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In a turbulent world, investors often lean on defense stocks, and with good reason. As the international stage becomes ever more dangerous, the United States and other countries beef up their military spending to make sure they are able to accommodate any threat or action from rogue nations. The defense sector has had a spectacular run since the election last year, and one top firm is advising clients to stay long.
In a new SunTrust Robinson Humphrey research report, the Aerospace and Defense team are positive on defense but they think the commercial aerospace arena is fully valued and trading at peak valuations. They advise investors to focus on six companies that have lagged their peers and to buy shares into year’s end. Here we focus on five that look very attractive. All are rated Buy.
The SunTrust team is positive on this off-the-radar stock. AAR Corp. (NYSE: AIR) is a provider of services and products to the commercial aviation and government and defense markets. It operates in two segments: Aviation Services, which consists of supply chain and maintenance, repair and overhaul (MRO) activities, and Expeditionary Services, which includes airlift and mobility activities.
The company’s services and products include aviation supply chain and parts support programs; MRO of aircraft and landing gear; design and manufacture of specialized pallets, shelters and containers; expeditionary airlift services; aircraft modifications; and aircraft and engine sales and leasing.
Investors receive a 0.81% dividend yield. The SunTrust price target for the stock is $42. The Wall Street consensus target is $41.17, and shares closed Thursday at $37.78.
This is another company investors may not know as well, but offers solid value at current levels. Curtiss-Wright Corp. (NYSE: CW) designs, manufactures and overhauls precision components and systems and provides highly engineered products and services to the aerospace, defense, automotive, shipbuilding, processing, oil, petrochemical, agricultural equipment, railroad, power generation, security and metalworking industries.
The company posted solid second-quarter results back in the summer that beat estimates and it raised guidance. Trading at less than 20 times next year’s estimates, the shares look very reasonable.
Investors receive a 0.6% dividend. SunTrust has a $115 price target, and the consensus target is $103.50. The stock closed Thursday at $105.70.
This stock was hit hard back in August and offers investors a very good entry point. Esterline Technologies Corp. (NYSE: ESL) primarily serves the aerospace and defense market (approximately 80% of revenues). The remaining 20% of revenues are derived by applying the same technologies to the industrial market. The company divides its business into three segments: Avionics & Controls, Sensors & Systems and Advanced Materials.
The stock was tagged on Wall Street concerns of defense programs that were sunsetting, but most are positive on the structural changes that have been made. While patience may be required, the stock looks tempting here.
The $105 SunTrust price objective is well above consensus target price of $92.80. Shares closed Thursday at $91.25.24/7 Wall St.
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This stock also was hit in the summer but has bounced back smartly and looks ready to break out. KLX Inc. (NASDAQ: KLXI) is the distributor and service provider of aerospace fasteners and consumables. It offers ranges of aerospace hardware and consumables and inventory management services across the world.
The company operates through two segments. The Aerospace Solutions Group’s offerings include inventory management and replenishment; creative and differential supply chain solutions, such as third-party logistics programs, special packaging and bar-coding, parts kitting; quality assurance testing and a range of purchasing assistance programs; plus the electronic data interchange capability.
Energy Services Group’s products and services include onshore completion services, wireline services, fishing services and tools, down-hole completion and production services, pressure control, accommodations and related surface rental equipment, and remanufacturing shops.
SunTrust has set its price target at $56. That compares with the consensus price objective of $55.40 and the most recent close at $53.04.
This company was hitting our insider buying screens in a big way earlier this year. Transdigm Group Inc. (NYSE: TDG) is a holding company for different businesses that provide a diverse array of products, including ignition systems, pumps, valves, motors, actuators, controls, water faucets and systems, quick disconnects and couplings, batteries, chargers and power conditioning, cockpit security systems, composites and elastomers, audio systems, and lighting and displays.
While Transdigm remains a highly charged stock following a steady barrage of short reports, the stock has solid upside potential. The shares pulled back recently on market concerns around tepid organic commercial aftermarket growth. Excluding four specific units, commercial aftermarket would have been up mid-single-digits and bookings exceeded shipments. Top analysts view the pull back in Transdigm shares as a particularly attractive buying opportunity.
