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America's Car Mart, Medifast, Microsoft, Apple and Amazon highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – December 20, 2019 – Zacks Equity Research Shares of America’s Car Mart CRMT as the Bull of the Day, Medifast MED asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Microsoft MSFT, Apple AAPL and Amazon AMZN.

Here is a synopsis of all five stocks:

Bull of the Day:

Vehicle sales in the US took a major hit during the great recession of 2008-2009. When times are lean, consumers tend to stretch the useful life of their autos further, making repairs and living with older models instead of committing a big portion of already stretched budgets to vehicle upgrades.

In general, when economic conditions improve, new and used vehicle sales increase at about the same rate. Over the past 6 years however, that hasn’t been the case. Used car sales have been outpacing new, especially as the price difference between the categories grows.

In 2013, the average price difference between new and 3-tear old vehicles was 56%. That number swelled to 62% - or about $14,000 – by 2018. That difference helped fuel record used car sales of 40.2 million vehicles last year. That number is expected to top 41 million in 2019.

America’s Car Mart operates 145 dealerships in 11 states, primarily in smaller cities through the Midwest and Southeast. Their direct competition tends to be independent “mom and pop” used car lots that struggle to match the variety of inventory and range of services made possible by greater scale.

CRMT is the big fish in the small pond.

That local presence, high levels of customer service and an increasingly loyal customer base has led to significant increases in top line sales – averaging more than 10%/year.

Selling cars is only part of the picture however, as America’s Car Mart specializes in offering customer financing, often offering low down payments and payment plans with bi-weekly options.

In the most recent quarter, the average customer bought a car worth $11,589, made a $700 down payment and financed the balance for 32 months at an annual interest rate of 16.4%.

In a low interest rate environment in which US Treasury Bonds with 10 years or less to maturity yield lower than 2%/year, 16.4% is a truly outstanding figure for loans with less than 3 years remaining.

You might surmise that many customers must have less-than-perfect credit - and you’d be correct – but the high interest rates don’t translate into high losses in the finance division. In fact, America’s Car Mart has been significantly shrinking charge-offs lately, thanks to the rapid new car depreciation figures discussed before.

The difference is in the value of the collateral for those auto loans.

The company is selling vehicles that already depreciated significantly over the first few years in service. That translates into a shallower depreciation curve later in the autos’ usable life and an increased chance that in the event America’s Car Mart will recover most or all of their investment in the event that they are forced to repossess a vehicle for non-payment.

America’s Car Mart has been consistently beating analyst estimates over the past several years and the shares have been rallying, yet remain a very reasonable value on a Price to Earnings basis.

With a 12 month forward P/E Ratio  of just 13.5X, CRMT is significantly cheaper than the S&P 500 (at 18X) and basically in line with the industry.

Several recent upwards earnings revisions earn the company a Zacks rank #1 (Strong Buy).

With a competitive advantage in the markets in which it participates and a unique niche in the finance business, America’s Car Mart represents one-stop shopping for its customers as well as investors in the auto-sales industry.

Bear of the Day:

Why would anyone want to buy an entire company that was locked in an earnings tailspin?

That’s what investors were left wondering Thursday after it was reported that hedge fund Engaged Capital was looking for financing to take the weight-loss multi-level marketing company Medifast private. Shares of the Zacks Rank #5 (Strong Sell) Medifast rallied more than 8% in a single session, a modest reversal of a steep downward trend that has been in place for over a year.

Publicly traded MLMs are often volatile investments. Relying on turning customers into the next crop of salespeople can be beneficial during boomtimes as the essentially free labor makes for excellent operating margins.

When the supply of new recruits dries up and discouraged members quit, revenues can dry up in a hurry. Though in principle MLMs are perfectly legal, they are also exposed to litigation from dissatisfied members who generally play up the “pyramid scheme” angle while seeking damages in a legal forum.

The volatility of MLM results tends to attract activist investors on both the long and short sides and vast fortunes are won and lost. It’s also a reason individual investors should generally tread lightly or stay on the sidelines altogether.

In the case of Medifast, the big rumor-driven rally makes for an excellent opportunity to sell out a long position, but even experienced traders should think very carefully about initiating a short position because the volatility is likely to be very high.

Medifast bears have seen the share price decline from near $250 in 2018 to below $75 after the most recent quarterly report – which was a major disappointment. Though it has recovered somewhat since then - getting back above $103 after Thursday’s rally - Medifast has significantly lagged the broad markets in 2019. In a year when the S&P 500 is up nearly 30%, Medifast is still down more than 18%.

