Stocks poised for gains Monday as optimism rises over potential coronavirus treatments


Stock-index futures pointed to a higher start Monday, with the S&P 500 and Nasdaq Composite set to build on last week’s record finish, as investors showed optimism over a potential COVID-19 treatment.

What are major benchmarks doing?

Futures on the Dow Jones Industrial Average
YM00,
+0.99%

advanced 283 points, or 1%, to 28,140, while S&P 500 futures
ES00,
+0.85%

rose 28.90 points, or 0.9%, to 3,421.50. Nasdaq-100 futures
NQ00,
+0.99%

were up 112 points, or 1%, at 11,674.

The S&P 500
SPX,
+0.34%

on Friday drifted higher by 0.3% in light volume to end at a record 3,397.16, marking a 0.7% weekly advance. The Dow
DJIA,
+0.68%

rose 190.60 points, or 0.7%, on Friday to end the week with a gain of less than one point at 27,930.33. The tech-heavy Nasdaq Composite
COMP,
+0.41%

logged a 2.7% weekly rise, finishing Friday at 11,311.80, its 36th record finish of 2020.

What’s driving the market?

The Food and Drug Administration on Sunday said it had approved the use of convalescent plasma, the antibody-rich component of blood taken from recovered COVID-19 patients, as a treatment for serious coronavirus cases. Medical experts said the treatment may provide benefits to those battling the disease, but that there isn’t conclusive evidence of its effectiveness, while questions remain about when it should be administered and dosage.

President Donald Trump hailed the move in a Sunday evening news conference after the administration had accused the agency without citing evidence of slowing approval in order to undermine his re-election prospects.

Also, the Financial Times reported that Trump may order the FDA to grant the same type of approval to the University of Oxford vaccine to be distributed by AstraZeneca
AZN,
+3.75%

AZN,
-1.38%
.

“Markets have started the week on a cheery note as news that President Trump has authorized the emergency use of plasma treatment for COVID-19 patents and is considering fast tracking a UK vaccine before the election boosted sentiment,” said Raffi Boyadjian, investment analyst at XM, in a note.

Expectations for a breakthrough virus treatment have been a driving force behind the market’s rebound from its pandemic-induced plunge earlier this year, Boyadjian said, though “there’s yet to be any conclusive results from any of the vaccines or treatments that are under development for the coronavirus and many investors have yet to wake up to the prospect that the pandemic could still be around in a year or two.”

Read:Are stock market investors overpricing or underpricing a coronavirus vaccine?

The S&P 500 last week returned to record territory, erasing a nearly 34% plunge that took the U.S. benchmark from a record Feb. 19 close to its March 23 low, in a rally driven largely by shares of big tech companies that have seen their businesses benefit from the pandemic, while shares of companies whose performance is tied more closely to the economic cycle have continued to lag despite some recent stretches of outperformance.

Investors are looking ahead to the Kansas City Federal Reserve Bank’s annual symposium. The event, typically held in Jackson Hole, Wyo., will be conducted via web cast this year. Fed Chairman Jerome Powell is slated to speak Thursday on how the central bank plans to achieve its twin goals of stable prices and maximum employment once the coronavirus pandemic has ended.

What are other markets doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
0.640%

TMUBMUSD10Y,
0.640%

rose 0.8 basis point to 0.64%. Bond prices move inversely to yields.

Gold futures
GCZ20,
+0.56%

rose, with the December contract up 0.,6% at $1,958 an ounce on Comex. Oil futures
CL00,
+0.96%

gained ground as Hurricane Marco and Tropical Storm Laura converged on the Gulf of Mexico, forcing the closure of around half of its production.

In global equity markets, China’s CSI 300
000300,
+0.78%

rose 0.8%, the Shanghai Composite
SHCOMP,
+0.14%

ended 0.2% higher, and Japan’s Nikkei
NIK,
+0.28%

closed with a gain of 0.3%. The Stoxx Europe 600
SXXP,
+1.78%

jumped 1.7% and U.K.’s FTSE benchmark
UKX,
+1.80%

advanced 1.8%, getting a boost after the FDA announcement.



