For Immediate Release
Chicago, IL – November 30, 2022 – Zacks Equity Research shares Coca-Cola FEMSA KOF as the Bull of the Day and Adidas AG ADDYY as the Bear of the Day. In addition, Zacks Equity Research provides analysis on United Parcel Service's UPS, Covenant Logistics CVLG and Ryder System R.
Here is a synopsis of all five stocks:
Bull of the Day:
Coca-Cola FEMSA, a Zacks Rank #1 (Strong Buy), has bucked the market's downtrend this year, displaying resilience in a difficult environment. Only stocks that are in extremely powerful uptrends are able to weather bear markets so gracefully. KOF continues to benefit from strong demand for its suite of beverage products, with the stock currently trading near 52-week highs.
KOF is part of the Zacks Beverages – Soft Drinks industry group, which ranks in the top 35% out of more than 250 Zacks Ranked Industries. Historical research studies suggest that approximately half of a stock's price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
Because this group is ranked in the top half of all industries, we expect it to outperform the market over the next 3 to 6 months. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Coca-Cola FEMSA is a franchise bottler that produces, markets, and sells Coca-Cola trademark beverages. A subsidiary of Fomento Económico Mexicano and based out of Mexico City, the company offers sparkling beverages, juice drinks, coffee, teas, sports and energy drinks, and plant-based items.
KOF provides its products through supermarkets, discount and convenience stores, restaurants, bars, as well as theaters and stadiums. The company also distributes and sells Heineken beer products in its Brazilian territories.
Earnings Trends and Future Estimates
The beverage company has surpassed earnings estimates in each of the last four quarters, with an average positive surprise of 33.63% over that timeframe. Coca-Cola FEMSA most recently reported Q3 EPS last month of $1.03/share, a +30.38% surprise over the $0.79 consensus estimate. Sales of $2.82 billion also exceeded projections.
Analysts are bullish and have been revising future estimates upward as of late. Looking ahead to next year, EPS estimates have increased 7.4% in the past 60 days. The 2023 Zacks Consensus Estimate now stands at $4.21/share, reflecting potential growth of 7.4% versus the $3.92/share projection for this year. Revenues are anticipated to climb 3.63% to $11.45 billion.
Let's Get Technical
KOF shares have advanced nearly 50% in the past year. The stock has shown immunity to the year's volatility while the market continues to hover in a deep correction. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.
The stock has been consistently making a series of higher highs. With both strong fundamentals and technicals, KOF is poised to continue its outperformance.
Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, KOF has recently witnessed positive revisions. As long as this trend remains intact (and KOF continues to deliver earnings beats), the stock will likely continue its bullish run.
In addition to rising earnings estimates for this top-ranked stock, KOF pays a healthy $2.50 (3.67%) dividend and has a market capitalization of $114.4 billion. Robust fundamentals combined with a strong technical trend certainly justify adding shares to the mix.
Backed by a leading industry group and robust history of earnings beats, it's not difficult to see why this company is a compelling investment. This market winner has broken out to the upside this year and appears primed to continue the bullish run.
Bear of the Day:
Adidas AG is a global designer, developer, and marketer of athletic and sports lifestyle products. The company offers footwear, apparel, and accessories under the Adidas brand. ADDYY sells its products through approximately 2,200 retail stores; mono-branded franchise stores; and wholesale and e-commerce channels. Adidas was founded in 1920 and is based out of Germany.
The sportswear company has recently been in the news after breaking ties with celebrity Kanye West. Adidas has launched an investigation into allegedly inappropriate behavior by Kanye while the company was working with the musician to develop and sell the Yeezy sneaker line. The end of the partnership has left Adidas facing a large revenue shortfall as well as internal complaints about the celebrity's behavior.
The Zacks Rundown
Adidas has been severely underperforming the market over the past year. A Zacks Rank #5 (Strong Sell) stock, ADDYY experienced a climax top in August of last year and has been in a price downtrend ever since. The stock has hit a series of 52-week lows throughout most of this year and represents a compelling short opportunity given a temporary move higher amid general market strength.
ADDYY is a component of the Zacks Shoes and Retail Apparel industry group, which currently ranks in the bottom 8% out of approximately 250 industries. Because this industry is ranked in the bottom half of all Zacks Ranked Industries, we expect it to underperform the market over the next 3 to 6 months.
Candidates in the bottom half of industry groups can often represent solid potential short candidates. While individual stocks have the ability to outperform even when included in poor-performing industries, their industry association serves as a headwind for any potential rallies.
Despite the stock's poor performance this year, ADDYY is still relatively overvalued, irrespective of the valuation metric used.
