Kraft Heinz, Norwegian Cruise Line, Best Buy, Taiwan Semiconductor Manufacturing Company and Microsoft highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – November 4, 2020 – Zacks Equity Research Shares of The Kraft Heinz Company KHC as the Bull of the Day, Norwegian Cruise Line Holdings Ltd. NCLH as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Best Buy Co., Inc. BBY, Taiwan Semiconductor Manufacturing Company Limited TSM and Microsoft Corporation MSFT.
Here is a synopsis of all five stocks:
Bull of the Day:
The effects of Covid-19 and the related shutdowns continue to ripple through the economy, affecting industries in drastically different ways – many of which have been far from what seemed obvious before the crisis.
One relatively bright spot has been packaged food companies, who have been experiencing sales that are at least at the level they were before the crisis. One such company is a very much household name – Kraft Heinz. It’s virtually guaranteed that you have the products of several familiar Kraft Heinz brands in your refrigerator and cabinets right now.
With seven upward revisions since last week’s earnings report, KHC earns a Zacks Rank #1 (Strong Buy).
In most times, the big food companies tend to be a fairly boring topic as far as investment opportunities go. Their business is stable and consistent and their revenues and earnings releases don’t tend to include large surprises. Stable (if unspectacular) low single digit growth generally also allow modest dividend yields.
Though consumer tastes shift over time, people don’t tend to drastically change the amount of food they eat. Economies of scale allow the giant producers a great deal of control over raw materials prices and competition on the shelves keeps retail prices fairly consistent as well.
Snooze, right?
Well it’s become at least a little bit more interesting story in the era of the Covid outbreak. First, we saw huge increases in sales at grocery and big-box stores as consumers hoarded large amounts of packaged food in anticipation of long quarantines in their homes. Bare shelves at the supermarket meant big sales for producers.
It wasn’t actually all that great. The cost of ramping up production and packaging facilities and rushing replacement goods to the marketplace consumed at least some of the windfall. Plus, pretty much all industry observers knew that while all the panic buying meant you couldn’t find a box of macaroni on the supermarket shelf for a while, it also meant many customers wouldn’t be heading back for more anytime soon.
Now that the original buying rush has past and consumers are comfortable with their ability to buy food whenever they choose and in more normal quantities, sales have largely stabilized.
There has been an important shift for Kraft Heinz, however – the widespread closure of restaurants and resulting shift to retail sales. In the most recent quarter, management noted “increased retail demand that more than offset lower foodservice related sales.”
Net sales growth of 3.8% and organic sales growth (excluding the costs of divestitures and currency impact) of 7.4% are pretty big gains for a company that’s more accustomed to something more like 0-2%. Even better, prices were up 2.2% over the prior-year period which the report attributed to “reduced promotional activity” – less discounting and coupons.
There’s also another possible reason for the price increases – container size. Retail consumers buy different quantities of goods during a trip to the store and KHC would rather sell 8 squeeze bottles of ketchup than the 7 pound cans that go primarily to restaurants. Though KHC didn’t specifically mention that effect in the report, we’ve seen the opposite effect in some liquor sales. Retail customers stock up on 1.75L liquor and 1.5L wine, while restaurants buy more 750ml bottles.
Sure it’s still not a really exciting story, but during uncertain times, owning a $43 billion US company that’s seeing better than expected sales growth during the crisis - and pays a 4.5% dividend yield - might be just the right kind of boring.
Bear of the Day:
I last wrote about Norwegian Cruise Line Holdings as the Bear of the Day in September after earnings had plunged 263% from 2019's $5.09 to ($8.30).
The operator of three brands, including Oceania Cruises and Regent Seven Seas Cruises, recently celebrated some good news as the CDC issued conditional sailing orders for cruise lines on October 30.
In last Friday's session, Norwegian and peers Carnival and Royal Caribbean were all up between 6% and 9% following the CDC's release of its guidance.
