The Zacks Analyst Blog Highlights Builders FirstSource, Panasonic, PulteGroup and Vipshop
For Immediate Release
Chicago, IL – June 29, 2023 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Builders FirstSource, Inc. BLDR, Panasonic Holdings Corp. PCRFY, PulteGroup, Inc. PHM and Vipshop Holdings Ltd. VIPS.
Here are highlights from Wednesday’s Analyst Blog:
Asset Utilization Ratio Adds Layer of Safety to Stock Picks
Market watchers have been pointing to various signs that indicate a recession is unavoidable. And these sounds have been growing louder ever since the Fed’s commentary that further rate hikes should not be ruled out.
One is the inversion of the yield curve -- when the yield on short-term treasury bonds exceeds the yield on long-term treasury bonds. This indicates that investors anticipate increased uncertainty in the near term, and is a sign of falling investor confidence. It has also preceded every recession in the past 50 years.
They’re also watching market performance. The S&P 500 for instance is down around 8% from its highest point in the last five years. Similarly, the Nasdaq is down over 15% from its highest point. While there are a lot of ups and downs in these graphs, these declines further strengthen the thesis that investors are growing nervous.
Third, GDP has been weak. The GDP growth rate has languished in the last four-five quarters, staying well below 2% in each of the last four. Agriculture and construction have been particularly weak, with mining, transport and services seeing relative strength.
Retail sales growth has been negative in two of the last five quarters. While it grew a dismal 0.3% in May, there’s a good chance of its slowing in the coming months. Ecommerce appears to be a relatively bright spot. Therefore, consumer spending could be slowing down.
While the job situation is not bad and employment remains at historic lows, wage growth is moderating. Therefore, we can’t deny that a recession, or at least a soft landing, appears to be around the corner and investors would do well to be prepared for it.
This could therefore be just the right time to be getting into “safe” stocks.
The most common way of identifying the safety of a stock is by checking its growth prospects and valuation. If there’s a dividend thrown in, all the better. I will be showing in this article how you can use the asset utilization ratio to add another layer of safety.
First let’s see what makes this significant. Most companies deploy a certain amount of capital to build some assets. These assets are then utilized to generate revenue. How much they’re spending depends on the industry and the level of technological development it is part of. Additionally, some of the capital is used in building inventories to allow the company to better address demand.
Asset utilization ratio basically tells you how efficiently a company is using its assets. It may be impacted by things like holidays and downtime for compulsory maintenance, but also by inefficiencies or weak demand for the company’s products, or weak pricing power. When there is sufficient demand but the company still has underutilized assets, it’s obvious that there are inefficiencies.
A well-run company would have acceptable levels of utilization of its assets. In general, we see that a utilization above 70% is good enough. If there is overutilization of physical assets, that too could be negative because it would unduly increase wear and tear, and therefore, maintenance costs.
So if you’re looking for safe stocks, you could make asset utilization part of your strategy. Just select a Zacks #1 (Strong Buy) rated large-cap stock. When this stock also belongs to an attractive industry, you further increase our chances of success. That’s because Zacks buy-ranked stocks have been seen to perform particularly well when they also belong to the top 50% of industries as classified by Zacks. Additionally, large-cap stocks usually have proven business models and steady cash flow streams. Therefore, their market prices tend to fluctuate less, especially in conditions of increased uncertainty.
Next, check how brokers view the stock. If most of the brokers, or even an average number of brokers have a Buy rating on the stock, investors will have more confidence in it, which will lend stability to prices.
The third point is the subject of this article. If the asset utilization is more than 70% (0.7), chances are the company doesn’t have an unreasonable amount of idle capacity. This in turn means that there is proper asset utilization, and therefore, efficient operations.
Finally, it makes sense to buy stocks that trade below their intrinsic value.
A list of stocks that satisfy these criteria is provided below:
Builders FirstSource, Inc.
Dallas, TX-based Builders FirstSource manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers and consumers in the United States.
The Rank #1 stock belongs to the Building Products - Retail industry (top 7%). The #1 rank captures the effect of positive estimate revisions, which implies positive sentiment of analysts.
And sure enough, the average broker rating of 1.73 translates to a Buy rating from brokers.
The asset utilization is very high at 1.87. The number is inflated by the significant value of intangible assets added to the balance sheet during its merger with BMC Stock Holdings. However, both inventory and receivables turnover are attractive. Therefore, it’s apparent that the company manages its asset utilization efficiently.
At 13.29X P/E, the shares are undervalued both with respect to the industry (17.94X) and the S&P 500 (19.16X).
Panasonic Holdings Corp.
Kadoma, Japan-based Panasonic develops, manufactures, sells and services various electrical and electronic products into residential, automotive, connectivity industrial, and energy markets.
The Rank #1 stock belongs to the Audio Video Production industry (top 23%).
Brokers have an average rating of 2.00 on the stock, which means a Buy rating.
The asset utilization of 1.03 is attractive, and reflects the fact that the industry is not a capital intensive one, such as you would find for an energy or utility stock,
At 12.40X earnings, the shares are trading at a discount to both the industry (15.10X) and the S&P 500.
PulteGroup, Inc.
Homebuilder PulteGroup is headquartered in Atlanta, GA. It acquires and develops land primarily for residential purposes and constructs single-family detached, townhomes, condominiums and duplexes on such land. It also provides related financing and other related services.
The Rank #1 stock belongs to the Building Products - Home Builders industry (top 8%).
Most brokers have a Buy rating on the stock, as seen from their average rating of 1.67.
The asset utilization of 1.16 is attractive, particularly because the company does have a considerable amount of asset outlay. It should not be considered excessive, since most of this is fixed assets like land and buildings rather than machinery, which would suffer wear and tear.
At 8.52X earnings, the shares are trading at a discount to both the industry (10.36X) and the S&P 500.
Vipshop Holdings Ltd.
Headquartered in Guangzhou, China, Vipshop Holdings operates online platforms vip.com, vipshop.com as well as Shan Shan retail outlets in China through which it provides products and financing for consumers and suppliers. It also offers warehousing, retail, procurement, and IT support activities for sellers.
The Rank #1 stock belongs to the Internet - Delivery Services industry (top15%).
Most brokers have a Buy rating on the stock, as seen from their average rating of 1.89.
The asset utilization of 1.74 is attractive. Technology companies employing digital infrastructure can have higher asset utilization at times. When they are building out the infrastructure, utilization will be lower, but as it becomes operational, utilization can pick up strongly. It depends a lot of the popularity of the platform.
At 9.612X earnings, the shares are trading at a discount to both the industry (14.07X) and the S&P 500.
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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report
Vipshop Holdings Limited (VIPS) : Free Stock Analysis Report
Panasonic Corp. (PCRFY) : Free Stock Analysis Report
