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Kratos Defense, CDW, Alphabet, Apple and Amazon highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – July 26, 2019 – Zacks Equity Research Kratos Defense KTOS as the Bull of the Day, CDW Corp CDW as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Apple AAPL, Alphabet GOOGL and Amazon AMZN.

Here is a synopsis of all five stocks:

Bull of the Day:

Kratos Defenseis a Zacks Rank #1 (Strong Buy) and is the Bull of the Day.  Clearly there are lots of stocks out there with positive earnings estimate revisions, but I chose this one becuase it has a super solid chart. Right now, I want stocks that have strong charts which implies that investors are not willing to sell them even in rough patches.

Description

Kratos Defense & Security Solutions, Inc. is a specialized National Security Technology business providing mission critical products, services and solutions for United States National Security priorities. Kratos' core capabilities are sophisticated engineering, manufacturing and system integration offerings for National Security platforms and programs.

Earnings History

I see a great history of beating the number for KTOS, with each of the last four reports coming in ahead of the Zacks Consensus Estimate. The average positive earnings surprise is 154% -- so they are destroying the number on a regular basis.

Estimates

Estimates are actually a little flat here, with the current quarter holding at 7 cents and next quarter holding at 10 cents. The full year saw an increase of 2 cents, but that is actually beyond the 60 day time frame the rank focuses on, so that move should not count.

A healthy 6 cent increase for 2020 is the move that I see impacting the rank the most… and it comes with 4 revisions all in agreement, so that really helps the cause.

Valuation

So the valuation is stiff here, with a 66x forward PE and a 4.6x book multiple. I see 12% topline growth and I was really expecting more. Operating margins are moving higher, but at only 3.5% we would need to see big revenue growth to make a meaningful impact on EPS.

Bear of the Day:

CDW Corpis a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day, but there is still a lot to like here.  Let's take a deeper look how this stock became the Bear of the Day and if you should gamble on this play with earnings coming in just a few days.

Description

CDW Corporation offers information technology products and services to business, government, education and healthcare customers primarily in the United States and Canada. Its hardware products comprise network communications, notebooks/mobile devices, data storage, video monitors, printers, desktops and servers as well as NetComm products. The company's software services include licensing, licensing management, software solutions and services. In addition, it offers configuration services which include virtualization, collaboration, security, mobility, data centre optimization and cloud computing. CDW Corporation is headquartered in Vernon Hills, Illinois.

Earnings History

This stock has a great earnings history.  The company has topped the Zacks Consensus Estimate in each of the last four quarters.  The average postiive earnings surprise is 8.9%.

This is clearly not the reason the stock is a Zacks Rank #5 (Strong Sell).

Estimate Revisions

The estimate picture is actually a very good one.  There are a few negative revisions, but on the whole, I like what I see.

The 2019 full year number slipped to $5.74 from $5.77 -- but then jumped right back to the prior level.  This negative revision, along with two negative revisions for the 2020 number are the only negatives that I see.

Valuation

I really like what I see here, with a 19x forward earnings multiple and solid top line growth of around 10%.  THe 17x price to book is rather high, but the 1x price sales tells me that the market values the sales of its services and products.

In summary, the slight negatives on the estimate revisions are things that investors need to be ok with if they want to be in this stock ahead of earnings.  The company is slated to report before the open on July 31.

What to Expect from Apple’s (AAPL) Earnings Next Week

Apple is set to report its third quarter earnings on July 30th after the closing bell. The company has been facing uncertainties from the trade war that escalated in early May, and this has investors wondering how drastic the repercussions would be on AAPL. Additionally, Apple is also under federal investigation for possible antitrust violations, which has warranted further questions about what could be in store for the tech giant. Not only is the company facing litigation on the home front but it is also under investigation by the European Union as well. While AAPL is in the midst of surrounding uncertainties, let’s take a further look into the company and how they might report their Q3 performance.

Recent News and Company Overview

Federal regulators have been putting the heat on Big Tech as the U.S. Department of Justice is running the investigation of Apple and Alphabet while the Federal Trade Commission will have lead oversight of Amazon and others.

Last Tuesday, the U.S. Department of Justice announced an investigation into the practices of market-leading online platforms. The DOJ is reviewing whether these companies are engaging in practices that reduced competition, stifled innovation, or otherwise harmed consumers. Wedbush Securities analyst Daniel Ives commented that the objective standard for the investigation is whether a company engages in anticompetitive behavior, thereby driving up prices for consumers. The objective standard differs in Europe as it is more focused on the impact of monopolies on smaller competitors with dominant market positions being frowned upon as a result.

In the second quarter of fiscal 2019, Apple released an iPad air and an updated iPad mini with Apple Pencil capabilities. The company also updated the iMac and the Air Pods with the option of a wireless charging case.

The company also announced its emergence in the subscription service realm. Apple announced that they would be releasing the subscription-based Apple News+, Apple Arcade, and Apple TV+, amongst other services and products. This attempt to enter the subscription-based services market could bode well for the company in the long run if they can learn to compete with the industry’s top players. Apple has been able to put together a solid year thus far; the tech giant is currently up 31.5% and has significantly outpaced the S&P 500. The company’s continued focus on boosting its services business has been a key catalyst in driving the company’s growth.

Q2 Performance and Q3 Outlook

Apple was able to bring in a quarterly revenue of $58 billion and reported earnings of $2.46, which were down 5% and 10% respectively from Q2 2018. Despite the year over year falloff, the company was able to beat our Consensus Earnings Estimate by 3.8% and revenue estimate by 0.8%. The tech giant’s profits also took a year over year hit, generating $11.6 billion and dropping 16.3%. iPhone sales were down 17.3% to $31 billion while Mac and iPad products brought in $5.51 billion and $4.87 billion, respectively. Apple’s services sector jumped 16.2% by bringing in $11.45 billion in Q2 2019. Furthermore, the wearables, home, and accessories segment increased 30% with revenue of $5.13 billion. Weak iPhone demand in China continued to plague the company in Q2, as net sales in Greater China fell 21.5% with $10.2 billion. 

For Q3, our Consensus Estimates are currently calling for earnings to drop 10.26% to $2.10 per share and revenue to be $53.3 billion for a slight increase from the year ago quarter. Our Key Company Metric Estimates are projecting for the company’s iPhone demand struggle to continue in Q3 with $26.1 billion, which would be a 12.8% drop. iPad revenue is expected to continue its growth in Q3 with $5.14 billion in revenue, growing 8.32% year over year. The company’s services revenue is forecasted to increase 22.6% with $11.7 billion. Wearables, Home, and Accessories Estimates are calling for a 33.3% jump from Q3 2018 with a revenue of $4.99 billion. Key Company Metric Estimates are also calling for the company’s China revenue to increase to $9.71 billion, which is a slight recovery from the struggles the company has faced. 

Bottom Line

Apple’s non-iPhone businesses, in particular the Services and Wearables sectors, are expected to drive top-line growth in fiscal 2019. AAPL currently has more than 390 million paid subscribers across its services portfolio. The company’s development into a variety of services and products lessen the dependence the company has on iPhone sales which in turn can supplement the company’s growth in the long run. Apple Music currently has more than 50 million paid subscribers and its availability on Amazon Echo devices can expand the streaming platform’s market share. Uncertainties over the trade war between Washington and Beijing will continue to plague the company as long as there is no trade deal. Furthermore, the litigation the company is facing from the U.S. and the European Union are significant headwinds for shareholders in the near term.

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