Alaska Air Releases Price Talk

No matter whether the source is fossil fuels or alternative energy, analysts agree that energy demand is set to rise through the end of this decade. Artificial intelligence (AI), machine learning, and cloud computing are all expected to be key drivers of higher energy demand and consumption, as highlighted by Friday's news that Constellation Energy is set to bring Three Mile Island back online under a new mantle to power data centers for Microsoft .

Against this backdrop, here's one undervalued industrial dividend stock that could benefit from this megatrend.

About Johnson Controls Stock

Valued at $50 billion, Johnson Controls International is a diversified industrial tech company involved in the engineering, development, manufacturing, and installation of HVAC, security, automation, and safety systems. They design, sell, install, and service heating devices, ventilators, air conditioners, automation devices, chillers and refrigerators, security and fire protection systems, and more. JCI operates in 4 main segments: Building Solutions North America; Building Solutions Asia Pacific; Building Solutions EMEA/LA; and Global Products.

A member of the S&P 500 Index , JCI has outperformed the benchmark with its performance in 2024. JCI is up 28.6% on a YTD basis, compared to the SPX's 19.6% return. Over the past 52 weeks, JCI has gained 31.1%.

Fifth Third Bancorp FITB shares touched a 52-week high of $43.85 on Thursday following the Federal Reserve's announcement of a 50-basis points interest rate cut.

The FITB stock closed slightly lower at $43.64, gaining nearly 18% over the past six months. It has outperformed its industry, the S&P 500 Index and its close peers like Comerica Incorporated CMA and Bank of America Corporation BAC in the same time frame.

Six-Month Price Performance

Key Drivers Behind FITB Stock's New 52-Week High

A major factor for this upward movement of FITB stock can be attributed to the Federal Reserve’s aggressive start to monetary policy easing.

On Wednesday, the central bank signaled two additional rate cuts this year to support the economy. Fed officials further indicated plans for four more cuts in 2025 and two in 2026.

The interest rate cut is a positive development for banks, including Fifth Third, CMA and BAC, which have been struggling with rising funding cost pressures. While higher rates have led to a significant jump in banks’ net interest income (NII) the same led to increased funding costs, which squeezed margins.

FITB’s NII has witnessed a three-year (2020-2023) compound annual growth rate of 6.8%. However, the company’s NII declined in the first half of 2024 due to higher funding costs.

So now that the Fed has cut the rates, funding costs will gradually stabilize and eventually start declining, thus supporting FITB’s NII.

Other Factors Supporting FITB’s Performance

Raised Guidance: At the Barclays Global Financial Services Conference, FITB raised its third-quarter 2024 outlook. The bank stated that total revenues are now expected to rise 2-3% sequentially in the third quarter from its baseline of $2.2 billion compared with the previous guidance of a 1-2% increase. Also, management updated its non-interest income, now expecting a 3-4% increase from its baseline of $717 million, up from the earlier projection of a 1-2% rise.

Strategic Collaborations: The company has been expanding its embedded payments platform on the back of strategic partnerships, positioning itself for substantial growth in the commercial payments space. Fifth Third's embedded payments platform, Newline, entered into a collaborative agreement with Trustly in September. This collaboration aims to develop its pay-by-bank arrangements and payments made through the Automated Clearing House (ACH) and Real Time Payments networks.

In July, the bank announced a collaborative agreement between its embedded payments arm, Newline, and Stripe, a financial infrastructure platform, to expand embedded financial services offerings.

In May 2024, in collaboration with Bottomline, Fifth Third launched Enhanced Payables — a new payment platform powered by the latter’s business payments network, Paymode-X. This partnership offers customers access to a wide range of payment options, including invoice automation, virtual card payments, premium ACH payments, standard ACH payments, check payments and business-to-consumer payments.

Through such strategic collaborations, the bank anticipates commercial payments to be a $1 billion business in the next five years. This will eventually boost the company’s non-interest income growth over time.

Balance Sheet: The bank has a strong liquidity position. As of June 30, 2024, the company had a total debt (long-term debt and other short-term borrowings) of $19.7 billion and total liquidity (cash and due from banks and other short-term investments) of $23.9 billion. The company’s senior debt enjoyed investment-grade credit ratings of BBB+, A- and Baa1 from Standard & Poor’s, Fitch and Moody’s, respectively. This will likely enable the company to access the debt market at favorable rates.

