For Immediate Release
Chicago, IL – May 7, 2021 – Zacks Equity Research Shares of Darden Restaurants, Inc. DRI as the Bull of the Day, Grubhub Inc. GRUB as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Alcoa Corporation AA, Ultra Clean Holdings, Inc. UCTT and Discover Financial Services DFS.
Here is a synopsis of all five stocks:
Bull of the Day:
Wall Street didn’t give up on the restaurant industry even though the pandemic devastated in-person dining throughout much of the U.S. for most of the past year, since what’s next always matters more. Darden Restaurants is a sit-down dining powerhouse that was hit far worse than the likes of Chipotle and others more custom to take-out.
Nonetheless, Darden shares hit new highs in late March and a return to top-line growth appears just around the corner, boosted by the economic reopening, the vaccine, and pent-up demand.
In-Person Dining Struggles
Darden is a dine-in restaurant chain standout, with brands from Olive Garden and LongHorn Steakhouse to Yard House and The Capital Grille. The company’s portfolio includes over 1,800 restaurants and it is continuing to open new locations.
As everyone knows, many restaurants closed in-person dining temporarily and struggled after that given capacity restraints. Plus, some customers decided to cut back on spending, while others opted for take-out options.
Consequently, DRI’s sales tumbled during the trailing four quarters. Its largest drop came in Q4 FY20 (period ended May 2020), when revenue fell 43%. The dining environment has changed since the start of the pandemic and its revenue largely improved since then.
Economic Rebound & Vaccine Rollout
Darden’s revenue still fell 26% for the three-month period (Q3 FY21) ended in February, with its adjusted earnings down 50%. The recent performance, however, showed improvement and more importantly Darden’s outlook called for a return to growth. The company’s positive guidance helped the stock surge to new highs after its March 25 release that saw it beat our bottom-line estimate by 36%.
The economic reopening underway throughout much of the U.S. is set to boost Darden and countless other hard-hit businesses and sectors. Many states have already lifted tons of coronavirus-based restrictions as the vaccine rollout remains largely successful.
With more than 40% of all U.S. adults fully vaccinated and the daily number of new Covid-19 cases on the decline, many other big states with some of the largest cities in the country, from New York to Illinois are paving the way for a much more expansive economic reopening, as restriction after restriction is lifted. And some recent economic data validated the growth economists started projecting last year.
For instance, U.S. GDP jumped by a seasonally adjusted annual rate of 6.4% in the first quarter, to put the economy within 1% of its pre-pandemic levels, according to new Commerce Department data. The latest round of stimulus checks helped propel a 4.2% month-over-month pop in consumer spending, the biggest since last summer. Plus, U.S. GDP is projected to climb by roughly 6.5%, which would be the strongest in roughly 35 years.
DRI shares have soared 110% in the last year to destroy its industry’s 50% climb and its peer group’s 70%. This group features Domino’s, McDonald’s and other businesses more prepared for the pandemic-based environment. This run includes a 33% jump since mid-November, following the vaccine news.
Darden shares surged to records after its earnings release on March 25, and luckily, they have cooled down a bit. The stock closed regular hours Thursday at $141.51, or roughly 6% below its highs.
The recent pullback has DRI sitting below neutral RSI levels (50) at 45, which could give the stock room to run even though it has already climbed so far. It’s also a great sign that DRI trades at a 30% discount to its industry at 20.8X forward earnings despite its outperformance. This also represents a 12% discount to its own year-long median.
Zacks estimates call for a big comeback, with Darden’s fourth quarter revenue projected to soar 67% from the easy-to-compare period to $2.12 billion. This top-line expansion is projected to help it swing from an adjusted loss of -$1.24 a share to +$1.71 per share. Darden’s fiscal 2021 revenue is still expected to dip 9%, even though its adjusted earnings are projected to pop 27%.
The floodgates now appear open for a major boom at the sit-down chain, with its FY22 revenue projected to soar 30% to reach $9.12 billion. This would mark by far its largest growth as a public firm—went public in the mid-1990s—and see it climb well above its pre-pandemic levels of $8.5 billion. This excepted top-line expansion is projected to boost its adjusted FY22 earnings by 78% to $7.04 a share.
