For Immediate Release
Chicago, IL – March 26, 2020 – Zacks Equity Research Shares of Clorox CLX as the Bull of the Day, Darden Restaurants DRI asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Intel INTC, The Boeing Company BA and JPMorgan Chase JPM.
Here is a synopsis of all five stocks:
Bull of the Day:
The novel coronavirus is forcing people to clean up their act, and Clorox is leading the charge. The panic buying of Clorox’s cleaning supplies and consumer staples led to the stock’s initial pandemic driven rally, but I think this uptick in sales is going to be more long-term than the market is pricing in. Analysts are pushing their EPS estimates up for the next three years propelling CLX into a Zacks Rank #1 (Strong Buy).
This pandemic is changing society and the way we operate. The world is going to become much more germ sensitive. Being a “germ freak” is going to be the new norm, and Clorox stands to gain. The panic buying that Clorox has seen this quarter is just the beginning of the topline growth to come.
Clorox is a global brand with a diverse portfolio of products that goes far beyond its disinfectant wipes. This enterprise is a category leader in charcoal, bleach, water filtration, premium trash, wipes, and even salad dressing. One of Clorox’s family of products can be found in 9 out of 10 US homes and a growing international presence (roughly 15% of sales and growing).
The firm’s portfolio is separated into 4 segments: cleaning (34% of sales), household (30%), lifestyle (20%), and international (16%). Cleaning makes up the majority of Clorox’s bottom line, and I suspect that this segment will be the company’s biggest growth driver in our novel “germ freak” society.
The company is dedicated to driving shareholder returns with consistent share price appreciation, stock buyback programs, and a cushy 2.5% dividend yield that has grown annually for the past 2 decades. According to the firm’s most recent investor presentation, over the past 5 years, CLX has driven shareholder returns of 91%, far outpacing the S&P 500’s 66% and its lagging cohort’s 50%.
Despite Clorox’s category leadership in most of its segments, it is competing with private-label products, that are typically less expensive. Some bargain shoppers may choose the private label products in these uncertain times, but Clorox still has the brand advantage.
The stock's low beta suggests that even in times of economic uncertainty, people will still choose Clorox products over competitors because they know it’s a brand they can trusted. During the pandemic panic, I suspect that Clorox’s brand trust & loyalty will continue to drive its growth.
CLX is trading at its highest forward P/E multiple in over two decades, which gives this stock some added risk. I think that this rich multiple is mostly justified for this high-yielding safe-haven stock.
CLX has traded all over the board since the pandemic panic began, falling down below $160, then surging up over $210. The stock has since settled down to the mid $160s.
CLX is a safety play for your portfolio and provides long-term potential. I am not banging on the table screaming buy at this price, but I think that this high yielding equity could help curb some of your portfolio’s market risk in these uncertain times.
The world is going to be much more germ sensitive in the years to come, and Clorox is well-positioned for this consumer transition.
Bear of the Day:
Darden Restaurants, best known for Olive Garden and Longhorn Steakhouse, has been taken to the cleaners by the novel coronavirus. The government-mandated dine-in shutdowns around the US have effectively halted sales for this restaurant giant. Analysts have been substantially reducing their EPS estimates for DRI over the next couple of years, and I expect this to continue the longer this virus stays active. DRI sits at a Zacks Rank #5 (Strong Sell).
Darden is in the direct line of fire from this pandemic, and its shares have taken a beating. The stock was down almost 70% year-to-date last week but has recovered marginally on the fiscal stimulus rally this week. I see these shares as exceptionally risky due to their direct exposure to this virus, and I would stay away.
Demographics Are Important
When looking at the long-term impacts of the novel coronavirus on Darden Restaurants, you need to look at the demographics that their restaurants attract. The majority of the people that are eating at Olive Garden and Longhorn Steakhouse (combined making up over 70% of revenue) are on the backend of the age curve. This age group is most at risk of having complications with the pandemic.
