For Immediate Release
Chicago, IL – December 10, 2018 – Zacks Equity Research Restoration Hardware RH as the Bull of the Day, Penn National Gaming PENN asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on American Eagle Outfitters, Inc. AEO, Costco Wholesale Corp. COST, Adobe Inc. ADBE.
Here is a synopsis of all five stocks:
Stocks were battered last week, but if there’s any hope for a “Santa rally,” it will likely come on the back of trade war progress paired with renewed optimism about the consumer economy. If that happens, look for companies that have recently posted beat-and-raise quarters on the back of strong business trends.
One such example is Restoration Hardware. The Zacks Rank #1 (Strong Buy) home furnishings retailer last week posted earnings of $ 1.73 per share, topping the Zacks Consensus Estimate of $ 1.27 and growing 66% from the year-ago period. This performance also surpassed RH’s own guidance range of $ 1.15 to $ 1.33 per share.
Adjusted revenue in the quarter totaled $ 638.5 million, which marked year-over-year growth of 8% and beat estimates of $ 633 million. RH’s comparable brand sales (comps) were up 4% from the prior year, which is especially impressive given that the comparable quarter saw comps growth of 6%.
So what contributed to the strong performance, and can investors expect the trend to continue? Well, let’s take it from management themselves.
“While the luxury housing market has sequentially slowed throughout 2018, our revenues have sequentially accelerated, despite cycling inventory reduction efforts and managing the business with a bias for earnings versus revenue growth, clearly demonstrating our ability to gain market share,” the company said in its release.
And in terms of outlook, management raised its Q4 revenue guidance to range of $ 680 million to $ 690 million, up from previous guidance of $ 665 million to $ 685 million. Earnings guidance for the period was raised to $ 2.75 to $ 2.90 per share, a major increase from prior expectations of $ 2.33 to $ 2.54 per share.
RH also maintained its fiscal year 2019 revenue guidance of $ 2.72 billion to $ 2.82 billion. This would represent growth of 8% to 12%. Moreover, management said it will not see a material impact from Chinese tariffs.
Shares of RH added about 11% in the day after its report, but the stock pulled back during Friday’s selloff. Investors simply did not want to hold on to stocks with fresh momentum over the weekend, as another volatile week of trading likely inspired whatever profit taking was possible.
That said, RH is now trading at an incredibly attractive valuation. By late afternoon hours, the stock was at about 16.2x the midpoint of its full-year EPS guidance range. This pairs well with its PEG ratio of 0.8, which is a discount to the industry’s average of 1.0 and implies investors are getting a great price for the company’s earnings growth outlook.
That’s a brief look at the near-term value and growth outlook, but one should also note that analysts have given RH a long-term projected EPS growth rate of 21.9%.
This is a very simple thesis, really. The overall price action in stocks right now looks relatively bearish. But with the Fed turning slightly dovish, we’ve shortened our list of major headwinds down slightly, and investors will be ready to rip higher if progress is made on the trade war.
RH protects you from the worst of the trade war blues by not being materially affected by it, plus it has the perfect combination of value, growth, and earnings fundamentals that investors will pile into as the outlook for the broader market improves.
In this volatile, range-bound market, you want to at least be sure that your holdings are supported by strong underlying business trends. This should lead us away from many casino stocks right now, including regional operators like Penn National Gaming.
Penn National is an operator of casinos and racetracks throughout the United States. It is primarily a regional operator and may be best known as the manager of the Hollywood Casino chain, although it does own and operate the Tropicana in Las Vegas as well. In total, it manages about 40 properties right now.
At first glance, one might like PENN for its unique growth prospects in the casino business. Regional gaming companies should be able to benefit from legalized sports gambling, for instance. Penn National has also proven that it can grow revenue at a rate that might others in the industry jealous. For the current quarter, the company guided for revenue growth in excess of 49%.
But Penn National’s growth plan is fueled by acquisitions. That top-line expansion it is seeing this quarter is likely due to the closing of its deal to buy Pinnacle Entertainment, which added 12 properties to its portfolio.
Growing by acquiring is a legitimate tactic, no doubt. For savvy investors, though, this knowledge means we must look a bit deeper at the underlying business trends.
In the most recent quarter, Penn National missed the Zacks Consensus Estimates for both earnings and revenue. Its results were also below the company’s own guidance. Management also said it expects Q4 earnings to be $ 0.90 per share, down from previous guidance of $ 1.75 per share. This type of swing-and-miss quarter is not what we like to see in this market climate.
