For Immediate Release
Chicago, IL – September 23, 2020 – Zacks Equity Research highlights Advanced Auto Parts AAP as the Bull of the Day and Rogers Communication RCI as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Microsoft MSFT, Sony SNE and Nintendo NTDOY.
Here is a synopsis of all four stocks:
Bull of the Day:
Advanced Auto Parts is a Zacks #1 (Strong Buy) that operates in the automotive aftermarket industry, selling replacement parts. It’s one of the leading automotive parts providers and caters to the DIY customer.
The company recently had a blowout quarter, where it beat on both the top and bottom line. The stock gapped higher after EPS, but was sold back down to pre-earnings levels.
Investors now must decide if the momentum seen during the pandemic will continue and if the DIY trend can fuel more growth.
About the Company
Advanced Auto Parts has almost 5,000 stores and has 39,000 full time employees. It is headquartered in Raleigh, North Carolina and was founded in 1932.
The company has a market cap of about $10 Billion and has Zacks Style Scores of “A” in Momentum and “B” in Growth. The Forward PE is 18, which is an appropriate valuation, giving it a Zacks Style Score of “C” in Value.
The company pays a dividend of 0.67% and has a 1.35 beta, making it slightly more volatile than the market.
APP reported on August 18th, seeing a topline beat and a positive EPS surprise of 48%. Same Store Sales came in at 7.5% v the 6.2% expected and operating margins were up 11.2% year over year.
While the company withdrew its FY20 outlook, they believe their focus on the digital platform will drive strong results in the back half of the year. The company also noted that they benefited from a surge in industry demand fueled by government stimulus.
The beat was the eighth beat over the last two years and marked the biggest upside surprise in that time frame.
Over the last 60 days, estimates have shot higher. For the current quarter, we have seen estimates raised by 32%, from $1.97 to $2.60. For the current year, we have seen a 29% move higher in that same time frame. Most analysts are citing consumer DIY trends in tough economic times as a catalyst. However, a shift away from public transportation is also forcing some to adjust to used vehicles that need fixing up.
DIY Trend and Auto Zone earnings
Economic uncertainties motivate people to save money and people have become more inclined to buy used over new vehicles. Advanced Auto parts, O’Reilly and AutoZone have all seen the DIY trend accelerate because of the pandemic.
AutoZone just reported earnings this week and confirmed that the trend is continuing. The company reported a 25% EPS beat and saw domestic SSS up 21.8%.
After spiking to 2020 highs, the stock turned lower with the recent market pullback and dipped below the 50-day MA. The stock could see support at the 61.8% retracement level at $147(drawn from July lows to post-earnings highs). However, if market pressure continues, we could see the stock test the 200-day at $137.25.
Looking to the upside, over $155 would be a bullish signal. Look for 2019 highs around $183 as the next resistance area.
The DIY trend is continuing due to tough economic times and the pandemic. With another round of economic stimulus likely before the year is over, the auto parts growth story looks solid. With the recent market pull back, investors should look at technical support for entry levels in Advance Auto Parts.
Bear of the Day:
Rogers Communication is a Zacks Rank #5 (Strong Sell) that provides cable television, high-speed internet and video retailing. The company also provides wireless services and operates radio and television broadcasting stations.
Overview of Company
Rogers is headquartered in Toronto, Canada and has the largest 5G network in the country. The company was founded in 1960, has almost 11 million subscribers and over 25,000 full-time employees. RCI has a market cap of almost $20 Billion and has a Forward PE of 18. The stock pays a nice dividend of 4%, but despite that positive, the stock is down over 20% on the year.
Fixed-Costs in a Bad Economy
Rogers has a sustainable business as the premier network in Canada. However, the business has a lot of fixed costs and with a pandemic harming the economy it will be difficult to grow or even meet earnings expectations. With less people on the move, roaming and overage revenue falls. Additionally, activations are down and the shutdown of sports has harmed media operations.
Cutting the Cord
Another issue for Rogers is that consumers are ditching cable for streaming services. While the company has adjusted, offering their SmartStream service that canaggregate content from the likes of Netflix and Amazon Prime, this costs an extra $5 a month. The service is new, but investors should be concerned if customers overlook the service and go straight to the streamers or a company like ROKU.
Earnings and Estimates
The company reported Q2 earnings at C$0.60 vs the C$0.79 expected. This miss of 27% was the sixth straight downside surprised, a slump that started in the second quarter of 2019.
Digital ads, wireless churn and wireless postpaid ads were down year over year. ARPU and EBITDA were also both down significantly year over year. The company blamed the economic conditions and is confident that its strong balance sheet and market share will help it get through the downturn. While that is likely true, investors are not happy and have taken the stock down over 10% from its post-earnings highs.
Looking at estimates, we see numbers falling slightly for most time frames. For the current year, estimates have ticked lower by 1.1% over the last 30 days. For the year, we see a drop from $5.04 to $4.83, or 4.1% over the same time period.
The stock rallied nicely off the March lows, but has since been stuck in the low $40s. After earnings, the stock moved higher, but failed at the 200-day MA. From there, RCI has been sold hard and revisiting its July lows.
The $38 area has been defended multiple times in the past, but it looks like there is limited upside from these areas. Until the stock can clear $42 and then $44, it is trending lower and investors should avoid.
Longer-term investors might be attracted to the stability of the company and that dividend. However, as long as the pandemic persists, investors shouldn’t expect much price appreciation. There are better places to be that are thriving in this environment.