Reaction from analysts was positive after a devastating year for this particular leisure business.
Stifel Nicolaus analyst Steven Wieczynski said that the CDC's lifting of its "no sail order" was a "clear positive" for the group, all of which are Buy-rated at the firm. The analyst noted that given how smoothly cruise operations have resumed in Europe, he believes the cruise industry had been trying to show U.S. government officials that restarting operations in North American could be done in a safe and confined manner.
Wieczynski also shares the belief of analysts that we should expect to see the major cruise operators start up "test" cruises in December and January and eventually have revenue cruises operational by the middle of the first quarter of 2021.
But this doesn't mean that revenue and EPS estimates will start moving up meaningfully right away.
In fact, yesterday (Monday Nov 2), Norwegian Cruise Line confirmed how slow the re-start might be by extending voyage suspension through December 31. The travel company announced an extension of its previously announced suspension of global cruise voyages to include all voyages embarking between December 1 through December 31, 2020 for its three cruise brands.
UBS analyst Robyn Farley is even less optimistic about how quickly normal cruising resumes from US ports. The analyst notes that lab testing, simulated voyages, risk mitigation and certifications will all have to roll out before CDC approvals are set:
"Bottom line is that cruise lines will not be able to offer passenger cruises in December, but January seems possible, though February more likely, in line with what the CDC was reportedly already targeting. That leaves downside risk to our Q1 estimates, which had assumed 7% of cruise capacity in use, but wouldn't have as much negative impact on our 2H estimates. Overall, our 2021 ests assume about 30% of cruise capacity in service for the year on average, so some downside risk to that from 1H adjustments but a Feb restart would at least give higher conviction in 2H and forward. We continue to favor RCL over CCL and NCLH because RCL's private island strategy should give it an advantage when US cruising restarts with short Carib cruises."
Bottom line on NCLH: There is probably long-term value in the shares right now, but there should be no rush to enter a position. Best to wait for the estimates to stop going down and start heading back toward zero from negative growth. The Zacks Rank will let you know.
Additional content:
3 Large-Cap Tech Stocks to Buy Despite Market Uncertainty
Stocks surged to start November after a rough last few weeks of October. The climb came despite the uncertainty of the election and what’s next on the virus front, as some parts of Europe and the U.S. roll out increased lockdown measures.
With this in mind, we are going to try to block out the noise of the election and the coronavirus and focus on what we do know. First, the earnings picture continues to improve for the third quarter, as strong results come in from some of the biggest names on Wall Street. And the fourth quarter outlook is also trending in the right direction, which helps show investors that the worst part of the pandemic-driven downturn is likely over.
The S&P 500 is projected to post strong overall earnings growth in fiscal 2021, and data last week showed that the economy grew at a record pace in Q3, up 7.4% over Q2, and at a 33.1% annual rate. Meanwhile, interest rates are likely to remain historically low through at least 2023, based on the Fed’s moves. All these factors help set up a bullish case for stocks.
Clearly, the market could remain volatile in the near-term as Wall Street digests what happens in Washington and around the U.S. in terms of the Senate elections. Nonetheless, investors with a longer-term horizon might want to consider buying tech stocks that look poised to grow during the coronavirus economy and beyond…
Best Buy
Best Buy has proven it’s ready to succeed in the Amazon age. Like most other retailers, big and small, the company invested in its own e-commerce offerings. These efforts paid off during the second quarter, when many of its stores were open by appointment only for the first six weeks due to coronavirus-based requirements. The consumer electronics firm has also been the beneficiary of remote work and schooling, as people purchased laptops, tablets, and more.
BBY topped Q2 estimates, with sales up 4% and adjusted earnings up 58%. Plus, BBY’s domestic comparable sales popped 5%, with comparable digital sales up 242%. Looking ahead, Zacks estimates call for Best Buy’s adjusted Q3 EPS to soar 50% on nearly 12% higher revenue. BBY’s earnings and sales are projected to climb this year and next and its positive earnings revisions help it land a Zacks Rank #2 (Buy) right now.
