also help investors to offset some of the impacts of high inflation.
3 Pipeline Choices
We bring here three energy pipeline firms with high yields that could be used as an inflation hedge.
MPLX LP:MPLX owns and operates gathering and processing assets along with crude transportation and logistics infrastructure. The partnership, which is valued at around $31.5 billion, carries a Zacks Rank #1 (Strong Buy). MPLX has edged up 1.4% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The energy infrastructure provider has an expected earnings growth rate of 14.7% for the current year. MPLX pays out 70.50 cents quarterly distribution ($2.82 per unit annually), which gives it a 9.2% yield at the current unit price.
DCP Midstream LP: This leading energy infrastructure firm has a diversified portfolio of gathering, logistics, marketing, and processing assets. DCP Midstream has a foothold in the major shale plays of the United States, including the Permian Basin, Eagle Ford, DJ Basin and SCOOP.
This Zacks Rank #3 (Hold) partnership has an expected earnings growth rate of 128.3% for the current year. DCP pays out a 43-cent quarterly distribution ($1.72 per unit annually), which gives it a 4.6% yield at the current unit price. DCP units have gained 21% in a year.
Delek Logistics Partners, LP: The firm is engaged in the gathering, transportation, storage and distribution of crude oil, intermediate products, feedstocks and refined products, and is also into wholesale marketing.
DKL pays out 98.50 cents quarterly distribution ($3.94 per unit annually), which gives it a 7.6% yield at the current unit price. Delek Logistics has an expected earnings growth rate of 10.6% for the current year. Valued at around $2.3 billion, DKL, a #3 Ranked stock, has gained 6.5% in a year.
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