Recent Earnings Miss and Deteriorating Forecasts
ADDYY fell well short of earnings estimates in the previous quarter. The footwear giant reported Q3 EPS earlier this month of $0.17/share, missing the $0.47 consensus estimate by -63.83%. A wide miss of this nature is troubling and speaks to uncertainty regarding the upcoming quarters. Last year, Adidas reported earnings in the third quarter of $1.38/share on revenues of $6.78 billion. This is the type of alarming, negative trend that the bears like to see.
Analysts have been slashing earnings estimates downward as of late. For the current quarter, estimates have been reduced -785.71% over the past 60 days. The Q4 Zacks Consensus EPS Estimate now stands at a loss of -$1.44/share, translating to a -523.53% earnings regression relative to the same quarter last year. Sales are expected to fall -1.61% to $5.78 billion.
As illustrated below, ADDYY is in a sustained downtrend. While not the most accurate indicator, ADDYY has also experienced what is known as a 'death cross,' wherein the stock's 50-day moving average crosses below its 200-day moving average. ADDYY would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen more than 55% this year alone.
A deteriorating fundamental and technical backdrop show that this stock is not set to print new highs anytime soon. The fact that ADDYY is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. The recent earnings miss along with falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock's downtrend.
Our Zacks Style Scores depict a weakening outlook for this stock, as ADDYY is rated a second-worst 'D' in our Value category and 'C' for our overall VGM score. Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of an overvalued ADDYY until the situation shows major signs of improvement.
UPS Strong on Dividends and Buybacks, Despite Cost Challenges
United Parcel Service's efforts to reward its shareholders through dividends and buybacks vouch for its solid financial footing. However, high operating costs, mainly due to elevated fuel expenses, are restricting bottom-line growth. Currently, UPS carries a Zacks Rank #3 (Hold).
UPS' strong free cash flow generating ability pleases us and supports its shareholder-friendly activities. In the first nine months of 2022, UPS generated a free cash flow of $8,472 million, paid out dividends worth $3.8 billion and repurchased shares of $2.2 billion. UPS aims to reward its shareholders with $8.2 billion in 2022 through dividends ($5.2 billion) and share buybacks ($3 billion).
Even though demand for online shopping slowed down from the pandemic peak with the reopening of the economy, the figures are higher than the pre-pandemic levels. To meet the demand swell in the holiday season, UPS added more than 100,000 seasonal workers throughout the United States. Additional workers are needed to ensure a repeat of UPS' buoyant performance witnessed last year with respect to timeliness. Therefore, the decision to hire extra hands to meet the anticipated surge in package delivery demand seems prudent. A strong performance during the holiday season is likely to boost the UPS stock.
However, higher operating expenses are concerning. For example, operating costs escalated 9.7% in 2021. Due to the 66.4% jump in fuel expenses, operating costs increased 4.6% in the first nine months of 2022. Due to the persistence of high fuel costs, operating expenses are likely to soar in fourth-quarter 2022 as well.
Rising capital expenses further add to its woes. UPS now expects current-year capital expenditures to be $5 billion, well above the 2021 levels. The increased capex guidance, albeit aimed at long-term benefits, may dent the current-year profit margins.
In third-quarter 2022, shipping volumes dipped 2.1% year over year to 22.9 million. The contraction in the volume of packages shipped indicates weakening demand due to the economic slowdown. The metric had declined in the June quarter as well. This downside in shipping volumes due to softening demand is an added concern.
Stocks to Consider
Some better-ranked stocks within the broader Transportation sector are as follows:
Covenant Logistics: CVLG offers a portfolio of transportation and logistics services, including asset-based expedited, dedicated and irregular route truckload capacity, besides asset-light warehousing, transportation management and freight brokerage capability.
The gradually improving freight market scenario is a tailwind to Covenant. CVLG's cost-control efforts are appreciated as well. CVLG currently sports a Zacks Rank #1 (Strong Buy). The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 10.1% upward over the past 60 days.
You can seethe complete list of today's Zacks #1 Rank stocks here.
Ryder System : Based in Miami, FL, Ryder provides integrated logistics and transportation solutions. With improved economic and freight market conditions, R is benefiting from higher rental revenues owing to strong demand and favorable pricing. R's acquisitions of Whiplash and Midwest Warehouse & Distribution System expand its e-commerce fulfillment network and boost multi-client warehousing capabilities. The transactions are expected to drive growth in the supply-chain solutions segment.
Ryder currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for R's 2022 earnings has been revised 7% upward in the past 60 days.
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