Best Buy boasts “A” grades for Value and Growth in our Style Scores system, as well as a “B” for Momentum. It is also part of the Retail - Consumer Electronics industry that rests in the top 13% of our over 250 Zacks industries. The stock has surged 250% in the last five years against the S&P 500’s 63% climb. This includes a 60% jump in the past year. Investors should also note that BBY shares have popped nearly 20% in the last three months, while the market has moved sideways. And Best Buy stock currently rests about 4% off its highs.
Despite its strong run and outperformance, Best Buy’s 1.86% dividend yield beats the S&P 500 average and the 30-year Treasury’s 1.65%. Best Buy also trades at a solid discount against its highly-ranked industry. And investors might want to consider BBY for its ability to grow in the remote landscape and for years to come, as consumer electronics proliferate because let’s face it, people are addicted to tech.
Taiwan Semiconductor Manufacturing Co.
Taiwan Semiconductor is the world’s largest semiconductor manufacturer, with roughly 55% market share. This means that it’s helping drive the chip revolution and it will likely continue for years to come, as some of the biggest and most innovative names in the market, including the likes of Nvidia, turn to TSMC to manufacture their chips. TSMC runs a dedicated semiconductor foundry business and it claims to boast the “world's largest semiconductor design ecosystem” and has enabled “85% of worldwide semiconductor start-up product prototypes.”
TSMC’s revenue has climbed by 29% or higher in the trailing four periods, including in Q3. Peeking ahead, Zacks estimates call for its Q4 revenue to jump another 24% to help lift its adjusted earnings by 26%. The stock’s earnings revisions help it land a Zacks Rank #2 (Buy) at the moment. TSM is also part of an industry that rests in the top 4% of our over 250 industries and its 1.53% dividend yield crushes the 10-year Treasury. Plus, shares of TSM have topped their industry in the last five years and in 2020.
Companies turn to foundries such as TSMC for their integrated circuit production because the costs and time involved have grown enormous. This makes the idea of building chips in-house far less attractive, if not impossible for many. Therefore, it might be worth considering TSMC because it is set to help support the ever-expanding chip industry for years. “We expect our sequential growth to be supported by strong demand for our industry-leading 5-nanometer technology, driven by 5G smartphone launches and HPC-related applications,” CFO Wendell Huang said in prepared Q3 remarks.
Microsoft
Microsoft’s cloud computing expansion proved once again to be its most important bet in years when it topped Q1 FY21 estimates last week. MSFT’s adjusted earnings surged 32%, with sales up 12%. The company’s Intelligent Cloud united jumped 20% to $13 billion, which made it the biggest top-line contributor of its three core spaces.
MSFT’s Azure-driven cloud business is thriving alongside Amazon. Plus, its Office offerings remain nearly as vital as ever. This helped its Productivity and Business Processes space, which includes LinkedIn and more, climb 11% in Q1.
Microsoft’s cloud efforts are now a part of nearly every facet of the company. Meanwhile, its Xbox content and services revenue surged 30% last quarter. And its portfolio of remote work offerings helps it compete against Zoom and others. The company’s EPS outlook has improved since its recent report to help it land a Zacks Rank #2 (Buy). Looking ahead, Zacks estimates project MSFT’s full-year revenue will climb roughly 10% in both FY21 and FY22, with its adjusted earnings expected to jump 15% and 10%, respectively.
Microsoft’s projected top-line growth would follow three straight years of between 13% to 15% revenue expansion. It last held $137 billion in cash and equivalents and its 1.10% dividend yield beats the 10-year U.S. Treasury and Apple’s 0.74%. Plus, MSFT stock hovers around 10% off its early September highs.
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Microsoft Corporation (MSFT) : Free Stock Analysis Report
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The Kraft Heinz Company (KHC) : Free Stock Analysis Report
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