Darden’s consensus earnings estimates climbed significantly since its last report to help it land a Zacks Rank #1 (Strong Buy). DRI has easily topped our bottom-line estimates in the trailing four periods, as part of a much longer string of beats.
The company is also part of an industry that’s in the top 40% of our over 250 Zacks industries, and 15 of the 22 brokerage recommendations Zacks has are either “Strong Buys” or “Buys,” with the remaining ratings at a “Hold.”
Plus, DRI raised its dividend last quarter and it authorized a new $500 million repurchase program. Given this backdrop, investors might want to consider Darden as a play on the economic reopening and beyond.
Bear of the Day:
Grubhub is an online and mobile food-ordering and delivery powerhouse that agreed to combine with Europe’s Just Eat Takeaway.com last June. The deal is not officially complete and GRUB shares have already fallen 14% in 2021, to lag behind its Internet-Delivery Services industry’s 1% decline.
Grubhub’s offerings include roughly 300,000 restaurants in over 4,000 U.S. cities, with a portfolio of brands that includes its namesake, as well Seamless, LevelUp, and others. The food delivery space is highly competitive, with long-term success is likely based on grabbing the most market share, as competitors race to undercut rivals in terms of pricing. These conditions are why Grubhub and Just Eat Takeaway.com struck a deal.
Grubhub went public back in 2014, well ahead of ride-hailing standout, one-time suitor, and now rival Uber. The stock struggled for years out of the gate, before it exploded from under $40 in March of 2017 to over $140 by the summer of 2018.
GRUB has tumbled 55% since then and closed regular hours Thursday at $64.25 a share, which put it roughly 20% below its January levels. The company’s 2020 revenue still climbed 39% to $1.82 billion, with its recently-reported Q1 sales up 52%. Despite the top-line strength, Grubhub posted an adjusted loss of -$0.56 a share, which was rather shocking considering Zacks estimates called for positive +$0.03 a share.
Zacks estimates call for a rather significant slowdown when it comes to revenue growth, with FY21 projected to climb 23% and FY22 set to jump 16%. Investors should note that GRUB has posted 30% or higher growth every year since it went public. And the company’s consensus earnings estimates have trended in the wrong direction since its report.
Just Eat Takeaway.com is set to acquire 100% of Grubhub shares in an all-stock combination. The Amsterdam-based firm said in September that it received “all regulatory approvals required in respect of its proposed acquisition of Grubhub.”
The deal is not officially complete yet. However, Grubhub said when it reported its Q1 results on April 28 that it’s no longer issuing forward-looking guidance because of its pending acquisition. “With yesterday’s public filing of the registration statement and preliminary proxy statement with the SEC and the Grubhub special stockholder meeting expected to take place in June, we are looking forward to closing the transaction in the coming months and beginning our next chapter as part of the Just Eat Takeaway.com family,” GRUB CEO Matt Maloney said in prepared remarks.
Grubhub currently lands a Zacks Rank #5 (Strong Sell), alongside a “D” grade for Value and “Fs” for Growth and Momentum in our Styles Scores system. GRUB fell another 2% during regular trading hours Thursday, and its industry sits in the bottom 6% of our over 250 Zacks industries.
Given this backdrop and the upcoming merger, investors might want to stay away from Grubhub, especially as the economy reopens and food delivery likely sees a natural slowdown.
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We all know Alcoa as a global leader in alumina and aluminum products, but it also had the distinction of being the unofficial start to earnings season. But these days, investors pay more attention to the fancy-schmancy financial space when it comes to kicking things off. But it really doesn’t matter whether you begin with bauxite or banks, we had a fantastic start to the season this year… and Alcoa was part of it.
The company said its first quarter performance was the best since 2018. Earnings per share of 79 cents topped the Zacks Consensus Estimate by nearly 65%, making five straight quarters of positive surprises. The average beat over the past four quarters was more than 56%. The result also marked a substantial improvement over the previous year’s loss of 23 cents.
Revenues of $2.87 billion topped the Zacks Consensus Estimate by nearly 7.9%, while also advancing from $2.38 billion a year earlier. The company attributed these results to higher aluminum and alumina prices, along with increased shipments.