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Gold retreats, poised for first back-to-back loss in about a month


Gold futures fell early Wednesday, with the metal on track to record its second straight decline and its lowest settlement in nearly two weeks.

Weakness in the asset comes as yields for benchmark government bonds have risen firmly in recent trade, providing haven-seeking investors another alternative to bullion, which doesn’t offer a coupon.

The rise in U.S. yields “delivered a sledgehammer blow to precious metal markets on Tuesday,” said Craig Erlam, senior market analyst at Oanda, in a market update.

Gold prices have generally rallied over the summer as U.S. real yields have gone negative and continued to decline, so the sudden spike in yields over the last couple of days “triggered a rush for the exits in what has become an incredibly overcrowded trade,” he said.

The rise in yields has been attributed to a “slew of upcoming auctions and higher PPI numbers, he said. Bond yields continued to rise Wednesday, as data revealed that the U.S. consumer-price index rose in July for a second month in a row.

Most recently, the 10-year Treasury note
TMUBMUSD10Y,
0.677%

yielded 0.673%, up from 0.562% at the end of last week, according to Dow Jones Market Data.

In Wednesday dealings, December gold
GCZ20,
+0.32%

GC00,
+0.32%

fell $2.30, or 0.1%, at $1,944 an ounce. A settlement around this level would be the lowest for a most-active contract since July 30, according to FactSet data. It traded low as $1,874.20 Wednesday, the lowest intraday mark for a most-active contract since July 23.

Prices for the yellow metal dropped 4.6% Tuesday, which represented the steepest one-day dollar decline since April 15, 2013, and steepest percentage slide since March 13 of this year, based on the most-active contracts.

September silver
SIU20,
-0.47%

was off 58 cents, or 2.2%, at $25.465 an ounce, after the metal tumbled 11% in the previous session to register its sharpest daily dollar fall since Sept. 23, 2011 and largest daily percentage drop since March 16 of this year.

Prices for precious metals have surged to at or near records in recent weeks at least partly on the back of the economic damage wrought by the COVID-19 pandemic, and the potential for a vaccine has been considered a bearish factor for the precious metal that thrives on uncertainty. On Tuesday, reports of a vaccine being registered in Russia helped to spark selling in silver and gold, experts said.

Among other Comex metals Wednesday, September copper
HGU20,
+0.57%

shed 0.5% to $2.861 a pound. October platinum
PLV20,
-2.55%

lost 3.4% to $938.60 an ounce and September palladium
PAU20,

inched lower by 0.2% to $2,171.60 an ounce.



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People’s United Financial: Poised To Profit From A Residential Real Estate Boom (NASDAQ:PBCT)


Home building stocks have been on fire lately, with most rising over 20% in the month of July alone. On top of the great results culminating from earnings calls of these companies, recent monthly new residential construction data from the U.S. Census Bureau looks promising, which could be a great boon for People’s United Financial (PBCT), a regional bank with already a large exposure to residential mortgage loans.

I outlined the emerging housing construction statistics in a recent SA blog post, as the dip in activity from the COVID-19 lock downs seems to be lifting. Another promising statistic: the price of lumber has also shot through the roof (no pun intended) in the month of July, further reinforcing the positive demand seen post-crisis.

With low interest rates seeming here to stay for quite a while, particularly with Jerome Powell’s announcement that the Fed intends to keep them there as long as the economy needs, the demand for mortgages could become a major catalyst for the banks willing and able to absorb a boon in demand.

