Chicago, IL – August 20, 2021 – Zacks Equity Research Shares of Shopify Inc. (SHOP Quick QuoteSHOP ) as the Bull of the Day, Cedar Realty Trust, Inc. (CDR Quick QuoteCDR ) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Chubb Limited (CB Quick QuoteCB ) , First American Financial Corp. (FAF Quick QuoteFAF ) and American International Group Inc. (AIG Quick QuoteAIG ) .
Here is a synopsis of all five stocks:
Bull of the Day:
Shopify shares shined long before the pandemic forced more businesses and shoppers down the e-commerce route. The Canadian firm posted another strong quarter at the end of July and its outlook remains impressive inside an industry with plenty of growth runway left.
Shopify helps companies of all shapes and sizes build, maintain, and grow their e-commerce footprints. Its business model is rather straightforward and provides what it calls “essential internet infrastructure for commerce,” including everything from site design and marketing to payments and shipping.
SHOP’s most basic package starts with a monthly fee of $29 for sellers and a 2.9% transaction fee. Shopify makes money from recurring subscription fees and a slew of various add-ons that help run many other essential business functions. SHOP’s point-of-sale products and software have gained momentum as well, competing against the likes of Square.
Shopify boasts that it powers over 1.7 million businesses in more than 175 countries. The company offers different tiers, with some aimed at entrepreneurs, as well as small and medium businesses. Meanwhile, its solutions are robust enough to support high-volume merchants and big businesses that include the likes of Heinz, Allbirds, and many others.
SHOP has partnerships with heavyweights such as Walmart and Facebook. The company went public back in 2015 and it grew rapidly for years before the pandemic. In Fact, 2019’s 47% sales growth marked its slowest since its IPO.
Recent Performance and Outlook
SHOP’s covid-boosted 2020 revenue skyrocketed 86% from $1.58 billion to $2.93 billion. Shopify then crushed Q1 estimates and posted blowout second quarter financials on July 28 that saw its quarterly sales cross the billion-dollar threshold for the first time.
Revenue jumped 57% to $1.12 billion, with the subscription unit up 70% and merchant solutions 52% higher. Shopify’s adjusted earnings soared over 100% to $2.24 a share.
The company has now topped our EPS estimates by an average of 110% in the trailing four quarters and analysts raised their long-term bottom line projections following its report. Zacks estimates call for its FY21 revenue to jump 58% from $2.93 billion to $4.61 billion, with FY22 ready to surge another 33% to $6.14 billion.
Fiscal 2022 is set to mark a slowdown in terms of percentage-based growth, but that’s what happens as the numbers get bigger. Instead, investors should focus on the likelihood Shopify’s 2022 sales will come in $1.53 billion higher, which is nearly as much as the company’s full-year revenue in 2019 ($1.58 billion).
Shopify’s adjusted earnings are projected to climb by 15% this year and another 12% in FY22. And some of the most recent EPS estimates Zacks has call for far larger bottom-line expansion.
SHOP shares went on a stellar run long before the pandemic, crushing everyone from Nvidia to Amazon. It surged from under $30 a share in 2016 to over $500 before the coronavirus crash. Luckily the stock has cooled down a bit since its initial post-covid surge, up around 40% to lag Target and come much closer to the broader tech space’s average.
Shopify stock had regained momentum along with other pandemic winners since mid-May. But it’s fallen 10% from its July records. The recent pullback pushed it below neutral RSI levels (50) at 47. The stock is also currently hovering right around its 50-day moving average. And it’s trading at a 30% discount to its own year-long highs in terms of forward sales.
The tech firm boasts an impressive balance sheet with $7.8 billion in cash, equivalents, and marketable securities against $1.83 billion in total liabilities. Its strong financial footing will help it continue to grow, while pursuing new areas and even possibly support an acquisition.
Shopify’s EPS revisions positivity helps it grab a Zacks Rank #1 (Strong Buy) right now. And 16 of the 29 brokerage recommendations Zacks has are “Strong Buys,” with only one “Sell.” There could be some near-term selling pressure given SHOP and the market’s huge run.
