Today’s news: Commercial Metals (CMC) reported second-quarter results; Designer Brands Inc. (DSW) held an Investor Day; Guess? (GES) reported fourth-quarter results.
Commercial Metals Company (CMC – yield 2.8%) reported adjusted second-quarter earnings per share (EPS) of $0.29 yesterday vs. the consensus estimate of $0.26, and $1.4 billion revenue vs. the consensus $1.5 billion revenue (August year end). Results incorporate the acquisition of four steel mills and rebar fabrication assets from Gerdau S.A. CEO Barbara Smith expressed a high degree of optimism regarding full-year 2019 results. Interested investors may read more in the company’s press release.
There were no updated earnings projections from management. Previous consensus estimates pointed toward EPS rising 22% and 24% in fiscal 2019 and 2020. The 2019 P/E is low at 9.5.
The stock has traded steadily between 15.5 and 17.5 all year, and could possibly surpass that trading range in the near future. There’s additional price resistance at 19. Strong Buy.
Designer Brands Inc., formerly DSW Inc. (DSW – yield 4.7%), announced new three-year strategic priority and financial goals this week.
• The company will change its name from DSW Inc. to Designer Brands Inc. to better reflect its current strategy and business model. The new ticker symbol will be DBI, and will begin trading on the NYSE on April 2.
• The company aims to increase gross profit by 240 basis points, achieve a 5.5% annual CAGR and achieve adjusted earnings per share (EPS) of $2.65-$2.75 in 2021.
Investors are invited to access the Investor Day webcast. DSW is a footwear, accessories and apparel retailer that joined the Buy Low Opportunities Portfolio this week.
DSW is an undervalued growth stock with a hefty dividend yield. Wall Street is currently expecting EPS to increase 12.0%, 15.1% and 26.2% in the next three years. The current-year P/E is 11.3 (January year end).
Upon the earnings release, the stock fell down to price support dating back to last April/May. That seems like an extreme overreaction that occasionally happens among small-cap stocks. I see nothing in the earnings outlook that would warrant the price drop, and I therefore expect the stock to rebound after it rests for a while. Patient growth stock investors can buy now and lock in the large dividend yield. Strong Buy.
Guess?, Inc. (GES – yield 4.7%) reported fourth-quarter earnings per share (EPS) of $0.70 this week when the market expected $0.75 (January year end). Revenue came in at $837.1 million, above the $831.2 million consensus estimate.
Investors are welcome to review the earnings press release and the conference call transcript, including comments from new CEO Carlos Alberini. Of the five major business segments, Asia revenues increased the most by 25.7% in U.S. dollars, while Americas Retail revenues decreased 1.0% in U.S. dollars. Mr. Alberini cited significant growth opportunities in China, Japan and Eastern and Northern Europe. The company expects net new store openings in fiscal 2020 totaling 30 in Europe and 20 in Asia. The 2020 fiscal year is expected to deliver increases in revenue, expenses (primarily advertising and compensation), gross margin and earnings per share.
Full-year 2019 EPS rose 40.0%. Based on current consensus earnings estimates, analysts expect EPS to rise 40.8% and 13.0% in fiscal 2020 and 2021.
Why did the stock fall yesterday? I’ve previously mentioned that it’s common for the computers that generate news stories to botch the numbers that they report. I believe that happened with Guess yesterday. The computers are programmed to report comments about projected non-GAAP EPS that they pluck from the corporate press release and compare the projected number to current consensus non-GAAP EPS estimates. The Guess press release did not contain projections of non-GAAP 2020 EPS, but it did contain projections of GAAP 2020 EPS. The computer therefore compared projected GAAP 2020 EPS to consensus non-GAAP EPS estimates—numbers that are not related to each other—and drew the conclusion that non-GAAP 2020 EPS will come in way below Wall Street’s previous expectations. Investors read the news report, did not know that the numbers were reported incorrectly, and they reacted by selling GES shares.
I was not able to find any statements from either Guess management or Wall Street analysts that corroborated the computer-generated report. I think it was an error, and that GES shares fell dramatically yesterday due to “fake news,” if you’ll pardon the phrase.
What will likely happen next is that Wall Street analysts will gather info from the Guess press release and conference call, and then begin doing calculations so that they can publish updated research reports that revise or reiterate their non-GAAP estimates for 2020 EPS.
Based on a $19.31 share price and the prior $1.38 earnings estimate, the fiscal 2020 price/earnings ratio (P/E) is 14.0, indicating that GES continues to be a greatly undervalued stock.
I’m disappointed that GES fell to the bottom of a 12-month trading range yesterday, but I am not worried. The earnings growth prospects remain strong, the valuation remains low, and the trading range remains consistent.
I continue to believe that GES will eventually surpass the current trading range between 19 and 25. In the meantime, investors can buy low, lock in a high dividend yield, and either trade the stock within the wide trading range or hold the stock for longer-term capital appreciation. Strong Buy.