Taking a look at the major U.S. regional banks in the S&P 500 (CFG, CMA, FITB, FRC, HBAN, KEY, MTB, PNC, RF, SIVB, TFC, USB, ZION), I went ahead and made a chart displaying what percentage of each bank’s loan books currently (as of their latest 10-k) make up the total loan portfolio, with an additional column for HELOC (home equity line of credit) added for the final column at the right “Total Residential % of portfolio”. While low rates is no guarantee for higher HELOC demand and usage, I’ve included it there as they are related to residential and do make up a large portion of the book for some banks on the list (People’s United included).

As you can see, PBCT far outweighs all other S&P regionals with 24% of their book consisting of residential mortgages, with USB the next closest at 20%, and the large majority sitting at somewhere between 15-17%. When you include HELOCs, the bank also takes the lead in this residential/consumer exposure (29%), with RF and HBAN close on its heels at 28% and 27% respectively.

Let’s take a closer look at the loan situation for PBCT, from their 10-k:

You can see that there has been steady growth across the board for both the Total Commercial Portfolio group and Total residential mortgage group over the last 5 years, in no small part from recent acquisitions (BSB Bancorp, United Financial, and First Connecticut.

Though the retail banking side of the business, which includes these residential mortgages and HELOCs, and consumer deposits, makes up a much smaller portion of the net income than commercial banking does, their retail earnings has shown incredible growth over the last 3 years.

From 2018 to 2019, retail banking grew 75.2%, after just earning a 233.5% growth the year prior. To explain the significant increase in net interest income for the segment, which in great part helped drive the great growth in earnings, management had this to say (bolded emphasis mine):

The $87.9 million increase in net interest income primarily reflects the benefits from an increase in average residential mortgage loans, new business yields higher than the total portfolio yield, as well as higher net FTP funding credits, partially offset by an increase in interest expense.

Of course, that data reflects the results before COVID, and that impact must also be discussed regarding the latest developments and fallout. Sheen Bay Research did a nice article discussing the company’s provision expense and their need to keep it elevated through Q2, but also did believe that PPP would support earnings through the tougher climate ahead.

From the company’s latest earnings call presentation (July 23), Q2 net interest income has actually increased from Q1, with increase in deposits almost absorbing the decrease in loans:

Loan forbearance, another interesting statistic to watch as parts of the economy experience a deep recession, has been updated to include 11,465 loans with $6,161 outstanding in commercial loans, and 2,957 retail loans with $1,009 outstanding, for a total of $7,170. Considering the company’s total size, this doesn’t appear to be catastrophic as of yet.

Comments by management on their latest earnings call provide good insight into the situation and reflect a positive outlook for the company through this pandemic shock (earnings call transcript here):

Positively the trends in the initial forbearance request have slowed materially, and we have been pleased to receive payments from 38% of the accounts, representing 19% of loan balances since they were in deferral. We also continue to assess the needs of customers that may require extended release. Second round forbearance requests are subject to a more extensive due diligence and credit analysis to confirm additional relief is needed, as well as the viability of the business in this new economic environment.

While still early in the process, based on conversations across our customer base, we expect second round forbearance levels will be meaningfully less than the first. We believe this is a testament to our approach to relationship banking and reflects the strong capital and liquidity profile of our customers.

Considering Long Term Growth Potential…

Looking past the struggles ahead and towards the future, the question becomes whether PBCT can continue its strong growth in commercial and retail banking, driven in no small part by its residential mortgages and recent acquisition strategy.

As it comes to companies that rely on certain regional locations (industries like aggregate mining, home builders, and auto dealers are first to mind), it helps to also evaluate the changing demographics picture for the locations that represent large portions of a company’s success. In the case of regional banks like PBCT, a strong geographical positioning could become a competitive advantage if changing population leads to economic prosperity in those regions. Again from the latest earnings presentation:

Compare this to the latest population growth statistics, and you wonder if there’s an impeding limit to the strong retail growth that the company has seen so far. With none of the states above ranking in the top 10 in population growth in the United States, both on a total growth and percentage growth basis, the continuation of population trends over the last 10 years into the next 5-20 years could present a long term obstacle for PBCT, or force expansion outside of their comfort regions.