Much has been said about slowdown in Vegas and Macau this year, but Penn National does not have an Asian presence, and Vegas is not a huge part of its business. Instead, it was “competitive pressures in Illinois and Mississippi,” as management noted in the earnings report, which may have contributed to the soft results.
Penn National’s weak earnings results and poor guidance obviously led to a plethora of negative estimate revisions from analysts. In fact, seven analysts have revised their estimates for 2018 and 2019 earnings to the downside. Our Zacks Consensus for 2018 is now relatively in line with Penn National’s guidance, while the 2019 mark has plummeted 40 cents to just $ 1.61 per share.
Earnings, earnings estimates, and—more specifically—earnings estimate revisions are the crux of the Zacks Rank. This downtrend explains why PENN is currently sporting a Zacks Rank #5 (Strong Sell). I would also point out that the stock is currently sporting just a “C” in the Value category of our Style Scores system, despite having lost about 30% in the past six months.
This suggest the recent selling has not quite brought shares down to a reasonable valuation. Indeed, PENN is trading at about 25.6x earnings, which is a premium to its industry’s average of 21.8. Moreover, the stock has a PEG ratio of 2.5, while the industry has an average of 1.5. This suggests the EPS growth that’s supposed to come in the next fiscal year is not coming at the best price.
So why cycle money into an overpriced casino stock with an earnings outlook that just fell off a cliff? I don’t think recent market price action is saying now is the time to make such a move. Overall, I’m not sure many casino options look great right now.
Upcoming Earnings to Watch: AEO, COST, ADBE
Stocks were sliding again on Friday morning, with investors seemingly shrugging their shoulders at the latest jobs numbers and continuing to crank up trade war-based selling. This headwind is overshadowing basically all other conversations, including strong reads on earnings and revenue in many sectors.
Wall Street got what it wanted from last weekend’s G20 summit, as trade representatives from the U.S. and China agreed to halt new tariffs for 90 days in order to work on a longer-term agreement. But that optimism was quickly erased thanks to discouraging trade-related news, including a series of tweets from President Trump and the arrest of U.S.-backed arrest of Huawei CFO Meng Wanzhou.
The trade war is now, without a doubt, the number one headwind affecting stocks, especially considering last week’s surprise dovish turn from the Fed. Sure, folks are worried about a recession on the horizon, but investors are really worried about the trade war sparking a recession much sooner than expected, and that has kept stocks in a bearish range recently.
This makes it difficult for companies reporting earnings during this stretch. Investors need to see powerful beat-and-raised quarters during this non-busy period for reports, and that is no easy task.
With that said, investors should remember to use the Zacks Earnings Calendar to plan out their schedules for earnings, dividend announcements, and other important financial releases. This handy tool is your perfect one-stop-shop to properly prepare for the market events that will have an impact on your own portfolio.
We have made this task even easier today by selecting a few of next week’s top reports to preview right now. Let’s take a closer look at a few of the earnings announcements due during the week of December 10.
1. American Eagle Outfitters, Inc.
Specialty retailer American Eagle is slated to announce its latest quarterly earnings results after the market closes on December 11. AEO had a great run to start the year, but the stock has now lost more than 30% since reaching five-year highs in August. American Eagle will hope to reignite its earlier momentum with an impressive report.
Analysts expect the retailer to report earnings of $ 0.47 per share, according to our Zacks Consensus Estimate. This would represent year-over-year growth of 27%. American Eagle has seen positive and negative revisions to estimates within the last 30 days, but the overall consensus has not budged. Revenue is projected to be up nearly 8% to $ 1.04 billion.
2. Costco Wholesale Corp.
Big-box retail giant Costco is expected to release its most recent quarterly report after the closing bell on December 13. Costco shares have added about 23% so far this year. The company posts monthly sales results and just announced that Q1 same-store sales growth reached 8.8%, crushing expectations. That should serve as an indicator that next week’s full report will be largely positive.
Our current Zacks Consensus Estimates are pegged at $ 1.62 per share for earnings and $ 34.5 billion for revenue. These results would represent year-over-year growth rates of 19% and 9%, respectively. COST is trading at roughly 30x earnings ahead of the report.
3. Adobe Inc.
Software innovator Adobe will release its earnings report after U.S. markets close on December 13. A darling momentum stock for the past few years, Adobe has pulled back from its highs as investors have ditched high-flying tech picks in recent months. That said, ADBE is still up over 40% in 2018 and could extend those gains with another great report.
Adobe’s earnings per share are expected to improve 49% to reach $ 1.88 for the quarter, based on our Zacks Consensus Estimate. Revenue is estimated to grow nearly 21% to total $ 2.42 billion. These results would bring full-year earnings and revenue growth to roughly 58% and 23%, respectively.
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