Yahoo Finance Marathon Petroleum and KeyCorp have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – Apil 20, 2023 – Zacks Equity Research shares Marathon Petroleum MPC as the Bull of the Day and KeyCorp KEY as the Bear of the Day. In addition, Zacks Equity Research provides analysis on United Airlines Holdings, Inc. UAL, Lockheed Martin Corporation LMT and Omnicom Group Inc. OMC.
Here is a synopsis of all five stocks:
Bull of the Day:
Still bullish on the energy sector? Marathon Petroleum is a leading independent refiner, transporter, and marketer of petroleum products and is a Zacks Rank #1 (Strong Buy) stock.
Analysts are in near unanimous agreement in upgrading Marathon Petroleum's earnings expectations, considerably improving its odds of a near-term rally. In addition to the near-term bullish catalysts, MPC has a very reasonable valuation and long-term macro tailwinds.
Marathon Petroleum is the largest petroleum refinery operator in the US and the fifth largest in the world. MPC has 16 refineries and over 3 million barrels a day of refining capacity.
Over the last year MPC stock has substantially outperformed the Oil Refining and Marketing industry, and the broad market, demonstrating its position as a preferred asset.
Q4 Beat, Buyback & Dividends
Marathon Petroleum posted a truly standout Q4 performance. Adjusted earnings per share of $6.65 handily beat analysts' estimates of $5.54, a +20% surprise.
Sales beat expectations as well by a comfortable +25%. Marathon reported revenues of $40.1 billion, which beat the Zacks Consensus Estimate of $32 billion and showed 12.6% growth year over year.
Additionally Marathon Petroleum bought back $1.8 billion in shares in Q4 to bring the 2022 total buyback to $11.9 billion. The company returned $13.2 billion to shareholders in 2022, $1.3 billion of which was through dividends.
Marathon Petroleum dividend currently yields 2.3%. MPC has increased it's dividend by an average of 7.7% annually over the last five years, and 29% in the last year alone.
Macro Tailwinds
MPC, along with the rest of the industry, is experiencing improved business fundamentals because of higher oil prices, which directly increase margins and profitability. As a reflection of this, Marathon Petroleum's Refining & Marketing segment reported profit of $3.9 billion in Q4, soaring from the year-ago profit of just $881 million.
The underlying factors improving profitability don't look to be abating either. Constrained supply and robust demand for oil products is still very much a reality. After oil prices broke below $70 per barrel a few weeks ago OPEC+ agreed to significantly reduce its daily oil production. This further tightened supply and pushed WTI oil prices back to $80 per barrel.
Additionally, while many investors came into 2023 expecting an economic slowdown and recession, which should slow demand for oil, it has yet to come to fruition. Surprising many, the most recent estimates for US GDP are still strong. According to the Atlanta Fed GDPNow, annual US GDP growth is estimated to be 2.5%.
The Chinese economy reopening has been yet another catalyst putting a floor underneath the price of oil.
Furthermore, there has been a gross underinvestment into energy infrastructure, particularly the oil and gas industry over the last decade. Because of ESG initiatives and a traumatic period of overinvestment in the early aughts there had been resistance to investing in the industry. But that investment gap is now rearing its ugly head as higher energy prices have boosted costs for industry and individuals.
While consumers are unhappy with the increased cost of energy, producers are in a good place, possibly for years to come.
Valuation
Marathon Petroleum is trading at a one-year forward earnings multiple of 6x, which is in line with the industry's average and below its 10-year average of 11x. It is quite impressive to see MPC with such a reasonable valuation considering the stock is up 155% over the last two years. This means that earnings have kept up with, and even outpaced the stock appreciation.
Earnings Expectations
Although current quarter earnings revisions are mixed, future earnings periods are decisively bullish. Next quarter earnings have been revised 10% higher and FY23 earnings revisions have climbed 15%. The Zacks Earnings ESP is projecting an 11% earnings beat during the next reporting period.
Marathon Petroleum stock has a lot going for it today. Even after the tremendous run energy stocks have experienced over the last two years, analysts are still bullish on earnings and shares are still trading at reasonable valuations.
However, the risks still need to be noted. The primary risk for MPC would be a marked slowdown in economic activity. Constrained supply can only push oil prices so high, and if the economy goes into recession oil prices should drop, and so will Marathon's profitability.