The coming economic boom should mean big things for Alcoa moving forward. Analysts have been raising their expectations based on these strong results. The Zacks Consensus Estimate for this year has jumped 158% over the past two months to $4.20, while next year has climbed 253% in that time to $3.78.
For the moment then, analysts are expecting a profit decline for 2022 over 2021. However, we’ve still got most of this year to go, and it’s apparent that expectations for next year are coming on strong.
These upward revisions have made AA a Zacks Rank #1 (Strong Buy). Shares have jumped approximately 74.6% this year, while soaring more than 440% over the past 12 months! As part of the metal products – distribution space, AA is in the top 11% of the Zacks Industry Rank.
Ultra Clean Holdings
Earnings estimates for Ultra Clean Holdings have spiked in the past seven days since the company’s first-quarter results last week. However, that’s nothing new for this semiconductor equipment services company, which has now beaten the Zacks Consensus Estimate for nine consecutive quarters.
UCTT is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries. As part of the electronics – manufacturing machinery industry, it’s in the Top 16% of the Zacks Industry Rank. Shares are up nearly 50% so far in 2021 and approximately 170% over the past 12 months.
Anything having to do with semiconductors is a good place to be right now. Chip demand accelerated in the stay-at-home environment to such an extent that there’s now a shortage. Therefore UCTT is on the right side of both supply and demand, which lead to a strong first quarter report.
Earnings per share of 92 cents beat the Zacks Consensus Estimate by 10.8%, bringing the four-quarter average surprise to 26.8%. The result was also a sharp improvement over the previous year’s 52 cents. Revenue of $417.6 million topped our expectation by more than 7% and advanced from the previous year’s $320.9 million.
For the second quarter, UCTT sees revenue between $490 million and $520 million with non-GAAP net income of 90 cents to $1.03.
One of UCTT’s big moves in the past several months was the acquisition of Ham-Let, a global leader in the development, manufacturing and distribution of Ultra-High Purity and industrial flow control systems. These include things like valves, fittings, hoses and connectors used in manufacturing semiconductor devices. The move expands UCTT’s semiconductor addressable market by more than $2 billion.
The Zacks Consensus Estimate for this year rose 13.9% over the past 30 days to $3.86, while expectations for next year jumped 15.3% in that time to $4.38. Therefore, analysts currently expect year-over-year improvement of 13.5%.
Companies with a strong digital presence had a head start on the pandemic-era economy. That was true whether you sold clothes, computers or consumer loans. Late last month, Discover Financial Services reported solid fiscal first-quarter results due in large part to its digital banking model.
DFS is a direct banking and payment services company that offers credit cards; personal, student & home loans; and deposit products. The Direct Banking segment accounted for 88.3% of pretax income in 2020, while the Payment Services segment made up the remaining 11.7%.
As part of the financial – consumer loans space, DFS is in the top 16% of the Zacks Industry Rank. Shares are up approximately 190% over the past 12 months, including nearly 30% so far in 2021.
In late April, the company reported its third straight positive surprise. Fiscal first quarter earnings per share of $5.04 beat the Zacks Consensus Estimate by a hefty 75%. It also improved substantially from a loss of 25 cents a year earlier. Revenues of $2.8 billion were down slightly year-over-year, but topped our expectation by 1.3%.
The company attributed its results to “sustained credit performance, robust sales growth and solid execution on operating & funding costs.”
It’s strong and diversified Direct Banking business was a real standout in the quarter. Along with its global expansions and strong balance sheet, DFS looks set to hit the ground running as the economy slowly but surely gets back on its feet.
DFS made many cost-curbing initiatives to stay healthy during this pandemic, which included reducing account acquisition expenses, cutting down on brand awareness activities, and lowering the vendor and technology spending.
With a strong banking business and prudent management, analysts have been boosting their expectations over the past 60 days. The Zacks Consensus Estimate for this year is up 43.2% in that time to $12.87, while next year has advanced 10.7% to $11.30.
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Ultra Clean Holdings, Inc. (UCTT) : Free Stock Analysis Report
Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report
Alcoa Corp. (AA) : Free Stock Analysis Report
Discover Financial Services (DFS) : Free Stock Analysis Report
Grubhub Inc. (GRUB) : Free Stock Analysis Report
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