Bullish Catalysts, and the Excess Returns Valuation

Nevertheless, a secular boom and/or recovery in residential real estate and the U.S. economy could lift all ships and make the challenging demographics a moot point, particularly for a smaller company like PBCT.

For this bank stock, I’ll use an excess return valuation model, as taught by Damodaran from NYU Stern and also used on bank stocks by fellow SA contributor David Ahern.

Here’s the inputs for the valuation model:

  • ROE = 7.96%
  • Retention ratio = 44.09%
  • Expected growth rate = 3.51%
  • Cost of equity = 8.8%
    • Beta = 1.25
    • Risk-free rate = 1.3%
    • Risk premium = 6%

The stock appears to have a fair value of $19.02, which is just under the stock’s latest high in 2018. Of course, the period ahead may present some difficulties and make such a valuation hard to justify with a dip in ROE and growth– but if the company can return to a satisfactory position after the pandemic then it could very well achieve such long term results.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.





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Private equity firm Sycamore poised to buy JCPenney, merge it with Belks


The private equity firm that backed out of a deal to buy Victoria’s Secret in the midst of the coronavirus pandemic appears poised to win an auction to buy JCPenney out of bankruptcy, The Post has learned.

New York-based Sycamore Partners has offered $1.75 billion to buy the 118-year-old department store chain with plans to merge it with Belks, a source with knowledge of the situation told The Post.

Sycamore sees JCPenney
JCP,
-1.88%

helping to revive the North Carolina-based Belks, a struggling department store chain with 300 stores located mostly in the South, the source said. Sycamore owns Belks, as well as retailers Talbots, Staples and The Limited.

“JCP is the lifeboat for Belks, which wants to compete with Macy’s nationally,” the source explained.

Also in the running for JCPenney is Saks Fifth Avenue owner Hudson’s Bay Company, which offered $1.7 billion, and mall operators Simon Property
SPG,
+2.29%

and Brookfield Property
BPY,
+1.26%

, which have teamed up with a $1.650 billion offer, sources said.

While the deal is still subject to approval from the court as well as from JCPenney’s lenders, creditors and board, Sycamore has been in the lead since bids were due on July 22, sources said.

“The bidders were told that Belks/Sycamore submitted the strongest bid to acquire JCP” one source said.

A second source, however, noted that all of the bidders are still in the running. “The three bids are being analyzed and because there’s not a big difference between them, it means that all three are seeing a similar valuation,” this person said.

Both JCPenney and Belks, founded in 1888, have suffered from declining sales amid competition from fresher brands and online retailers like Amazon. JCPenney was also saddled with $5 billion in debt when it filed for bankruptcy protection.

The Sycamore plan involves rebranding some 250 JCPenney stores to Belks stores in markets where the two retailers don’t overlap. The rest of the JCPenney locations would be liquidated, the source said.

Plano, Texas-based JCPenney operated 850 stores when it filed for bankruptcy protection on May 15. In June, it announced plans to close at least 154 stores permanently.

Belks CEO Lisa Harper would run the combined entity. While Sycamore isn’t interested in keeping the JCPenney brand, it would acquire the rights to the name and could sell the intellectual property at a later date, a source said.

Sycamore acquired Belks in 2015. Harper replaced Tim Belks as CEO the following year — marking the first time the family-owned department store chain was run by someone outside the family.

Earlier this year, Sycamore offered $1 billion for a controlling stake in iconic but troubled lingerie peddler Victoria’s Secret. But the buyout firm wiggled out of the deal in May by claiming that the retailer’s parent company, L Brands, had violated the terms of their deal by closing Victoria’s Secret stores and failing to pay their rent during the pandemic.

Two weeks later, L Brand’s billionaire founder Retail legend Leslie Wexner retired after 56 years at the helm.

JCPenney and Sycamore declined to comment.

This report originally appeared on NYPost.com.