Since the last report in which Medifast missed the Zacks Consensus Estimates for both revenues and net earnings, analyst forecasts have been falling like a rock. Expectations for the next two quarters and the next two full years are all significantly lower than 60 days ago.

Of course, there’s some chance that Engaged is successful in obtaining financing and takes Medifast private at a premium to the current stock price, though in a way, that possibility puts a lid on appreciation potential. The fund has never taken control of an entire company before.

If Engaged is not successful, it would seem that Thursday’s big gains are in immediate jeopardy and it wouldn’t be surprising to see the shares test the November lows.

If you’re holding shares of Medifast, now would be a good time to consider taking the recent profits and running for the exit while recent events get sorted out.

Additional content:

Buy Microsoft (MSFT) for 2020? The ‘Whys’ and ‘Why Nots’

Microsoft shares have surged over 50% in 2019 on the back of its continued cloud computing expansion and stable growth from its legacy businesses. MSFT stock sits right near its highs and Microsoft remains one of only two public companies in the U.S. with a $1 trillion market cap—alongside Apple.

With this in mind, should investors consider buying Microsoft stock for 2020?

MSFT’s Pitch

Microsoft is Amazon’s largest competitor in the cloud space. Last quarter (Q1 fiscal 2020), its Intelligent Cloud revenue surged 27%, driven by 59% expansion in the key Azure division. This cloud growth easily topped the fourth quarter's 19% jump and fiscal 2019’s 21% cloud growth.

Cloud computing helps drive MSFT stock and remains a focus for Wall Street. But the Redmond, Washington-based firm’s other businesses, from Office and Windows to gaming and devices have evolved and expanded. Microsoft has also diversified through a ton of acquisitions, which includes big purchases such as LinkedIn. Looking ahead, Microsoft plans to expand its reach in everything from artificial intelligence to IoT.

Microsoft has also remained mostly out of the recent government spotlight that others have found themselves in—clearly MSFT already had its big day in antitrust court years ago.

On a macroeconomic level, the historic bull market could keep on rolling in 2020, as U.S. unemployment rests at 50-year lows. The Fed is also poised to keep interest rates low and the U.S. economy is expected to expand around 2.2% in 2020 (also read: Why Stocks Are Poised To Soar In 2020).

Other Fundamentals

Along with the economic picture appearing strong, which would likely benefit MSFT as its business reaches enterprises and consumers, its other fundamentals remain solid. Investors can see that Microsoft stock surged over the last two years to easily outpace Amazon. MSFT closed regular trading Wednesday just off its 52-week high at $154.37 a share.

MSFT currently trades at 27.3X forward 12-month Zacks earnings estimates. This represents a discount compared to its industry’s 29.2X average and its own two-year high of 29.9X. Its price to sales ratio is more stretched. But Microsoft returns value to shareholders through buybacks and dividends, of which it consistently raises.

The firm lifted its quarterly dividend by 11% for fiscal 2020 and its board announced in September that it approved a new share repurchase program of up $40 billion. MSFT’s annualized dividend currently yields 1.32%, which rests below the 10-year U.S. Treasury Note’s 1.92% but comes in above Apple’s 1.10%.

On top of that, Microsoft has paid down its current debt load over the last several years. Plus, the firm has started to reduce its longer-term debt, which climbed somewhat heavily after its $26.2 billion LinkedIn purchase in 2016. MSFT’s debt-to-equity ratio came in at 0.69 at the end of last quarter (down from 0.71), which comes in below Apple’s 1.01.

Bottom Line

Our current Zacks estimates call for Microsoft's fiscal 2020 revenue to pop 11.3%, with fiscal 2021 expected to jump another 11% higher to $155.51 billion. These estimates come in below the firm’s 14% growth in both 2019 and 2018 but look strong compared to 2017’s 6% climb and mark impressive top-line expansion for a company of its size and age.

Perhaps more importantly, the company’s cloud computing revenues are projected to surge another 21% in 2020 to match last year’s growth.

At the bottom end of the income statement, MSFT’s adjusted full-year earnings are expected to climb 12.6% this year and another 12.3% in 2021. On top of that, Microsoft’s longer-term earnings revision activity has trended completely upward since its last quarterly report.  

Overall, Microsoft is a Zacks Rank #2 (Buy) at the moment and is part of an industry that rests in the top 20% of our more than 250 Zacks industries. Therefore, MSFT stock appears to be worth buying for 2020 even near its highs.

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America's Car-Mart, Inc. (CRMT) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
MEDIFAST INC (MED) : Free Stock Analysis Report
 
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