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Consumer spending in the US has been a mixed bag based on the types of goods and services, but in general the consumer has proved fairly resilient despite inflationary pressures and the substantial increase in interest rates since the tightening period began.
Zacks recently upgraded 2 small caps, Hamilton Beach Brands Holding Company and Armanino Foods of Distinction , Inc.), from Neutral to Outperform. Both companies reported marked operating improvements in Q2 but also rely on discretionary consumer spending.
Hamilton Beach makes branded electric appliances for household and commercial use, with 2023 sales of $626 million and a market capitalization of about $380 million. The stock has had an impressive run lately, up +57% over the past year, handily outperforming the Zacks Consumer Discretionary sector’s roughly flat returns over the period.
Hamilton Beach’s sales grew 14% year-over-year (YOY) in Q2 as the designer of small kitchen appliances continues to execute on its sales strategy which includes successful penetration into the higher margin premium products category. Products include air fryers, blenders, coffee makers, juicers, mixers, etc.
While the company expects a more subdued YOY performance in the second half of 2024 due to tough comps, we believe the forward valuation, strong free cash flow generation , lower interest expense from material debt reduction, and proven market penetration outweigh topline softening risks.
Hamilton Beach shares are currently trading at 10.9X trailing 12-month earnings. This compares to a high of 22.1X, low of 4.9X and median of 9.9X over the preceding 5-year period, as the chart below shows.
Armanino Foods of Distinction, Inc. produces frozen and refrigerated food products including pesto flavors, specialty sauces, frozen pasta, meatballs, and prepared meals. Sales grew 16% YOY in Q2 while operating income improved 90% YOY due to reduced commodity prices and improved manufacturing process efficiencies.
We expect the company to continue to benefit in the near term from these conditions. Additionally, the company has recently expanded into the Texas market with hopes of duplicating their leading brand success experienced in certain California markets.
With a market cap of $180 m, the company has generated $63 m of sales over the past 12 months. The stock is up 16.7% YTD vs. 1.1% for the Zacks food industry.
Armanino Foods of Distinction shares are currently trading at 16.5X trailing 12-month earnings as the chart below displays. Over the last 5 years the stock has traded as high as 58.83X and as low as 10.3X. The median over this time-frame is 18.5X.
While both companies have expressed a degree of caution about the state of the consumer, we don’t foresee topline imploding. Thus far their respective product categories have demonstrated consumer spending resiliency while also successfully executing on new strategies i.e. new market penetration with improved balance sheets.
Forward looking valuations appear reasonable, in our opinion. Please note that both companies also offer dividend yields of 2.6% and 1.7% respectively for Armanino Foods and Hamilton Beach. Lastly, both companies may benefit from a lower interest rate environment down the road.
Zacks Investment Research
First Commonwealth Financial appears an attractive pick, as it has been recently upgraded to a Zacks Rank #1 (Strong Buy). This upgrade is essentially a reflection of an upward trend in earnings estimates -- one of the most powerful forces impacting stock prices.
The sole determinant of the Zacks rating is a company's changing earnings picture. The Zacks Consensus Estimate -- the consensus of EPS estimates from the sell-side analysts covering the stock -- for the current and following years is tracked by the system.
Since a changing earnings picture is a powerful factor influencing near-term stock price movements, the Zacks rating system is very useful for individual investors. They may find it difficult to make decisions based on rating upgrades by Wall Street analysts, as these are mostly driven by subjective factors that are hard to see and measure in real time.
Therefore, the Zacks rating upgrade for First Commonwealth Financial basically reflects positivity about its earnings outlook that could translate into buying pressure and an increase in its stock price.
Most Powerful Force Impacting Stock Prices
The change in a company's future earnings potential, as reflected in earnings estimate revisions, and the near-term price movement of its stock are proven to be strongly correlated. The influence of institutional investors has a partial contribution to this relationship, as these big professionals use earnings and earnings estimates to calculate the fair value of a company's shares. An increase or decrease in earnings estimates in their valuation models simply results in higher or lower fair value for a stock, and institutional investors typically buy or sell it. Their transaction of large amounts of shares then leads to price movement for the stock.
For First Commonwealth Financial, rising earnings estimates and the consequent rating upgrade fundamentally mean an improvement in the company's underlying business. And investors' appreciation of this improving business trend should push the stock higher.
Harnessing the Power of Earnings Estimate Revisions
As empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock movements, tracking such revisions for making an investment decision could be truly rewarding. Here is where the tried-and-tested Zacks Rank stock-rating system plays an important role, as it effectively harnesses the power of earnings estimate revisions.
The Zacks Rank stock-rating system, which uses four factors related to earnings estimates to classify stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Earnings Estimate Revisions for First Commonwealth Financial
This financial holding company is expected to earn $1.44 per share for the fiscal year ending December 2024, which represents a year-over-year change of -15.3%.
Analysts have been steadily raising their estimates for First Commonwealth Financial. Over the past three months, the Zacks Consensus Estimate for the company has increased 4.1%.
Bottom Line
Unlike the overly optimistic Wall Street analysts whose rating systems tend to be weighted toward favorable recommendations, the Zacks rating system maintains an equal proportion of 'buy' and 'sell' ratings for its entire universe of more than 4000 stocks at any point in time. Irrespective of market conditions, only the top 5% of the Zacks-covered stocks get a 'Strong Buy' rating and the next 15% get a 'Buy' rating. So, the placement of a stock in the top 20% of the Zacks-covered stocks indicates its superior earnings estimate revision feature, making it a solid candidate for producing market-beating returns in the near term.