Still, investors with long-term horizons might want to consider adding Shopify stock for its ability to thrive in a booming growth sector. And e-commerce is far from its peak, considering it accounted for only 13.3% of total U.S. retail sales in the second quarter, down from a record 16% in Q2 FY20.
Bear of the Day:
Cedar Realty Trust stock is up big over the last year. But the REIT’s near-term outlook is far from impressive and it fell short of our second quarter estimates at the end of July.
What’s Going On?
Cedar Realty Trust is a fully-integrated REIT focused on the ownership, operation, and redevelopment of grocery-anchored shopping centers. The company operates in high-density urban areas ranging from Boston to D.C. CDR’s revenue fell 5% in 2019 and 6% during the covid-hit 2020.
Cedar Realty Trust’s second quarter sales then fell below Zacks estimates, as did its funds from operations. Instead of earnings, REITs report funds from operations or FFO, but investors can view them as essentially the same thing.
Despite its recent performance and its declining revenue, the stock has skyrocketed 190% in the past year to crush its industry’s 25% climb.
But the last 12 months hardly tell a complete story because even with its strong showing the stock is down 65% in the past five years. The stock has slipped from its 52-week highs recently and it was down 2.8% during regular hours Thursday.
Cedar Realty Trust’s FFO outlook has trended in the wrong direction since its report on July 29 to help it land a Zacks Rank #5 (Strong Sell), alongside “D” grades for Growth and Momentum in our Style Scores system.
Zacks estimates call for its FY21 FFO to slip 20% on 6% lower sales. Therefore, the stock might be worth staying away from at the moment, especially considering its massive year-long run.
Additional content:3 Insurance Stocks Still Worth Buying After Reaching 52-Week Highs
Insurance stocks caught investors’ attention as the sector rides on economic strength. Shares of insurers like Chubb, First American Financial Corp hit their 52-Week high on Aug 18 and American International Group hit its 52-week high on Aug 17 reflecting investors’ optimism on the industry that suffered COVID-led lockdowns last year. Demand for insurance took a back seat when businesses shuttered down, and people parked their cars and got confined to homes.
Now with businesses running on full steam and people venturing out, demand for commercial, auto and other kinds of insurance shot up. This was reflected in a strong earnings performance for the overall sector.
Along with buoyant demand, the rising insurance premium rate, which in insurance parlance is called hardening of rates, bodes well for insurers.
While business is gaining momentum, the low interest rate environment is weighing on the fixed investment income. Prompted by the nature of their business, insurers are inclined to invest the collected premium in safe bonds so as to accumulate funds and pay when required. Nonetheless, they are navigating this challenge by pumping their resources into alternative investments like private equity, hedge funds, real estate etc.
Overall bullishness in the sector can be seen through the performances of the iShares U.S. Insurance ETF (IAK), which has rallied 21.75% year to date compared with the S&P 500 Index’s gain of 19%. This index consists of insurers that provide life, property and casualty (P&C), and full-line insurance. Chubb has the greatest holding with 11.58% weightage followed by AIG (6.46%). First American Financial comprises 1.09% of the fund.
Despite trading at their respective 52-week highs, Chubb, First American Financial and American International presently hold a Zacks Rank of #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s discuss these stocks in detail here that appear attractive investment bets.
AIG is currently getting noticed after remaining an underdog for long. Its most recent earnings performance delivered a beat for the second straight quarter, reflecting improvements in its property/casualty operations since 2017. In the first half of 2021, revenue growth was registered at 5.4% versus a decline of 12% in the comparable period of 2020.
The company withstood a tough operating environment with revenues shrinking annually since 2013 (except in 2019) due to low insurance rates, and stiff competition and several asset divestitures that trimmed its revenue sources.
Thus the company kept shedding its numerous non-core businesses that produced little synergies. Other operational measures taken since 2017 under the tenure of the then CEO Brian Dupperault are now reaping gains.
This year, the company should gain traction from a better insurance premium rate in a hardening market along with a lower expense base, aided by its AIG 200 initiative. This, in turn, will likely boost premiums and underwriting profits.
