For Immediate Release
Chicago, IL – May 29, 2020 – Zacks Equity Research Shares of United Natural Foods UNFI as the Bull of the Day, Ralph Lauren RL asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on ExxonMobil XOM and Chevron CVX.
Here is a synopsis of all four stocks:
Bull of the Day:
United Natural Foods is a Zacks Rank #1 (Strong Buy) that is a leading distributer of natural, organic, and specialty food. The company had been left for dead earlier in the year, but strong consumer demand by the response to COVID-19 has helped the company and the stock. With more people in the grocery stores, more product is being moved, which is a big plus for a distributor like Untied Natural Foods.
Traders have been buying the stock in hopes the recent momentum will continue, putting shares up over 100% on the year. Now, the stock has settled under the $20, but some bulls are eyeing 2018 levels of $40.
Earnings and COVID-19
On May 12th, the company reported large earnings beat and announced that it had substantially reduced its long-term debt. This news sent the stock up almost 100% in a few days.
The company reported preliminary Q3 numbers of $1.40 v the $0.46 expected and saw revenues beat expectations. The quarter will see an expected 12% revenue growth for Q3. Moreover, the company lifted its FY20 forecasts.
The stock was trading at $12, but surged to $23.45 after the news came out. This move of almost 100% was attributed to the improvement in the debt situation, but it was magnified by a lot of short sellers that were taken to the cleaners. Almost 28% of the float was short before earnings, an obvious mistake in the current lockdown atmosphere.
Solid sales from the COVID-19 tailwinds of grocery shopping allowed the quarter to happened. While this trend might not continue forever, the quarter allowed the company to deleverage and improve its financial situation.
The beat on EPS and hike in fiscal year expectations has analysts raising estimates. Over the last 30 days, estimates for next quarter were taken to $0.43 from $0.62, or a move of 44% higher. For next year, we see analysts moved from $1.34 to $1.60 for the same time frame. This 19% move higher shows that analysts expect earnings to remain positive for the long-term.
While the stay at home lifestyle may not last forever, there looks to be positive momentum for grocery stores and their distributers over the next year.
The Technical Take
UNFI was above $40 for most of 2018. However, the stock broke that support level when it announced it would take over SuperValu in July of that year. The amount of debt that UNFI was taking on was a problem for investors. During the course of that year, the stock traded all the way down to $10, where it was stuck for most of last year.
During the COVID panic in March, the stock hit $5, but quickly bounced once investors realized the company would benefit. After the earnings outlook hit, the stock went to almost $24 a share and has since pulled half way back from highs.
The 61.8% Fibonacci level at $15.50 and the 21-day moving average at the same area should provide technical support. If this level holds, Fibonacci targets at $26 should eventually come.
If positive news can continue, longer-term holders can target $34 and even the $40 gap area.
United Natural Foods will continue to have success even as economies reopen. Many consumers will be taking their time getting back to normal and they will stick to the grocery stores rather than restaurants. This momentum is extremely positive for UNFI and the company will continue to deleverage away from the SuperValu acquisition, which will create value for investors.
Bear of the Day:
Ralph Lauren is a Zacks Rank #5 (Strong Sell) that is a major designer, marketer and distributor of premium lifestyle products. The company offers apparel, accessories and home products and sells its products in department stores, specialty stores, golf shops, retail stores and digital commerce sites.
The company has obviously been hurt by the lockdowns and closing of the stores it sells its products in. While the company operates online, the foot traffic in stores is what drives overall revenues. The question investors have is how will the company bounce back when economies reopen.
In mid-march the company was forced to close all of its stores in North America.
At the end of March, the company gave investors their plans on how they will survive the pandemic and store closings. They decided to draw down on $475 million from their credit facility, halted share repurchase and reduced cap-ex. They essentially raised some cash and halted all their plans.
At the beginning of April, Moody’s and S&P cut the company’s outlook to negative from stable.
Earnings and Estimates
Obviously, traders were expecting a bad number from RL this week when they reported EPS. However, things came in much worse than expected.
The company reported Q4 of -$0.68 vs the -$0.05 expected and revenues missed. RL also suspended its outlook and dividend. On the positive side, the company reopened 2/3rds of the stores in Europe and half in North America. However, there will be higher costs to put in social distancing measures and we don’t know how quickly the customers will walk through the doors when allowed.
Estimates have been plummeting due to the pandemic. Over the last 90 days, we have seen the current year fall from $8.64 to $4.02, a drop of 53%.
The chart has shown strong support at the $60 level and the stock is up about 30% from 2020 lows. Current levels around $80 a share are above both the 50 and 21-day moving averages, but below the 200-day at $96. Considering the fundamental view, it will be challenging to get up to the 200-day and I would look for those levels below to be tested again.
There are plenty of better stocks to choose from that are working, so why buy one that has cut its dividend and reduced its outlook drastically. Ralph Lauren, as well as many other retail specialty stocks, will have to prove themselves post-COVID before investors will pile in.
Forget Oil Prices, It's Time to Buy Exxon and Chevron
Just a few short weeks ago, energy investors were running for cover as the demand erosion caused by efforts to stem the spread of the coronavirus whipsawed stocks and futures. The price of WTI oil fell below $30, $20, $10 and even went negative for a while. Remember, the commodity started the year at around $60 a barrel. This led analysts to sharply reduce their forecasts for the oil sector components. Investors got spooked too, and responded with a broad sell off in equity that included integrated majors like ExxonMobil and Chevron – both falling to multi-year lows.