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QuinStreet: Poised To Grow Margins With QRP Catalyst (NASDAQ:QNST)


Company Overview

QuinStreet (QNST) lays claim to the term ‘pioneer’ of performance marketing. With a history of over 20 years, the company specializes in delivering clicks, leads, inquiries, calls, applications, or customers to its clients. This performance marketing strategy is attractive to QuinStreet’s clients, who pay solely based on tangible execution. QuinStreet operates in financial services, education and home services. M&A is a big part of the business model: the company has acquired three companies since 2018 (AmOne, CCM, and MBT) primarily to increase its number of customer relationships. Although digital ad spend has been down during the pandemic, the macro-shift toward online advertising is resolute. QuinStreet is well-positioned to profit from this transition as long as management can successfully increase margins.

Business Model

QuinStreet’s business model is fairly simple. The company is paid a commission for its marketing performance on a per-quote basis. The variable model runs very few fixed costs as the cost of revenue is largely media-based. When revenue drops, so too does the company’s largest cost. Unfortunately, this low-risk model returns less than favorable margins. The company has TTM gross margins of 11%. Management plans to increase these margins by divesting its unprofitable businesses and rolling out SaaS-like products. Additionally, the company plans to continue its heavy emphasis on growth-oriented acquisitions. On the 2Q 2020 Earnings Call, CEO Doug Valenti remarked:

We plan to narrow our focus to a smaller number of our best-performing businesses and market opportunities and to restructure to align resources and efforts with those areas…We also expect faster margin expansion from top-line leverage on a smaller cost base and a heavier mix of businesses with SaaS-like margins

These plans will need to be monitored by investors over the next few months as the changes begin to be recognized. If the plan is followed through successfully, QuinStreet will prove to be undervalued at its current price.

Financial Highlights

The last few years have been rocky for QuinStreet. After increasing revenue by 35% YoY in 2018, the top line grew just 13% in 2019 and is expected to grow just 7% at the end of the fiscal year in July. This volatility in top-line growth has led to a wavering stock price, as shown below:

Zimlon Insurance Company Analysis

As shown in the graph, QuinStreet’s earnings have been up and down and it is reflected in the steep declines in price. Breaking down its revenue, financial services represented 77% of total revenue in Q3 FY2020. The majority of other revenue comes from the education vertical, representing ~12% of revenue. Financial services grew 15% YoY in the most recent period, while education showed meager 4% growth. The company has struggled to gain ground in education since 2019 when it lost Dream Center Education Holdings, which represented upwards of 20% of revenue. Client diversification remains a risk for QuinStreet as Progressive Corporation (PGR) represents 22% of net revenue. One strong positive for QuinStreet is its balance sheet. The company has upwards of $97 million in cash on hand, representing 17% of its market cap. This gives management a cushion if ad-spend falls off temporarily due to coronavirus. It also may allow management to pursue acquisitions or develop new products to increase margin.

Catalyst

Although the company hasn’t grown its top line favorably over the last few years, it has an exciting catalyst which management expects to grow margins. The QuinStreet Rating Platform (QRP) is an enhanced workflow system designed to vastly improve the sales efficiency of carrier partners and their agents. Carrier partners will get much better workflow management and control, ultimately allowing them to reduce costs. CEO Doug Valenti cited on the Q3 2020 Earnings call that QuinStreet has the most end-to-end integrations with the biggest carriers, allowing them to provide agents with accurate and timely quotes. Although the product has not been completely rolled out, Valenti said the pilot company realized upwards of 40% lift in productivity.

The most exciting part of this catalyst is the SaaS-like margins. Management expects QRP to have 80% gross margins and rise steadily with use. Valenti also noted that the pipeline for the product is extremely deep. In the Q3 2020 Earnings Call, he had this to say regarding QRP:

Launched QRP clients already represent over $6 million dollars in estimated annual revenue opportunity once fully ramped. Signed and near-signed clients (not yet launched) represent $12 million of additional estimated annual revenue opportunity. The balance of clients in the advanced pipeline (not yet at signing stage) represents $36 million more of estimated annual revenue opportunity. That means we believe we already have line-of-sight to over $50 million of estimated annual QRP revenue. We believe the full pipeline and market represent an estimated revenue opportunity of well over $100 million per year.

