For Immediate Release
Chicago, IL – November 17, 2020 – Zacks Equity Research Shares of General Motors Company GM as the Bull of the Day, Royal Caribbean Group RCL as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Activision Blizzard, Inc. ATVI, Electronic Arts Inc. EA and Take-Two Interactive Software, Inc. TTWO.
Here is a synopsis of all five stocks:
Bull of the Day:
You’d be hard-pressed to find a company as quintessentially American as General Motors.
Founded in 1908 by former horse-drawn carriage maker William Durant as a holding company with the intention of acquiring nascent automobile manufacturers, GM grew to be the world’s largest automaker by 1931 – a title the company held for more than 75 years. At its peak, the company enjoyed market share of over 50% in the US.
Though the number of brands under the GM umbrella has changed frequently over the years and has been consolidated to include only four makes in the US, its highest-end brand has become synonymous with high quality or luxury. How many times have you heard someone refer to the best example of something that has noting to do with automobiles as, “the Cadillac of…”?
Starting in the 1970s, GM encountered much more difficult conditions with tough fuel economy and pollution regulations, high US labor costs and competition from foreign automakers. Product quality suffered, though a loyal audience continued to buy GM autos.
You probably already know that the GM of the past century is not the same entity as the current corporation – though they do share the name. The original company declared Chapter 11 bankruptcy during the financial crisis of 2008-09 and was rescued with an equity purchase by the Troubled Asset Relief Program (TARP) which saved over a million US jobs, primarily in manufacturing – both at GM itself as well as at its many suppliers.
Equity shareholders in the old company found that their stakes were worthless after creditors were paid, but a new public company rose from the ashes in 2010. The US Government closed their position as an owner of GM in 2013 at a small loss. (That loss was unusual. Most TARP assets were eventually sold profitably, though the separate sale of GM’s former finance arm did produce a profit and the preservation of GM’s outsized tax revenues made the bailout a good deal for taxpayers.)
Unfortunately, since selling shares to the public at $33 in the 2010 IPO, GM is up only about 27%. Over the same period, the S&P 500 is up over 200% - and even more when dividends are factored in. (GM does not currently pay a cash dividend.)
It looks like things are about to change.
Electric vehicle manufacturer Tesla has become the most valuable car company in the world – by a very wide margin – by offering a popular and diverse line of electric cars, outselling all other manufacturers combined and planning for the future by manufacturing their own battery pack.
The efficiency of the batteries and the cost to produce (or buy) them is the single most important factor in the feasibility and profitability of electric vehicles. The rest of the car is very similar to conventional internal combustion-engined cars. (In many respects, it can actually be simpler than traditional cars.)
Until now, GM only had one fully electric model - the Bolt – and it’s believed the company was losing as much as $5,000 on each of the economy-sized vehicles they sold. Over the next three years, they’ll be rolling out more than 20 fully- electric cars in the US as well as in China and that lineup will include high-end luxury cars and SUVs. We won’t know until after at least a few quarters of sales, but it’s likely that those luxury vehicles will sell at prices that provide comfortable gross margins.
GM has developed its own modular battery platform that CEO Mary Barra says will allow the company to create, “a multi-brand, multi-segment EV strategy with economies of scale that rivals our full-size truck business with much less complexity and even more flexibility.”
Analysts are warming up to the idea that GM is putting together the pieces to be a successful EV company even as they continue to enjoy success in conventional cars ad trucks. Over the past 30 days, the Zacks Consensus Earnings Estimate for full-year 2020 has risen from $2.52/share all the way to $4.47/share, earning GM a Zacks Rank #1 (Strong Buy).
Part of the reason for that big increase was a huge beat last quarter when the company reported a net of $2.83/share, almost double expectations. Though several big beats in a row have driven the share price back up over $40/share, that price still represents a forward P/E Ratio of less than 10X.
It’s a legitimate value play.
A lot of attention has been paid to Tesla and other upstart EV competitors lately and rightly so – it’s almost certainly the transportation technology of the future. Investors would be unwise however to forget about the reasonably priced, legacy automaker with over 100 years of experience, trusted and recognizable brands and the scale to make a big splash in the future EV market even as they continue to churn out profits in the present.
Bear of the Day:
“Don’t put all of your eggs in one basket.”
It’s an age-old aphorism, but thanks to its application to the principles of diversification in an investment portfolio, we hear it all the time.
It can apply to individual stocks as well. When there’s a single, binary event facing a company, owning the shares amounts to a simple “bet” on whether or not that event actually happens. It’s certainly not impossible to make money this way, but it’s gambling – not investing.
In the case of the shares of the big cruise lines, the event shareholders are waiting for is US government assistance to plug the holes left by ceasing almost all revenue generating operations for six months and counting. Owning the shares not is essentially a bet on a bailout.