Microsoft’s Bethesda Buy to Intensify Console Gaming War
Microsoft is leaving no stone unturned to make the launch of the highly awaited next-generation Xbox Series X gaming console, which is scheduled to release on Nov 10, 2020, a blockbuster hit.
The tech giant recently announced its intentions to acquire leading video game developer Bethesda Softworks’ parent company ZeniMax Media for an all-cash deal valued at $7.5 billion.
The deal will help boost the subscriber base for Xbox Game Pass service as Microsoft will be adding Bethesda’s popular AAA titles to its Game Pass roster. At present, the subscription service has 15 million users.
Rockville, MD-based Bethesda Softworks boasts a robust IP portfolio and exclusive AAA console and PC game content, with popular video titles like The Elder Scrolls, DOOM, Quake, Wolfenstein, and Fallout, under its banner.
Moreover, Microsoft, currently carrying a Zacks Rank #3 (Hold), is likely to make the upcoming Bethesda game titles available on Xbox, the same day these are released. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
With this agreement, the company is well poised to disrupt Sony’s PlayStation 5 ambitions, which is priced at $499.99 and set to release on Nov. 12 in the United States and a few other select countries. Markedly, Microsoft has announced estimated retail price for Xbox Series X at $499, which takes the console war a notch ahead.
Per VGChartz data, PlayStation 4 dominated the console market in terms of total sales through August 2020, with 50.3% market share, outpacing Nintendo’s Switch and Xbox One market shares of 28.2% and 21.5%, respectively.
Nevertheless, Microsoft is constantly integrating its Azure cloud’s capabilities into its gaming segment. This will facilitate it to improve gaming strategies and develop better content and provide it a competitive edge over Sony and Nintendo in the console gaming space.
Moreover, Sony is reportedly facing some manufacturing issues with its SOC with production yield as low as 50%. In other words, about half of the products were not up to the desired quality standards and were not fit to be shipped. Although the yields have started to improve, they are yet to reach an optimum level, forcing Sony to lower its production estimate by 4 million. At present, Sony carries a Zacks Rank #3 (Hold).
Content Strength to Boost Market Presence
Microsoft has been doubling down on its console, cloud and PC gaming endeavors to seize a larger share of this lucrative market. The latest acquisition will enable Microsoft to gain access to all ZeniMax’s creative studios like Bethesda Softworks, Bethesda Game Studios, ZeniMax Online Studios, and Roundhouse Studios along with all their video game franchises. This brings the number of in-house development studios to 23 from 15 for Microsoft.
Moreover, the company recently launched its cloud gaming service for Xbox users across 22 markets in North America and Europe, simultaneously, bundled with the company’s Xbox Game Pass Ultimate subscription.
Gamers will be able to access more than 100 game titles including the likes of Minecraft Dungeons, Halo, Sea of Thieves, Gears 5, Destiny 2, and Tell Me Why, as part of their Xbox Game Pass Ultimate subscription.
Prior to that, Microsoft introduced its smallest Xbox ever — Xbox Series S, at a price of $299 to lure more customers, especially non-gamers who do not like to splurge on consoles.
Further, Microsoft announced its in-house developed gaming studio, The Initiative, in 2018 with an aim to enhance the exclusive gaming content. In fact, The Initiative, is hiring engineering and design experts from well-known gaming studios, in a bid to develop a “blockbuster-level video game.”
The company has also acquired Playground Games, Compulsion Games, Ninja Theory and Undead Labs, gaming studios in the past.
We believe the acquisitions will significantly expand the gamer base. The company is well poised to benefit from the operational efficiencies and the combined innovative skills. These factors are likely to bolster originality in its gaming content. Furthermore, the expanding game portfolio bodes well.
Market Prospects Aplenty
The growth in the video game market is being driven by COVID-19 induced stay at home trends, rapid uptake of mobile gaming as well as the launch of newer Xbox and PlayStation console devices. Per Fortune Business Insights data, the gaming console market is envisioned to hit $51.51 billion by 2027 from $34.27 billion in 2019, at a CAGR of 5.3%.
Also, rising interest in esports, amid shelter-in-place guidelines, is expected to lead to higher gaming spend. Mordor Intelligence report cites that the worldwide gaming market is expected to hit $256.97 billion by 2025 at a CAGR of 9.17% between 2020 and 2025.
We believe that the latest developments and robust initiatives to boost player engagement and provide immersive experience, amid rapid growth in gaming industry, will help Microsoft to bolster its gaming revenues in the quarters ahead.
Markedly, Gaming revenues increased 66% at cc in fiscal fourth quarter, driven by increased engagement led by stay-at-home wave. Xbox content and services revenue increased 68% at cc year over year, driven by solid growth in Xbox Game Pass subscriber base, third-party transactions and Minecraft. Notably, Minecraft recorded a new high of nearly 132 million monthly active users during the fiscal fourth quarter.
Robust market prospects have allured major players into the gaming arena. It is important to note that Nintendo is reportedly working on an upgraded version of its Switch console and plans to ship it in 2021.
With more computing power and 4K graphics, it has created quite a buzz in the gaming space and aims to derail the hegemony of PS and Xbox models. Nintendo has particularly flourished during the pandemic with its social simulation game titled ‘Animal Crossing: New Horizons’ selling 22.4 million copies since its release in March. Sales of its Switch and Switch Lite consoles have also improved significantly during this period. Currently, Nintendo carries a Zacks Rank #3 (Hold).
These Stocks Are Poised to Soar Past the Pandemic
The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.
Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.
See the 5 high-tech stocks now>>
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