The upgrade of First Commonwealth Financial to a Zacks Rank #1 positions it in the top 5% of the Zacks-covered stocks in terms of estimate revisions, implying that the stock might move higher in the near term.
Zacks Investment Research
Shares of the U.S. legacy automaker Ford F have tumbled nearly 23% in the past month, primarily due to dismal second-quarter results. Since its latest earnings report on Jul 24, Ford has seen its stock plummet 24.7% as earnings per share missed expectations, and net income contracted more than 5% year over year to $1.8 billion.
A rise in warranty and vehicle recall expenses hit the automaker’s profits hard. These costs reached a staggering $2.3 billion in the second quarter alone, up $800 million and $700 million on a sequential and yearly basis, respectively. Ongoing quality issues have been increasing Ford's warranty costs for years, but the massive surge in the second quarter seems to have really spooked investors.
In contrast, General Motors GM, Ford’s closest competitor, reported better-than-expected second-quarter earnings and sales and even raised its full-year guidance for EPS and free cash flow . While Ford did boost its adjusted FCF guidance for 2024, it maintained its profit outlook, which left some investors disappointed, hoping for a more optimistic forecast.
As investors weigh Ford's historical resilience against its current setbacks, the question arises whether now is the opportune time to invest in Ford, taking advantage of the recent share price dip. To answer that, let’s delve deeper into the potential drivers and headwinds that could shape the company’s future.
Price Performance Over a Month
Ford Pro: A Beacon of Strength
One of Ford's brightest spots in the second quarter was its commercial vehicle division, Ford Pro. This segment delivered an impressive operating margin of 15.1%, the highest among all Ford’s divisions. The robust demand for Super Duty trucks and Transit commercial vans, supported by a healthy order book, drove the segment’s performance.
The successful launch of the all-new Super Duty has set a strong foundation for future growth. To capitalize on the rising popularity of Super Duty trucks, Ford recently announced plans to add a third assembly plant in North America, increasing production capacity by 100,000 units starting in 2026.
The company has raised the EBIT forecast of Ford-Pro unit from $8-$9 billion to $9-$10 billion amid continued strength across all three domains: vehicles, software and physical services.
Ford’s increasing focus on software technology and services business will be a major driver. CEO Jim Farley highlighted on the latest earnings call that Rivian RIVN, Tesla TSLA, and Ford are the only OEMs outside of China with control over software across all vehicle domains.
Ford's paid software subscriptions grew 40% in the quarter, reaching more than 765,000, with integrated service revenues set for double-digit growth this year. The company is targeting $1 billion in software revenues next year, with 50%+ gross margins, largely driven by Ford Pro. By 2026, Ford Pro is expected to contribute 20% of the company’s overall EBIT.
Ford Model e: A Drag on F’s Overall Profits
While Ford Pro has been a strong performer, the company’s electric vehicle division, Ford Model e, has been a significant drag on overall profits. In the second quarter, the Ford Model e business incurred a loss of $1.1 billion due to lower sales volumes, pricing pressure and high manufacturing costs. Ford anticipates the full-year loss from the Model e unit to range between $5 billion and $5.5 billion amid continued pricing pressure and increased investments in next-generation EVs.
This underperformance in the EV segment is a critical concern for Ford’s overall profitability. The Zacks Consensus Estimate for Ford’s EPS in 2024 is pegged at $1.90, implying a 5.5% year-over-year decline. Additionally, earnings estimates for 2024 and 2025 have been revised downward over the past 30 and seven days, indicating a lack of confidence in the company’s near-term prospects.
Assessing Ford’s Path Forward
Despite the challenges in the EV segment, Ford Pro’s strong performance is expected to offset some of these losses. However, the company has also reduced its operating profit forecast for the Ford Blue segment, which includes traditional internal combustion engine models, due to ongoing quality issues. Ford’s overall EBIT guidance for 2024 remains within the range of $10-$12 billion.
Financially, Ford ended the second quarter with approximately $27 billion in cash and $45 billion in liquidity, an increase from $25 billion in cash and $43 billion in liquidity at the end of the first quarter. The company also remains on track to deliver $2 billion in material, manufacturing, and freight efficiencies over the full year. Additionally, Ford has raised its adjusted FCF projection for the year by $1 billion to a range of $7.5-$8.5 billion.
However, the road ahead for Ford is far from smooth. Ford needs to improve vehicle quality, reduce complexities, cut warranty and recall costs, and turn around its EV business. The company has indicated that most warranty issues stem from older models and that it is actively improving the quality of its newer models. However, it may take 12 to 18 months before these efforts begin to reduce warranty costs. Unfortunately, this means that Ford could continue to face elevated warranty expenses for some time.
What Does Ford’s Valuation Suggest?
Ford’s valuation remains attractive. The company trades at a forward sales multiple of 0.24, lower than the industry average and its own five-year average, earning it a Value Score of A.
Last Word
While Ford’s valuation is appealing and its Ford Pro division is performing well, the company faces substantial internal challenges. High warranty and recall costs and lower-than-expected EV demand present significant hurdles for the company. Farley and his team face an uphill battle in steering Ford through these challenges, especially as the company works to turn around its struggling Model e division.
For new investors, it may be prudent to adopt a wait-and-see approach, while existing shareholders might consider holding onto their shares as the company navigates these headwinds.
Ford currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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