The oil collapse and the subsequent stock price decline brought to the fore the question as to whether the two U.S. oil energy behemoths continue to make sense for conventional investors.
Right now, the clear answer is a ‘yes’.
Let's take a look at the reasons:
Impressive Q1 Results: The first-quarter results 2020 were out a few weeks ago, and the so-called supermajors put up an impressive show. Defying the price plunge, they actually beat on earnings, producing EPS that was significantly higher than the Zacks Consensus Estimate.
ExxonMobil’s earnings per share of 53 cents easily surpassed the Zacks Consensus Estimate of 4 cents, thanks to growth in production volumes from the prolific Permian and Guyana oil resources. Chevron, meanwhile, reported adjusted first-quarter earnings per share of $1.29, above the Zacks Consensus Estimate of 64 cents. The beat was driven by strong production from the Permian Basin and higher margins on refined products.
Integrated Structures: Both companies are fully integrated, meaning they participate in every aspect related to energy — from oil production, to refining and marketing. As such, they are the ones that are best in adapting their business model to the prevailing scenario.
Thanks to their integrated structures, companies like ExxonMobil and Chevron are able to withstand plunging oil prices better than the rest and protect their top and bottom lines to a certain extent. With the refining unit of these conglomerates being buyers of crude – whose price is in a freefall – their profitability improves due to a fall in input cost.
Upstream Results Should Keep Improving: Both reported dismal first-quarter results in the upstream segment, which deals with oil and natural gas exploration, field development, and production. ExxonMobil and Chevron faced the wrath of plunging crude and natural gas prices in the quarter. While output gains contributed positively to results, the historic meltdown in realizations put pressure on the companies’ E&P segment profits. ExxonMobil’s quarterly earnings of $536 million plunged from $2.9 billion a year ago, while Chevron’s upstream segment income was down 6.5% year over year to $2.9 billion.
But it seems that crude’s worst losses are in the rear view mirror with signs of gradual rebalancing. Therefore, going forward, it is highly probable the upstream portfolios for both ExxonMobil and Chevron will see improved profitability due to recovery in oil prices in particular. Additionally, their low-cost structures and high-margin production should help prop up segment margins.
Dividend Safety: Investors are typically attracted to ‘Big Oil’ companies, thanks to their reliable dividends and defensive characteristics. These oil and gas industry kings usually consider high payouts as sacrosanct and do their utmost to continue paying them. But this time things seem to be different. This earnings season, Norway’s Equinor cut its dividend, becoming the first oil major to reduce payouts amid a steep oil price plunge in a bid to preserve liquidity. But what caused the greatest shock among investors was the decision by Shell to cut its dividend.
ExxonMobil and Chevron - the only two energy stocks on the list of Dividend Aristocrats – have said that they would keep paying shareholders a quarterly dividend. ExxonMobil has a $3.48 annual payout and a 7.5% yield, while Chevron’s yearly dividend of $5.16 offers a yield of 5.5%. With the companies portraying their dividend resilience during the bust cycle of energy prices, the expected rise in levels of net income in tandem with oil price recovery should give income investors even more confidence in the payout holding out.
Balance Sheet Strength: A sustainable dividend is more than just yields and payouts. A company must maintain a strong balance sheet to sustain their dividends when the going gets tough. In that respect, net debt (or total debt less cash) is of paramount importance. Of the two companies, Chevron has a net debt of $23.9 billion, followed by ExxonMobil’s $20.4 billion. In other words, ExxonMobil and Chevron have a healthy balance sheet.
Next, we look at gearing, or the ratio of net debt to total capital. ExxonMobil and Chevron’s low net debt translates into gearing ratios of just 9.3 and 14.2, respectively - very manageable indeed. Further, both carry high investment grade ratings, which translate into low borrowing rates.
Focus on Capital Discipline: If there's one thing the commodity price crash has taught oil and gas companies, its capital discipline. In view of the coronavirus-induced demand destruction for oil, ExxonMobil has slashed its 2020 capital budget by 30% to roughly $23 billion. The integrated firm has also decided to lower planned cash operating expenses for this year by 15%. Meanwhile, Chevron now expects to spend $14 billion for the year, compared to its previously lowered estimate of $16 billion and 30% less than its initial projection. The company is also targeting $1 billion in operating cost cuts.
As it is, over the past few years, ExxonMobil and Chevron have made dramatic progress in lowering their operating cost structures, with a barrel of production now costing around 30% below 2014 levels across most regions. The cost improvements should support operating profitability and lead to greater cash flow.
Given how much volatile commodity prices are, it would be prudent for the conservative income investors to stick to companies with proven track records. There are none better in this regard than ExxonMobil and Chevron. Both these firms have restructured their operations, divested lower margin properties and positioned themselves to thrive even amid the wild price swings.
With oil prices set to rise in the near-to-medium term, the supermajors appear attractive plays for investors right now. Both carry a Zacks Rank #2 (Buy), further validating their potential. Even if oil prices continue to stay weak for a long time, ExxonMobil and Chevron should continue to see solid cash flows, earnings and revenues.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Right now, their stocks are affordable with a favorable risk-reward profile. Investors looking for safe energy bet can, buy ExxonMobil and Chevron for income and capital appreciation.
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