The excitement for this catalyst is evident in the management’s rhetoric. The company has yet to recognize revenue for the product, but expect to do so sometime in the next few months. Until then, investors can rely on the testimonial of Tom Lyons, Chief Operations Officer of Plymouth Rock Management Company of New Jersey:

QRP will help us improve response time to client inquiries while preparing the most competitive insurance quotes possible. We view QRP as a mission-critical enterprise workflow management application that should significantly drive our business value to customers and help us expand sales.

It should be clear to investors that QRP is a great opportunity for QuinStreet in the near future. The product offers great reward to carriers and their agents, and will allow QuinStreet to improve upon its poor margins. Management expects to see 8-digit revenue from QRP in FY2021 which is just shy of 15 months from now.

Risk

Aside from the bright future surrounding QRP, the company has a few risks. As mentioned earlier, 22% of its revenue is derived from Progressive Corporation. Although no other companies represent more than 10% of revenue, this heavy reliance on a single company could be reason to worry. Progressive currently has a strong balance sheet, but further virus implications could force the company to reduce ad-spend. Doing some simple math, a 50% reduction in ad-spend would wipe more than 10% of QuinStreet’s revenue. This is a very real risk and deserves to be recognized in any financial projections.

Another risk lies in the company’s business model. Management has promised to continue to pursue acquisitions. While the company certainly has enough cash to do so, the underlying principle is cause for concern. One bad acquisition could prove costly to a growth company like QuinStreet. Investors will be putting their trust in management, relying on them to choose the right acquisitions at the right cost.

Valuation

Given the risk of decreased ad-spend from Progressive and/or other carriers, any valuation deserves two scenarios. A DCF model captured both scenarios. The following table shows the inputs and assumptions of the model:

5-Year CAGR

QRP Revenue Growth

50%

Other Revenue Growth

10%

QRP Gross Profit Margin

80%

Other Gross Profit Margin

11%

Operating Expenses (% of Revenue)

10%

Tax Rate

20%

Growth rate in perpetuity

2%

WACC

7%

Beta

1.25

Risk-free Rate

2%

Market return

6%

The above assumptions were present in both scenarios. In the first scenario, FY2021 revenue (consisting of Financial services/Education/Other) decreased by 10% from FY2020. The effect of the loss on earnings is somewhat diminished by QRP revenue which represented $10M in 2021, in line with management guidance. Discounting the 2025 value back to present, the model returns a price target of $12.25. This should be viewed as a baseline price target.

In scenario 2, FY2021 revenue has no growth, followed by 10% growth in subsequent periods. This results in a price target of $13.83, representing 35% upside from the current price. It should be noted that both models incorporated QRP revenue as management guided, forecasting for 8-digit revenue in FY2021. QRP revenue tops out around $50M in 2025 in the model, although management foresees revenue reaching $100M in the future. As seen in the chart below, profit margins will steadily increase as QRP gains ground in the market.

Zimlon Insurance Company Analysis

As the company becomes more profitable with QRP and other SaaS-like products, the stock price is sure to follow. Both of these scenarios were relatively conservative and thus clearly exhibit a considerable margin of upside for investors.

Conclusion

To sum up, QuinStreet is an undervalued company with room to grow. Revenue growth has been up and down in recent years, but the impending QRP product will rejuvenate the company’s earnings. Keen investors will notice QuinStreet trading at an absurd 38 P/E ratio. Normally this high of a ratio would be cause for concern. However, QRP promises to lift earnings over the next few years and management remains focused on growth-oriented acquisitions. The successful combination of these two will result in a profitable business worth more than 35% of its current share price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.





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