The SunTrust price target is $300. The posted consensus target is $299, and the stock closed Thursday at $253.55
SALE OF DURABLE GOODS UP
PRICE OF OIL REMAINS STEADY
The U.S. Energy Information Administration (EIA) released its weekly petroleum status report Wednesday morning, showing that U.S. commercial crude inventories decreased by 1.8 million barrels last week, maintaining a total U.S. commercial crude inventory of 471 million barrels. The commercial crude inventory remains in the upper half of the average range for this time of year.
Tuesday evening the American Petroleum Institute (API) reported that crude inventories fell by 761,000 barrels in the week ending September 22. API also reported gasoline supplies fell by 1.5 million barrels and distillate inventories fell by 4.5 barrels. For the same period, analysts had consensus estimates for an increase of 2.3 million barrels in crude inventories, a decrease of 962,000 barrels in gasoline inventories and a drop of 2.472 million barrels in distillate stockpiles.
Total gasoline inventories rose by 1.1 million barrels last week, according to the EIA, and remain in the upper half of the five-year average range. U.S. refineries produced about 9.9 million barrels of gasoline a day last week, up about 400,000 barrels compared to the prior week. Total motor gasoline supplied (the agency’s proxy for demand) averaged over 9.4 million barrels a day for the past four weeks, down by about 100,000 barrels a day compared with the prior week.
The analysts at RBN Energy reported this morning on second-quarter profits for 43 oil and gas exploration and production (E&P) firms. In the first quarter of the year, the industry posted profits of $9.1 billion, or $9.12 per barrel of oil equivalent. In the second quarter profit fell by 80% to $1.7 billion ($1.71 a barrel), including a $6.3 billion impairment charge taken by ConocoPhillips. Excluding that charge, second-quarter profit totaled $8.0 billion ($8.02 a barrel).
E&P firms weighted more heavily for oil production posted pretax income of $1.88 billion in the second quarter, while gas-weighted firms posted pretax income of $1.36 billion. Diversified firms posted a loss of $1.53 billion for the quarter, including the Conoco impairment. Excluding Conoco, profit totaled $1.2 billion, down from $1.3 billion in the first quarter.
Before the EIA report, benchmark West Texas Intermediate (WTI) crude for November delivery traded up about 0.25% at around $52.04 a barrel, and it traded at $51.94 shortly after the report’s release. Prices bounced back above $52 a barrel within a few minutes. WTI settled at $51.88 on Tuesday and opened at $52.09 Wednesday morning. The 52-week range on November futures is $42.84 to $58.37.
Distillate inventories decreased by 800,000 barrels last week and remain in the lower half of the average range for this time of year. Distillate product supplied averaged over 4 million barrels a day over the past four weeks, up by 13.9% compared with the same period last year. Distillate production averaged over 4.6 million barrels a day last week, up about 100,000 barrels a day compared to the prior week’s production.
For the past week, crude imports averaged over 7.4 million barrels a day, up by 59,000 barrels a day compared with the previous week. Refineries were running at 88.6% of capacity, with daily input averaging 16.2 million barrels a day, about a million barrels a day more than the previous week’s average.
Crude oil exports rose to 1.49 million barrels a day last week, up by 564,000 barrels over the prior week and 984,000 barrels more than at the same time last year. The cumulative daily average export total last week rose to 783,000 barrels a day, up from 483,000 barrels a day in the same week a year ago, an increase of 62.2%.
According to AAA, the current national average pump price per gallon of regular gasoline is $2.571, down nearly three cents from $2.607 a week ago and up about 20 cents per gallon compared with the month-ago price. Last year at this time, a gallon of regular gasoline cost $2.207 on average in the United States.
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Here is a look at how share prices for two blue-chip stocks and two exchange traded funds reacted to this latest report.
Exxon Mobil Corp. (NYSE: XOM) traded up about 0.1%, at $80.94 in a 52-week range of $76.05 to $93.22. Over the past 12 months, Exxon stock has traded down about 6.4%.
Chevron Corp. (NYSE: CVX) traded down about 0.4%, at $117.02 in a 52-week range of $98.75 to $119.00. As of last night’s close, Chevron shares are trading up about 16% over the past 12 months.
The United States Oil ETF (NYSEMKT: USO) traded up about 0.1%, at $10.50 in a 52-week range of $8.65 to $12.00.