The novel coronavirus is going to change consumer patterns even after the state-wide quarantines are lifted. The age group that is most prevalent at Darden’s restaurants is going to be extra cautious and may decide to stop their weekly trip to the Olive Garden. Baby Boomers don’t want to risk their lives for unlimited salad and breadsticks.
Darden’s aging demographic is also not a good sign for its long-term business outlook, even if the pandemic never occurred.
Overall Bearish Story
The fact of the matter is that we have no idea how long we will need to practice social distancing and how many weeks or even months the “self-quarantine” may last. The number of new cases is still growing exponentially, and Darden’s dine-in restaurants may be shut down for multiple quarters.
Despite its currently healthy balance sheet, no company can afford to operate with a severely depleted topline for an extended period of time. The longer this virus sticks around, the more Darden’s balance sheet will deteriorate.
I am not saying I would short this stock, but I would keep my distance from these infected shares.
Intel (INTC) Halts Share Buybacks Amid Coronavirus Concerns
Intelbecomes the latest S&P 500 company to bear the brunt of ongoing coronavirus pandemic. Per the 8K filed with the SEC, the chipmaker revealed that it is suspending stock repurchases temporarily on account of the COVID-19 crisis. However, the company will continue its dividend payment plans.
Notably, in October 2019, Intel had announced plans to repurchase shares worth $20 billion over the next 15-18 months. The company noted that prior to the stock buyback suspension announcement; it has repurchased shares worth $7.6 billion in fourth-quarter 2019 and first-quarter 2020.
The semiconductor giant also amended its “Risk Factors” section, adding that the uncertainty around COVID-19 pandemic could hurt its financial position. The company also anticipates that the crisis “will cause an economic slowdown”, and “a global recession.”
Given the rising possibility of recession in 2020, cash is the king for businesses and investors. Further, lower buybacks imply stronger liquidity position allowing room for investment into product development & business, which is the need of the hour. We believe that the decision will aid Intel, currently carrying a Zacks Rank #3 (Hold), to tide over the crisis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Coronavirus Wreaks Havoc on Buybacks
Per the latest report by S&P Dow Jones Indices, during full year 2019, S&P 500 companies spent $728.7 billion in buybacks, down 9.6% from $806.4 billion in 2018. Nevertheless, the figure ranks second highest in the index’s history.
However, the coronavirus crisis has triggered suspension of share repurchase programs and shelving of dividend payouts in 2020.
Markedly, pre-COVID-19 estimates had projected that 2020 share buybacks “would come close to or exceed the $806 billion record set in 2018,” which ranked highest in the index’s history.
As of now, first-quarter 2020 buybacks are expected to decline sharply. In fact, second quarter 2020 buyback scene is anticipated to be “dismal.” For 2020, it is now estimated that stock-buybacks may witness “a complete reversal of the 2018 buyback bonanza.”
Coronavirus Crisis Triggers Stock Buyback Suspension
The coronavirus outbreak has not only claimed human lives but is also wreaking havoc on the global economy. It is affecting global trade, investment, travel and tourism, and supply chain.
To preserve cash and maintain ample liquidity, various companies are resorting to dividend cuts and stock-buyback suspensions. Major Aerospace-Defense player, The Boeing Company scraped its quarterly dividend payments and suspended share repurchase program until further notice, last week.
Citing the uncertainty regarding the coronavirus pandemic, major U.S. banks, including JPMorgan Chase, America’s biggest bank by assets, has also suspended share buybacks temporarily.
Companies across the globe are facing unprecedented challenges and taking stringent measures to tackle the crisis. Suspension of production and forced leaves/layoffs and cost cutting are becoming commonplace. Despite policymakers’ best efforts, companies are finding it difficult to stay afloat amid such trying times.
Therefore, amid the coronavirus crisis, many companies might be forced to take rigorous measures for cash preservation. So, until the fog clears, investors should brace for more dividend and share-buyback suspensions.
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Click to get this free report JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report The Boeing Company (BA) : Free Stock Analysis Report Intel Corporation (INTC) : Free Stock Analysis Report Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report The Clorox Company (CLX) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research