Bear of the Day:
KeyCorp is a diversified consumer and commercial bank that is expected to see its earnings decline this year. KEY's negative earnings revisions also help it earn a Zacks Rank #5 (Strong Sell).
KeyCorp offers a variety of products and services. These include consumer services like deposits, lending, and investments to individuals, and small and medium-sized businesses. It also operates a full-fledged investment bank on the commercial side offering debt and equity capital markets, equipment finance, commercial mortgage banking and other services to middle market firms.
KeyCorp stock has markedly underperformed both the industry and broad market YTD. As a regional bank, it has been caught up in the banking crisis drama that was centered around Silicon Valley Bank and the stock has yet to recover.
KEY has several concerning headwinds: Analysts unanimously downgrading earnings expectations, poor Q4 earnings results, and large exposure to the struggling commercial real estate loan market.
KeyCorp Q4 Earnings Lag Estimates
KeyCorp had an unimpressive Q4 earnings report. Earnings for the quarter came in at $0.38 per share, which missed analyst estimates of $0.55 per share by -31%. This figure also represented a -40% decline in profits YoY.
KEY experienced strong growth in Net Interest Income thanks to the rally in interest rates, but those profits were more than offset by ballooning operating expenses. Investments in technology, and inflationary pressures have kept expenses high and growing.
Earnings Expectations
Analysts don't have strong expectations for KEY earnings and had been revising estimates lower since before the banking crisis in mid-March. Analysts are in complete agreement with downgrading expectations. Earnings estimates have been lowered by as much as -24% over the last two months.
Exposure to Commercial Real Estate Loans
It's no secret that the commercial real estate market is under pressure. With the transition to work from home destroying the office building values, to now falling residential home prices in many US geographies, the bad news is beginning to mount.
Following the Covid-19 pandemic there was a boom in both residential and commercial real estate purchases. However, many booms are followed by busts and the cracks are clearly beginning to form.
Commercial real estate giants like Vornado Realty Trust, the largest commercial real estate owner in NYC, are down bad. VNO shares are down nearly -90% from their peak.
Notable investor Howard Marks of Oak Tree Capital doesn't think the pain is over either. In an interview on Tuesday, Marks stated "We're very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk."
He also said that "The possibility of a recession bodes ill for rental rates and occupancy, and thus for landlords' income."
Also on Tuesday, Brookfield Asset Management announced that they would default on a $161 million mortgage tied to a dozen office buildings in Washington DC. The debt was underwritten in 2018, and the floating-rate mortgage payments more than doubled in the last year because of the jump in interest rates.
KeyCorp commercial real estate loan exposure currently sits at 16% of total loans. Fortunately, this isn't nearly as much as some other regional banks such as Valley National VLY with 60%, or New York Community Bancorp NYCB with 71% exposure.
Nonetheless, it isn't a promising development.
Valuation
KeyCorp is trading at a one-year forward earnings multiple of 7x, which is below the industry average of 9x, and below its five-year median of 10x. KEY also offers a hefty dividend yield of 6.8%, which it has raised an average of 3.5% annually over the last three years.
Bottom Line
While KeyCorp is currently trading at a reasonable valuation and offers an appealing dividend yield there is still too much idiosyncratic risk associated with the stock and sector more broadly. Regional Banks sit in the bottom 20% of the Zacks Industry rank, and the Finance sector is at the very bottom of the Sector rank.
With falling earnings, macroeconomic risk, and poor earnings expectations, KeyCorp is definitely a stock investors should steer clear of.
Additional content:
3 Buy-Rank Stocks That Beat on Earnings This Week
Estimates have been coming down steadily over the past year, as the market adjusted to the probability of an economic slowdown, possibly a recession, as a result of one of the fastest tightening cycles in history. Since we have set our expectations rather low (the S&P 500's 2023 aggregate earnings estimates on an ex-Energy basis are already down by more than 14% since mid-April 2022), there is now a relatively good chance of companies beating estimates.
While some analysts say that the recent banking crisis has further increased uncertainty (and to a certain extent that is true), the big banks often come out stronger from such crises. In this case, the loss of confidence in smaller banks has worked in favor of the bigger banks. Credit card usage is also robust, as consumer discretionary/leisure spending remains healthy and the outlook for the summer is strong as of now. So overall, what we are seeing so far in this quarter is that banking/Finance sector results are coming in better than expected.