The VanEck Vectors Oil Services ETF (NYSEMKT: OIH) traded down about 1%, at $25.59 in a 52-week range of $21.70 to $36.35
HUBER NOW HAS QUICK SIGN UP
The manager of the world's largest money market fund said it would take steps to reduce risk in its investments and lower the lofty yields that have delped draw a flood of cash into the fund over the past year. Tianhong Asset Management Co a Bejing based company that manages money market fund with more than $200 billion in assets in making changes to comply with liquidity rules imposed recently by Chinese regulators, according to Wang Dengfeng general manger of Trianhong's fixed income department. We will step up efforts to adhere to the original function of money market funds as a cash management tool that carries low risk, low yield and high liquidity. The result will be a gradual slide in the fund's investment yields.
The fund, called Yu'e Bao recently saw its seven day investment yield top 4% on an annualized basis up from 2.3% a year earlier. Its yield is in line with that of other Chinese money market funds but dwarfs interest rates on short term Chinese government debt and bank deposits as well as returns on money market funds in the US and Europe.
TESLA STOCK HAMMERED
UBS STOCK PICS
If there was a contest to find the one major government economic report that is the most volatile and unpredictable through good times and bad times alike, the durable goods report from the U.S. Department of Commerce would have to win the prize. These are the big-ticket items bought by businesses and consumers that are not immediately consumed and are generally kept for a period of years. After seeing some volatility in durable goods in prior reports, August turned out to be a strong month, and it may be strong enough to curb some of the pessimism in the gross domestic product (GDP) forecasts for the third quarter.
The level of new orders rose 1.7% in August to $232.8 billion, and July was revised to a −6.8% reading of $228.9 billion. Bloomberg had predicted just a 1.5% gain in August. If taken on a year-over-year reading, new orders were up by 5.1%.
Excluding transportation, the Commerce Department showed that new orders increased by just 0.2%. Bloomberg had projected a 0.4% gain here. One issue that may have hindered the result was that the July reading without transportation was revised upward to a gain of 0.8% from a preliminary view of a 0.5% gain.
Excluding defense, new orders increased by 2.2% in August, and transportation equipment led the increase with a $3.6 billion gain (up 4.9%) to $77.4 billion.
There is a core reading here that removes some of the volatility from defense and airplane orders. This measure showed a 3.6% gain in August, although July’s preliminary 3.5% gain was revised to a higher gain of 4.1%.
The factory sector did not seem to be affected at the national level by the impact of Hurricane Harvey in late August. If September holds up from Hurricane Irma in a similar fashion, then an earlier acceleration into year-end seems likely.
All in all, the August report on durable goods should have been well received by those hoping for higher growth and looking for strong GDP. The inventory-to-shipments ratio held pat at 1.69, a level that is considered to be lean on the inventory side, translating to strong production numbers ahead as we get closer to year-end.
There was a special note about hurricanes having an impact. Motor vehicles showed a return to growth at 1.5% in orders and up 1.9% in shipments. Communications equipment orders rose by 4.0%.
Each monthly report on durable goods is based on a survey from a panel of approximately 5,000 reporting units, which represents approximately 3,100 in the manufacturing sector. These reporting units may be divisions of diversified large companies, large homogenous companies, or single-unit manufacturers from 92 different industry categories.
hares of Tesla Inc. (NASDAQ: TSLA) have dropped about $40 from the 52-week high posted less than 10 days ago. That’s a 10% slide and analyst Toni Sacconaghi at Bernstein doesn’t think it’s over yet.
Bernstein reiterated its $265 12-month price target on the stock this morning, a figure that is 23% below last night’s closing price of $345.25 and a massive 43% below the 52-week high of $389.61.
Tesla’s problem, as far as Bernstein is concerned, boils down to how long investors are willing to put up no profits and no positive cash flow. CNBC cited Sacconaghi, who noted that Tesla will burn $4.7 billion in cash this year, raising its total cash burn to $10.6 billion since becoming a publicly traded company:
Tesla’s persistent cash burn has been a major investor controversy … In fact, Tesla may be the largest public company in history to have never generated either positive annual cash flow or positive annual profit.
What keeps Tesla going and keeps investors in the stock is it phenomenal share price growth. At their peak, share prices were up about 87% year over year, about 4 times better than the year-over-year performance of the Nasdaq Composite.
