For Immediate Release
Chicago, IL – September 4, 2020 – Zacks Equity Research Shares of Toll Brothers, Inc. TOL as the Bull of the Day, Kirby Corporation KEX as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Tesla, Inc. TSLA and Apple Inc. AAPL.
Here is a synopsis of all four stocks:
Bull of the Day:
Toll Brothers is riding the wave of the Millennial buyers, record low mortgage rates and migration due to the pandemic. This Zacks Rank #1 (Strong Buy) just reported its highest third quarter net contracts ever.
Toll Brothers is a luxury home builder. It started business in 1967 and now builds for first-time, move-up, empty-nester, active-adult, affordable luxury and second home buyers. It also serves urban and suburban renters.
It operates in 24 states.
Big Beat in the Fiscal Third Quarter
On Aug 25, Toll Brothers reported its 2020 fiscal third quarter and blew by the Zacks Consensus Estimate by $0.21. Earnings were $0.90 versus the consensus of $0.69.
Revenue fell 7% to $1.63 billion as deliveries rose 1% to 2,022.
Net signed contract homes were up 26% to a record 2,833 homes. Contract value was up 18% to a record third quarter of $2.21 billion.
Adjusted gross margin, which excludes interest and inventory writedowns, jumped to 21.9%.
This strength has continued into August.
“We attribute the surge in demand to a number of factors, including historically low interest rates, a continued undersupply of homes, and consumers focused more than ever on the importance of home,” said CEO Douglas C. Yearley, Jr.
Strong Guidance for Q4
Toll Brothers did give a fourth quarter outlook.
It expects Q4 deliveries between 2,400 and 2,550 homes with an average price between $815,000 and $835,000.
Gross margins are expected to be elevated at 21.5%.
The analysts are bullish too.
2 estimates have been raised since the report, pushing the Zacks Consensus Estimate up to $3.03 from $2.72 in the last month.
2 estimates have also been raised for Fiscal 2021. That pushed the Zacks Consensus up to $4.22 from $4.00 in the last 7 days. That’s a gain of 39.3% over 2020.
Shares Rally Off Coronavirus Sell-Off
Shares took a dive during the March coronavirus sell-off but have rallied 27.5% over the last 3 months.
Shares are still attractively priced, however, with a forward P/E of 14.4.
It’s still paying a dividend, currently yielding 1%.
The home builders are in the Top 1% of all Zacks ranked industries.
Millennials are reaching peak first-time home buying years now. Combined with record low mortgage rates, that has lit a fire under the housing market.
For those looking to play this trend, Toll Brothers is one to keep on your short list.
Bear of the Day:
Kirby Corporation is trying to get through this coronavirus year. This Zacks Rank #5 (Strong Sell) is expected to see sales decline 17% in 2020.
Kirby Corporation operates tank barges which transport bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, along all three U.S. coasts and in Alaska and Hawaii.
They transport petrochemicals, black oil, refined petroleum products and agricultural products.
It also has a distribution and services segment with after-market service and parts for engines, transmissions, reduction gears and related equipment used in oilfield services, marine, power generation and other industrial applications.
Kirby Meets Estimates in the Second Quarter
On July 30, Kirby reported its second quarter results and met the Zacks Consensus of $0.42.
Revenue fell to $541.2 million from $771 million in the second quarter of 2019.
In marine transportation, its largest segment, the economic slowdown really hit their business.
Revenue was $381 million down from $404.3 million a year ago.
Demand for barge transportation fell as demand for liquid products and chemical plant utilization dropped to near 70%. Demand weakened as the quarter progressed and barge utilization fell into the mid-70% range in inland and the low 70% range in coastal by the end of the quarter.
Kirby cut costs to offset the weakness.
Distribution and services also got hit in the quarter as the oil industry shut rigs and reduced business.
Sales came in at $160.2 million versus $366.8 million a year ago.
As a result, Kirby’s oil and gas business experienced minimal manufacturing orders, parts sales or service throughout the quarter. Additionally, one of its large oilfield clients went bankrupt and Kirby incurred a bad debt expense of $0.04 per share.
With oil and gas remaining weak heading into the third quarter, Kirby did furloughs and aggressive reductions in general and administrative expenses.
Earnings Estimates for 2020 and 2021 Cut
While Kirby didn’t give guidance, it did say there has been a “slight increase in demand” across the company which it believed represented the initial recovery.
But since the future of the virus remains unclear, Kirby said it would aggressively manage costs.
It has ample liquidity with $537 million in cash and liquidity available as of June 30, 2020.
Kirby expects free cash flow in 2020 between $250 million and $350 million.
But the analysts are bearish.
4 estimates have been cut for 2020 in the last 2 months. That has pushed the Zacks Consensus down to $1.97 from $2.18 during that time.
That’s a decline of 32% compared to $2.90 it made a year ago.
4 estimates were also cut for 2021 which has pushed the Zacks Consensus down to $2.42 from $2.79 in the last 60 days. But that would be a rebound of 23.1% in earnings.
Shares Still Down Big in 2020
Given its ties to the oil and gas industry, it’s not surprising that investors are treating Kirby similar to those companies.
Shares are down 54.6% year-to-date.
Given the cuts in earnings, they’re not super cheap with a forward P/E of 21.
But Kirby does believe the bottom in demand has been hit.
Is the worst behind them?
Additional content:
Markets Sell Off Ahead of Labor Day Weekend
Apparently, investors were looking to free up some cash for boat fuel at their lake houses this weekend (seriously: have you ever seen what it costs to fill a boat?). This would explain the sudden turn-around in market sentiment, from “bullish at all costs” to “it costs to be bullish.” The Nasdaq tripped on regular trading today, down 4.96% on further pullbacks for companies like Tesla (-9%) and Apple (-8%). The S&P 500 and Dow followed suit, selling off -3.52% and -2.78%, respectively.
Ultimately, this is just a small dent in the months-long rally the indexes have enjoyed. Still, they do come as somewhat of a surprise, with the Dow and S&P hitting their biggest skids since June 11 and the Nasdaq down furthest since March 16. Further, it’s the Nasdaq’s first down day in the last 5; the index has set 43 record closes so far in 2020, the most recent being yesterday. All sectors fell on the day, with Tech faring worst. This is more evidence it’s a profit-taking ploy: Tech had been the catalyst for the rebound bull market from March 23 lows in the first place.
This also may be the first slap of reality felt by hundreds, if not thousands, of new “Robinhood traders” — those newbies to the market who played with Tesla shares like a new toy and saw almost nothing but future upswings across all major indexes for, literally, months. Now that it’s been proven that markets don’t always go up, how many new players are going to stay in the game? Is it possible many will take their app and go home? If so, does that portend further down-legs in the market going forward?
Actually, it might, even though it may not have anything to do with new stock traders. The fact of the matter is the run-up was very high very fast; most analysts were expecting some sort of a pull-back on the indexes, though no one could say for sure when it would be. Tomorrow’s job numbers will be something to reckon with. So will the lack of a relief package for Americans affected in their household economies from Congress, now more than a month after the CARES Act expired. House Speaker Nancy Pelosi was quoted as saying there were still “serious differences” on an agreement.
In any case, now is not the time to panic. Might we see an extended downturn tomorrow? Perhaps. But after the long weekend, there will have been ample time for smoke to clear and valuations to recalibrate toward more acceptable levels, and virtually everyone expects the reopening of the economy to continue to strengthen over time, helping justify future market gains.
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