It is also divesting its Life and Retirement business via an IPO. Though this strategic move will stifle the diversification benefits, management believes that it is the “optimal path forward”.
We believe, these discreet efforts will spur growth ahead. With its current price-to-book value of 0.72 compared with the industry average of 1.58, the stock looks cheaply priced and a good buy.
Chubb occupies the number one position in the Commercial Lines Insurance industry with a market share of 5.5% on the basis of the 2020 direct premium written. It also holds eight positions in the property and casualty market.
In the recently reported quarter, its earnings topped estimates by 22.3% for the third time in a row. Improving economy supported results. Management stated that net premiums written in its consumer lines remain subdued by the pandemic’s effects on travel and other business plus consumer-related activity. However, the same began to improve of late and already increased 5.6% in the said quarter.
Per management, the company is capitalizing on a strong commercial P&C pricing environment in all important regions of the world. With nearly 70% of its business portfolio lying in commercial lines, this favorable condition represents a major growth opportunity.
The chairman at its recent earnings conference stated that “From everything we see today, I am confident these market conditions will continue. Our company is firing on all cylinders – we are growing our business while we continue to expand underwriting margins. We will continue to outperform and deliver strong, sustainable shareholder value.”
Chubb has a stellar earnings history to fall back on. It has long shown its underwriting discipline and a willingness to trade market share for underwriting profitability. It is one of the most profitable insurers with a combined ratio averaging 91.2% over the last 10 years, which has outperformed its competitors by 7.7%. Combined ratio shows the total expense and loss as a percentage of premium. The lower the ratio, the better it is.
The insurer also produced the best P&C premium revenue growth, globally, in more than 15 years, powered by its commercial P&C businesses and backed by a continued robust commercial P&C pricing.
Chubb holds an edge in the industry, given its geographically well-diversified presence in 54 countries, which provides its business with stability. Its international consumer P&C businesses have been its crucial growth engines to date and will remain so in years to come, especially among the rising middle classes of developing Asia and Latin America.
Chubb’s balance sheet strength is another positive. Its consistent cash flows allowed it to share a part of profits with its equity stakeholders in the form of dividend payments, which have grown over the past 28 years. It carries a dividend yield of 1.73%. The insurer is sure to continue rewarding its investors with dividend raises, led by solid business growth.
In a nutshell, its expanding geographies, a broad product portfolio, underwriting skills, judicious expense management, consistency of risk appetite and strong finances will help it ride the growth tide forward.
First American Financial is a leader in the Title and Settlement Services Industry, holding 23.3% of the Title market share. A general improvement in the economy provides a tailwind to its business. It is primarily focused on the real estate market while 92% of its revenues comes from providing title insurance.
In the last reported quarter, the company’s bottom line beat estimates by 30.7% for the third consecutive quarter. Title segment revenues were up 44% year over year owing to the strength of the purchase and commercial markets. This year, the company expects to achieve a record in its commercial business.
A hot real estate market works in favor of the company given its driving demand for title insurance products. Housing purchase market saw a V-shaped recovery, led by low mortgage rates, favorable demographics and appreciation in home prices.
The company is also developing next-generation cloud-based technology to make its business more customer-friendly.
First American also made investments worth $260 million in venture-backed companies, which should yield investment gains.
The company is streamlining its business and to this end, it is divesting its property and casualty business. Growth of international operations in Canada, Europe and Australia is one of its focus areas.
Its strong balance sheet with ample liquidity and financial flexibility bolsters its strategic initiatives and dividend payments. Since 2015, its dividend payments witnessed a CAGR of 10.7%. Its dividend payout ratio of 29% provides room for further growth. Its dividend yield of 2.8% is another enticement for income investors.
Overall, a positive real estate market and strategic investments facilitated by a solid financial footing are key levers for First American Financial.
Zacks Investment Research
800-767-3771 ext. 9339
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks “Terms and Conditions of Service” disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit www.zacks.com/performance for information about the performance numbers displayed in this press release.