But if the share price even stalls, much less drops 23%, why would an investor stick around? There will be some, of course, who will buy the dip, but Tesla will have to deliver on its promised production and sale of its Model 3 sedan. Sacconaghi told CNBC:
[W]e worry about whether Tesla can successfully build the mass-market Model 3: (1) with good gross margins, (2) with good quality, and (3) on time. … We believe the essential issue with Tesla’s stock is not how much cash the company burns right now, but rather how well the company can execute upon its Model 3 launch – specifically around gross margins – and demonstrate that it has a clear path to long-term profitability.
Tesla stock traded traded up less than 0.1% in the early afternoon Wednesday at $345.24 in a 52-week range of $178.19 to $389.61. The consensus 12-month price target on the stock is $319.94.
WORLD'S BIGGEST MONEY FUND WILL CUT RISK
Uber has begun a new promotion to get drivers in the United States. Among the benefits is that people can sign up to “be on the road in no time” through a process that takes only four minutes. The plan clearly makes it hard for Uber to have much quality control over new drivers.
According to a new promotion, being an Uber driver has three benefits. The first is that drivers “make great money.” Uber points out that the sum depends on how many hours drivers work. Drivers get paid weekly, and “your fares get automatically deposited.”
The next benefit is flexible hours. Drivers can drive whatever hours they want to. Probably drivers who elect to drive during light travel periods, like 1 a.m. to 5 a.m. will make less money that those who work during daylight and early evening hours.
Finally, the short sign-up process:
Sign up today and you’ll be on the road in no time. Plus, signing up takes less than 4 minutes. Don’t wait to start making great money with your car.
It is a good sign Uber needs new drivers, unless they are replacing others who want to leave. CNBC reported that the driver churn is tremendous:
Add to the list of problems at Uber: Driver retention. Only 4 percent of people who sign up to drive for the ride-hailing service are still driving a year later, according to a report in The Information.
The company’s accelerating driver drop off rate is partially due to increased competition from companies like Lyft. But the number one complaint among Uber drivers is the pay, according to undisclosed data seen by The Information. Many Uber drivers have complained about unfair compensation for long trips, and not being able to accept tips.
Few businesses have this kind of turnover in workers, even if those workers are independent contractors, as they are at Uber.
Uber has had its share of problems recently, from the dismissal of its CEO to complaints about sexual harassment to being banned from London. However, it may be able to get an army of new drivers, if they are willing to take the four minutes to sign up.
SEPTEMBER NEWSLETTER 6
RECOMENDED DEFENSE STOCKS
A look at the current prices of many of the top technology stocks today can be somewhat discouraging, as the sheer sticker shock makes many of them almost impossible to own on a single-stock basis. Or sure, you can add them via a mutual fund or an exchange traded fund that owns the shares, but that kind of fractional ownership is often not the path investors want to take. One idea is to look for tech companies that are lower priced and offer big upside.
We screened the Merrill Lynch research universe looking for top-quality technology stocks that were priced under $20 per share, rated Buy and looked to have good potential to the firm’s price target. While not suitable for all accounts, aggressive investors may find these four right up their alley.
This stock has been hit hard and could offer the best upside for aggressive accounts. 3D Systems Corp. (NYSE: DDD) is a leading provider of 3D content-to-print solutions, including 3D printers, print materials and on-demand custom parts services for professionals and consumers.
The company has seven print engine technologies: Stereolithography, Select Laser Sintering, Multi-Jet Molding, Fused Deposition Modeling, Film Transfer Imaging, Digital Light Processing and Powder Binding. For 2016, 35% of revenue came from the Products segment, 25% from Materials and 41% from Services.
The Merrill Lynch price target for the stock is $20, and the Wall Street consensus target is $15.73. The shares closed Wednesday at $13.75.
This stock was on fire a couple of years ago but was absolutely eviscerated after numerous earnings misses. FireEye Inc. (NASDAQ: FEYE) has been mentioned over the years as a takeover target, and trading 85% below highs that were printed this time three years ago, it may indeed be on the radar.
The company provides cybersecurity solutions for detecting, preventing, analyzing and resolving cyberattacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information.
FireEye also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors. Its Threat Analytics Platform helps to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, and its Malware Analysis System helps to manually execute and inspect advanced malware, zero-day and other advanced cyberattacks embedded in files, email attachments and web objects.
The company reported solid second-quarter numbers in August, and the stock has rallied smartly from lows printed in March.
Merrill Lynch recently raised the price target to $21 from $18, while the consensus target is $16.95. The stock closed Wednesday at $16.90.