Other sectors are also doing well, depending on their exposure to certain segments of the market that remain relatively strong. Here are three Buy-ranked stocks that beat estimates this week:
United Airlines Holdings, Inc.
This is a provider of air transportation services in North America, Asia, Europe, Africa, the Pacific, the Middle East and Latin America. It transports people and cargo through its mainline and regional fleets.
United Airlines reported March quarter earnings that were 13.7% ahead of estimates on sales that were more or less in line. The company's available seat miles were ahead of expectations which led to a lower passenger load factor, bringing both passenger revenue per available seat mile and total revenue per available seat mile below estimates. Cargo revenue was also below expectations, while other revenue exceeded.
Operating cash flow was at record levels and management expressed confidence in strong demand and continued execution. The international business where United has some competitive advantage, is doing particularly well, growing at double the domestic rate and testimony to the strength in leisure travel. Whether and to what extent it holds up is something we'll have to wait and see. United is on track to reach its full-year adjusted diluted EPS and cost targets although macroeconomic risks are being carefully monitored. Fuel cost could also play spoilsport. Although they've guided conservatively, OPEC production cuts could affect negatively.
The Zacks Rank #2 (Buy) stock has scored an A for Value, Growth and Momentum. Its estimates have already started climbing since the earnings announcement, with the 2023 estimate increasing 13 cents and the 2024 estimate increasing 5 cents. About half the covering analysts are yet to react. So there's a very good chance of these shares getting upgraded to a Zacks #1 (Strong Buy) rating.
Lockheed Martin Corporation
Lockheed Martin is involved in the research, design, development, manufacture, integration and sustainment of technology systems, products and services worldwide. It operates through four segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space.
Many of its signature platforms, including the geosynchronous orbit infrared-sensing satellites, the F-35s, the Aegis radar systems and submarine combat systems are being actively incorporated into an open digital architecture for the U.S. and its allies. This increases their effectiveness and attractiveness for years to come.
In the last quarter, Lockheed Martin's revenue came in 1.9% above estimates while its earnings came in 5.9% higher. Three of its four segments saw revenue declines however.
Aeronautics is a big attraction given its contracts to supply weapons to Ukraine. But although the volume of such contracts increased, supply will be spread out totaling $6 billion in value up to 2027. Clearly, nobody expects the war to end soon.
Offsetting this positive is China's stand on Lockheed and Raytheon, both of which are being punished for supplying Taiwan. They're not allowed to import or export anything related to China and their senior executives are banned from entering working, staying and residing in the country. The quarter's revenue performance was not affected by these factors. It was hurt by lower deliveries as a backlog of F-35 fighter jets built up.
During the quarter, Lockheed Martin secured a contract for the first U.S. sea-based hypersonic missile program, Conventional Prompt Strike (CPS) and was selected to provide 88 F-35 fifth generation fighter aircraft to Canada. It also delivered the first F-16 fighter aircraft out of its new Greenville, South Carolina factory.
Management reiterated 2023 guidance and promised to keep returning value to investors through both share repurchases and dividends.
Zacks has a #2 rating on the shares along with a Value Score of B and Growth Score of A. Analysts are yet to upgrade their models, therefore estimate revisions are still pending.
Omnicom Group Inc.
Omnicom offers a range of services in the areas of advertising and media; precision marketing; commerce and brand consulting; as well as experiential, execution and support, public relations, and healthcare solutions.
The company beat earnings estimates for the March quarter by 13.0% on revenue that beat by 2.3%. Management said that organic revenue grew 5.2%.
The company is growing despite the macro concerns on the strength of its highly-specialized marketing and communications services that are driven by leading analytics, creativity, data and digital media solutions to help companies manage their brands. But it is also working to increase operational efficiency to mitigate the impact of the macroeconomic factors on its profitability. These actions, along with an expansion of its services and suitable capital allocation are expected to continue supporting its business.
The Zacks Rank of this stock is also #2. The Value Score is A and Growth Score B. Analysts are likely to raise their estimates after this strong showing.
Wrapping Up
These three stocks reported strong results in the March quarter, beating estimates on both the top and bottom lines. Analysts are therefore expected to raise their estimates, which could lead to their upgrade. Since they appear to be stocks that are relatively well positioned to deal with macro softness, investors could benefit from accumulating some shares.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
https://www.zacks.com
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
Omnicom Group Inc. (OMC) : Free Stock Analysis Report
KeyCorp (KEY) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