Impressive Capital Distribution: The company is expected to keep enhancing shareholder value through efficient capital distribution. This month, the company announced a 5.7% rise in quarterly dividend to 37 cents per share. It has increased its dividend five times in the last five years. At present, the company has a dividend payout ratio of 40% with an annualized dividend growth rate of 8.55%.

Similarly, BAC hiked quarterly dividends by 8.3% in July to 26 cents, while CMA has kept its dividend payouts steady at 71 cents per share since February 2023.

In addition to dividends, the company has an impressive share repurchase plan. FITB repurchased 3.5 million of its outstanding common shares in the first half of 2024 as part of the 100-million-share repurchase plan announced on June 18, 2019. As of June 30, 2024, 28.6 million shares remain available under the authorization. Going forward, the company expects to repurchase $200 million worth of shares for each remaining quarter of 2024. Such efforts will enhance shareholder value in the long term.

Few Concerns Prevail for FITB

Mounting Expenses: Fifth Third’s non-interest expense saw a five-year CAGR of 2.8%, ending 2023. In the first half of 2024, the non-interest expenses remained flat compared with the same period of last year. Higher compensation and benefits expenses, as well as initiatives, such as branch expansion and digitization, will keep the company’s expense base under pressure in the short term.

Limited Loan Portfolio Diversification: The company’s loan portfolio comprises majorly of commercial loans (61.6% of total portfolio loans and leases as of June 30, 2024). The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Moreover, in case of any economic downturn, the asset quality of these credit categories might deteriorate. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.

Final Words on FITB

FITB’s inorganic expansion efforts and a robust balance sheet position, along with the Fed’s recent rate cut, are set to support FITB’s financials in the upcoming period.

Sales Estimate

EPS Estimate

Unlocking Valuation

FITB stock appears expensive relative to the industry. The company is currently trading at the 12-month trailing price-to-earnings (P/E) F12M ratio of 12.49%, above the industry’s 11.59%.

P/E F12M

Though the rising expense and lack of diversification in its loan portfolio remain near-term concerns, FITB’s long-term prospects remain bright.

Considering its expensive valuation, prospective investors can keep this Zacks Rank #3 (Hold) stock on their radar and can wait for a better entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Investment Research

On Sept. 18, 2024, the Federal Reserve cut interest rates by 50 basis points in response to the cooling inflation scenario. This was the first time that interest rates were slashed since March 2020. While a 25-basis-point rate cut was more or less assured, the 50-basis-point rate cut highlights the Fed’s increasing focus on bolstering the job market. The Fed signaled that it will cut the rate by another half a percentage point in the current year.

The economy is likely to benefit from this considerable rate cut. Given this brightening scenario, investors should design a winning portfolio of broker-friendly stocks for impressive returns. Brokers are deemed to be experts in the field of investing. Stocks such as American Airlines AAL, Alaska Air Group ALK, Warner Bros. Discovery WBD, Dana DAN and Best Buy Company BBY should grace their portfolios.

We have designed a screening process to shortlist stocks based on improving broker recommendations and upward revisions in earnings estimates over the past four weeks. Also, since the price/sales ratio is a strong complementary valuation metric in the presence of broker information, it has been included. The price/sales ratio takes care of the company’s top line, making the strategy a well-rounded one.

Screening Criteria

# (Up or Down Rating)/Total (four weeks) = Top #75 (This gives the list of the top 75 companies that witnessed net upgrades over the last 4 weeks.)

% change in Q(1) est. (four weeks) = Top #10 (This gives the top 10 stocks that have witnessed earnings estimate revisions over the past 4 weeks for the upcoming quarter.)

Price-to-Sales = Bot%10 (The lower the ratio, the better. Companies meeting this criterion are in the bottom 10% of our universe of more than 7,700 stocks with respect to this ratio.)

Price greater than 5 (as a stock trading below $5 will not likely create significant interest for most of the investors).

Average Daily Volume greater than 100,000 shares over the last 20 trading days (Volume has to be significant to ensure that these are easily traded.)