The shares of Cruise Ship Operators have been moving quite a bit lately, up on good news about vaccines or relaxed CDC guidelines and down on bad news about a surge in Covid-19 cases and new shutdowns in the US and abroad.
All the while, all but a tiny handful of ships are docked, and the first passenger cruise in months a ship called the Sea dream from a smaller operator was abruptly cut short and sent back to port with passengers quarantined in their cabins after one of them tested positive for Covid-19.
Huge operator Royal Caribbean looks to be in serious trouble. With all cruises cancelled through the end of 2020, the company was forced to more than double its long-term debt this year to $17.6 billion and floated another $1 billion in convertible securities. At the end of the third quarter, RCL had about $4 billion in liquidity on the balance sheet, and they’re burning between $250-290 million a month – leaving them with enough cash for a little bit over a year in a “no-revenue” environment.
In 2019, RCL posted net profits of $9.54/share. In 2020, the Zacks Consensus Earnings Estimate is a loss of ($18.33)/share. In 2021, it’s a loss of ($11.38)/share. As Covid-19 cases spike, those estimates have been falling fast, earning Royal Caribbean a Zacks Rank #5 (Strong Sell).
But could additional fiscal stimulus from the federal government change the situation? It’s not impossible, but it’s not likely either. First, Congress and the White House tried for months to make a deal on a replacement for the parts of the CARES Act that expired in July, but they were unsuccessful in coming to terms on anything.
Even if a deal is reached after a new Congress and President are sworn in next year, new stimulus is still at least several months away. (Remember, four months is over a billion dollars of cash burn for RCL.) There’s also no guarantee anything would go to the cruise industry. Airlines are essential to our way of life and would likely be among the first to receive targeted aid in order to ensure the survival of the industry.
Cruise ships are essentially a luxury item. With millions of Americans still out of work because of the pandemic, it could be difficult to find much public support for keeping them afloat – and there’s certainly no guarantee that any aid package they received would preserve existing shareholder equity.
With durable customer demand and impressive profitability during normal times, it’s certainly possible that the cruise industry could come back someday, but it’s likely to be a long time and they’ll still have all that debt to pay down – at fairly high interest rates. There are simply too many more attractive places to invest your money that don’t involve the possibility of going down with the ship.
Additional content:
Activision (ATVI) Launches "Call of Duty: Black Ops Cold War"
Activision Blizzard recently announced the availability of Call of Duty: Black Ops Cold War, a sequel to the original Call of Duty: Black Ops game.
The game includes three playing modes: multiplayer mode, the new co-operative Zombies survival mode and single-player campaign. All three modes are integrated to support a theme which combines 1980s’ pop culture with a gripping conspiracy, set at the height of the Cold War.
Coronavirus-Led Gaming Surge Aids Prospects
Video games have gained massive traction due to coronavirus-induced social distancing practices and lockdowns that have compelled people to stay at home. Per the NPD Group report, consumer spending on video games in the United States reached $11.2 billion and sales of video game content reached $10.4 billion in the third quarter of 2020.
Activision, along with its Zacks Toys-Games-Hobbies industry peers like Electronic Arts and Take Two Interactive, is benefiting from this trend.
Notably, Activision's shares are up 30.5% year to date compared with the industry’s rally of 17.8%.
Activision has leveraged this ongoing wave by increasing its in-game spending to drive net bookings and expand its user base.
Markedly, in the recently concluded third quarter, Activision Blizzard’s in-game net bookings were up 76.6% year over year to $1.2 billion, driven by strong adoption of its gaming franchises: Call of Duty: Modern Warfare & Warzone, World of Witchcraft, Hearthstone, Overwatch, Candy Crush Saga and Candy Crush Friends Saga.
Moreover, the launch of Black Ops Cold War drives expansion of the company’s existing product portfolio. It will also boost Call of Duty franchise’s presence across platforms and geographies. Activision also launched Call of Duty: Warzone in March, which has gained a significant player base within a short span of time.
Additionally, as per App Annie, the company’s division, King’s Candy Crush Saga was the top-grossing title in U.S. app stores in 2019. It also benefited from higher advertising net bookings despite coronavirus-led disruption on ad spending.
Moreover, this Zacks Rank #2 (Buy) company expects net bookings to be $8.1 billion for 2020. Accelerated gaming demand and a robust product portfolio are expected to aid the company’s top line. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Activision Blizzard, Inc (ATVI) : Free Stock Analysis Report
TakeTwo Interactive Software, Inc. (TTWO) : Free Stock Analysis Report
General Motors Company (GM) : Free Stock Analysis Report
Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
Electronic Arts Inc. (EA) : Free Stock Analysis Report
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