Here are the biggest calls on Wall Street on Thursday
Jefferies downgraded CMG mostly on valuation.
“With CMG stock up +65% (vs +13% S&P) in 1Q, we believe valuation is full and reflects improved visibility for powerful SSS and margin drivers. We expect CMG to post strong 1Q results on April 24, with potential upside to our/consensus SSS of +6.5% and EPS (we are 13% above the Street) on flow-through, although beef and marketing headwinds are likely. Despite NT sentiment risk related to avocado prices, we raise our PT to $700 and cut our rating to Hold.”
Read more about this call here.
Credit Suisse said Apple‘s iPhone sales are in a, “difficult,” spot and that it will take time to see how its service business pans out.
“As Apple‘s iPhone matures, the company is looking to transform itself into a more recurring, higher-growth, and ultimately higher-value business as it pushes to increasingly monetize its massive 900mn iPhone installed base. We recognize the potential in the shift to Services, which we expect will reach $65bn in revenue by FY21, but believe it will take time for that view to play out. Near-term upside from here likely requires the multiple to re-rate higher; investor perception of Apple as a hardware-centric company will be hard to shake against a backdrop of double-digit iPhone sales declines (CSe -11% y/y in CY19), in our view. With the stock up 40% from its Jan low and near a peak multiple (15x CY20 EPS), we remain on the sidelines awaiting a better entry point and/or line-of-sight to significant Services-led upside to break out of the historical valuation range.”
“IBM is standing on the precipice of change, with the pending Red Hat (RHT) acquisition marking a landmark shift in strategy and bringing a potential return to true revenue-driven EPS growth vs. years of over-reliance on lower-quality drivers. The combination significantly improves IBM’s positioning in the rapid push toward hybrid cloud, bringing together the platform, incumbency, and expertise necessary to help customers with the vast majority (~80%) of applications that have yet to migrate to the public cloud. We see meaningful financial opportunity longer term, as we estimate ~10% FCF accretion within three years that should enable sustained dividend growth (4.4% yield currently) despite rapid debt repayment. We see a potential negative surprise from sizeable near-term EPS dilution (~11% impact in CY20E); we are undeterred, as the biggest drag is from the required writedown of Red Hat’s deferred revenue under GAAP accounting which has no material impact on FCF and should fade quickly thereafter. Further, the acquisition has yet to close; while IBM is confident in a 2H19 timeline, we nonetheless acknowledge it represents risk to our view.”
Credit Suisse sees significant opportunity with Xerox in a, “secularly declining industry.”
“We believe Xerox is in the early stages of a multi-year margin expansion and FCF self-help story. Despite challenges to revenue growth amid a secularly declining industry, we see significant opportunity trapped in opex and working capital to unlock.”
Morgan Stanley downgraded KDP saying they see single-serve coffee penetration is slowing down.
“We are downgrading KDP to UW from EW, with our survey and analysis underpinning our ~250 bps downside in coffee system sales growth relative to high market expectations of ~4% priced into the stock from a DCF-implied standpoint. Our ~80 bps below consensus corporate revenue forecast is supported by takeaways from our survey in terms of slowing household penetration and further pressure in pod pricing. From a valuation standpoint, a high valuation bar (~17x NTM EV/EBITDA) and our below-consensus estimates create a -2.3:1.0 negatively skewed risk-reward. We are lowering our KDP price target by ~11%, from $27 to $24, reflecting our lower coffee estimates and a lower assumed multiple.”
Bank of America double downgraded the stock and said market conditions are deteriorating in the U.S.
“We downgrade U.S. Steel to Underperform from Buy on worse near-term U.S. market conditions than we anticipated, with channel checks telling us not only have recent price hikes not stuck but benchmark hot rolled coil retreated to its lows of the year in recent days. A sharply lower scrap price, down ~$25/t m/m for April defied higher global iron ore prices, and has pressured U.S. steel lower. Without a more confident 2019E price view, we see limited catalysts in light of our Steelmageddon™ thesis materializing in late 2020E/early 2021E. Our new $18 PO falls from a prior $31 on the lower steel price forecasts and using 5x 2019E EV/EBITDA and 6x 2020E, under its historical 7x.”
Guggenheim said LLY has the best “long-term growth” in pharma but thinks that is already priced in to the stock.
“In our view, LLY has the best long-term growth profile in US Pharma, that growth is the broad consensus, and we believe this is largely priced into the stock given its EV/EBIT premium to the group. We believe management has done an impressive job delivering, but we see limited upside from here until competition from NOVO’s semaglutide franchise and LLY’s overall immunology portfolio is more fully understood. As a result, we are downgrading LLY to Neutral but are now removing our price target and estimate the fair value to be in the range of $125-135/share.”
J.P. Morgan upgraded the stock after meeting with management saying they see, “high visibility to +20% annual net income growth.”
“FIVE targets 20% annual revenue growth on high-teens unit growth expansion and low-single-digit comps (i.e., +3.0%) with roughly flat margins and a 3% fixed cost hurdle equating to 20% net income growth. Importantly, we see high visibility to +20% annual net income growth based on (1) high-teens unit growth with new store returns the sole governor, (2) low-single-digit “core” comps (ex craze trends) on positive store traffic, and (3) margin expansion driven by scale citing opportunity to reduce today’s +3% fixed cost hurdle over time. We upgrade to Overweight and raise our Dec ’19 price target to $150 (was $133) based on 40x our FY20E EPS, representing a 1.8x PEG on our FY20/21 model and management’s long-term annual 20% net income growth profile representing a premium to 1.5x 2020E growth peer average.”
HSBC said they like Lyft’s prospects but that their number 2 position may put them at a disadvantage.
“We are bullish on the growth prospects for ride-hailing, but as the clear No. 2 in the US, Lyft is likely to face a bumpy ride. Autonomous driving could be a game changer for ride-hailing, but this looks unlikely before 2025. Lyft’s recent IPO is expected to be the first of several by ride-hailing companies around the world. We build on our previous deep dive into the fundamentals of the ride-hailing industry to value Lyft, providing a framework to assess other players in this fast-growing sector. We initiate coverage of Lyft with a Hold rating and TP of USD60.”