Market value ($ million) = Top #3000 (This gives us stocks that are the top 3000 in terms of market capitalization.)

Com/ADR/Canadian = Com (This takes out the ADR and Canadian stocks.)

Here are five of the 10 stocks that made it through the screening:

American Airlines is based in Fort Worth, TX. A gradual increase in air travel demand (particularly for leisure) is aiding AAL. However, high operating costs are hurting its bottom line.

The Zacks Consensus Estimate for third-quarter 2024 earnings has been unchanged at 4 cents per shareover the past 90 days. AAL currently carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Alaska Air is based in Seattle, WA. The uptick in air travel demand is aiding the airline. The carrier’s shareholder-friendly attitude bodes well.

Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 8.8% upward. The Zacks Consensus Estimate for 2025 earnings has been revised 2.9% upward over the past 60 days. ALK currently carries a Zacks Rank #3.

Warner Bros. Discovery benefits from impressive streaming subscriber growth, driven by an expanding content portfolio. The company’s focus on sports streaming, particularly live sports, is another tailwind.

WBD currently carries a Zacks Rank #3. The Zacks Consensus Estimate for WBD’s current-quarter earnings indicates growth in excess of 100% from the year-ago actual.

Dana is a provider of power conveyance and energy-management solutions for vehicles and machinery in North America, Europe, South America and the Asia Pacific. The company is headquartered in Maumee, OH.

DAN currently carries a Zacks Rank #3. The Zacks Consensus Estimate for DAN’s 2024 earnings has been revised 30.7% upward over the past 60 days.

Best Buy retails technology products in the United States and Canada. The companyis benefitting from an uptick in retail sales. Best Buy’s initiatives to invest in systems and boost omni-channel capabilities should certainly lift its profit margins.

Over the past 60 days, the Zacks Consensus Estimate for 2024 earnings has been revised 2.5% upward. The company currently carries a Zacks Rank #3.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance

Zacks Investment Research

Alaska Air Group ALK strengthened its position as the fifth-largest U.S. airline by revenues when it completed the acquisition of Hawaiian Airlines for $1 billion in cash. ALK also assumes about $900 million in Hawaiian debt. The acquisition was completed a day after the last major regulatory obstacle to the deal was overcome when the Department of Transportation or DOT cleared the transaction.

The DOT approval did not come without any strings attached to it. The conditions laid down by the regulatory authority include that ALK and Hawaiian Airlines must protect the value of rewards programs as they combine their loyalty programs and maintain the existing service on key Hawaiian routes to the continental United States and inter-island. The carriers agreed to preserve support for rural service, ensure competitive access at the Honolulu hub airport and offer lower costs for military families. Under the conditions laid down by the DOT for the merger, the carriers have to compensate passengers for cancellations and significant delays arising out of their fault.

Following the closure of the buyout, ALK will take over cargo transportation for e-commerce giant Amazon.com AMZN. The DOT approval followed the nod given by the Department of Justice last month. We remind investors that earlier this year, JetBlue Airways JBLU decided against going forward with its decision to buy Spirit Airlines SAVE for $3.8 billion, citing anti-trust hurdles. JBLU’s decision to walk away from the deal came after a federal judge blocked JetBlue’s acquisition of Spirit Airlines on antitrust grounds. Thankfully, no such obstacle came in the way of ALK’s buyout of Hawaiian.

What’s Next for ALK Stock?

With the deal being closed, Alaska Air will now work to obtain a single operating certificate from the Federal Aviation Administration or FAA. Both carriers will, however, operate as separate brands. Until the single operating certificate is received from the FAA, Alaska Airlines and Hawaiian Airlines will function as one organization with two separate airline operations, under two individual operating certificates.

Peter Ingram steps down as chief executive officer of Hawaiian Airlines with Joe Sprague, who served as ALK’s regional president of Hawai‘i/Pacific prior to the closure, replacing him. Sprague leads all aspects of Hawaiian Airlines’ operations until receipt of the single operating certificate. ALK has formed an interim leadership team in Honolulu to oversee Hawaiian Airlines' operations until the two airlines are fully integrated.

The closure of the deal brings in good news for ALK stock, which has already gained in double-digits in a month’s time, outperforming its industry.

One-Month Price Comparison