Chicago, IL - March 31, 2015- Zacks Equity Research highlights Sonic Corporation ( SONC - Free Report ) as the Bull of the Day and Freeport-McMoRan Inc. ( FCX - Free Report ) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Summit Hotel Properties, Inc. ( INN - Free Report ), Chesapeake Lodging Trust ( CHSP - Free Report ) and Post Properties Inc. ( PPS - Free Report ).
Here is a synopsis of all five stocks:
Sonic Corporation ( SONC - Free Report ) recently posted blow-out second fiscal quarter results as traffic picked up at this drive-in chain. This Zacks Rank #1 (Strong Buy) is expected to see double digit earnings growth both this year and next as technology initiatives are starting to pay off.
Sonic operates 3500 drive-in restaurant locations around the United States selling cheeseburgers, hot dogs, chicken sandwiches, tater tots and numerous drink combinations.
It revolutionized the drive-in experience in 1953 when it perfected the curbside speaker for ordering.
On Mar 24, Sonic reported its fiscal second quarter results and beat the Zacks Consensus Estimate by a penny. Earnings were $0.13 compared to the Zacks Consensus of $0.12.
It was the 5th consecutive earnings beat in a row. It has a solid earnings surprise record with just one miss since 2012.
But the real surprise came in the same store sales results which soared 11.5% due to higher traffic.
Freeport-McMoRan is one of the largest copper and gold producers in the world but in 2013, in a controversial move, it expanded its commodities portfolio into energy and now has oil and natural gas assets in North America, including in the Deepwater of the Gulf of Mexico, onshore and offshore California and in the Haynesville shale.
Even while its shares slid, Freeport-McMoRan had been paying one of the juiciest dividends in the industry at 6.80%.
But on March 24, the company announced that it was cutting the dividend by 84% to $0.05 per share from $0.3125 per share payable on May 1, 2015 to shareholders of record as of April 15 in order to conserve its cash.
It was the first dividend cut since it suspended the dividend completely during the financial crisis in 2008. Once the crisis abated, it resumed the dividend.
In 2013, the company paid $9 billion in cash and stock to acquire Plains Exploration & Production and McMoRan Exploration. Energy is now approximately 25% of revenue.
But with crude prices crashing, so has revenue.
The company is also cutting capital expenditures in the oil and gas business to strengthen the balance sheet.
3 REITs to Buy on Fed's Gradual Rate Increase
Last Friday, Fed Chair Janet Yellen indicated there was a possibility of a gradual hike in interest rates sometime this year. Markets responded enthusiastically to these comments while sovereign yields increased marginally. Yields had struggled before the Fed Chair's statements following lower-than-expected GDP numbers.
Gradual Rate Hike
At a conference sponsored by the San Francisco Fed, Yellen said that an improving economy "may warrant an increase in the federal funds rate target" at the end of the year. However, the Fed Chair added she and other FOMC members believe a "gradual rise in the federal funds rate" would be the correct approach "over the next few years." At the same time, the Fed would evaluate the health of the economy through several economic indicators including real activity and inflation.
Yellen emphasized that rise in inflation rate is not essential for the Fed to hike interest rates. She was "cautiously optimistic" that economic growth will touch 2.3% in 2015, unemployment rate will drop further and consumer spending is expected to increase "at a good clip."
However, GDP numbers indicate some amount of slack in economic growth. Fourth quarter GDP increased at an annual rate of 2.2%, less than the consensus estimate of an increase by 2.4%. The report on fourth quarter GDP remained unchanged when compared to the "second" estimate issued last month. This rise in fourth quarter GDP was also less than the third quarter's growth in real GDP by 5%.
Growth was hampered after business investment was trimmed, government spending dropped and trade balance deteriorated. Additionally, corporate profit after tax declined 3% from the third quarter, its biggest quarterly decline since first quarter of 2011. A stronger U.S. dollar and decline in global demand were cited to be the reasons responsible for the fall.
Will REITs Lose?
Real Estate Investment Trust ("REIT") investors have had cause for concern. While an improving economy, particularly the labor market, has led to optimism, anticipation of the Federal Reserve's tightening cycle has heightened fears. While positive data strengthens the industry's fundamentals and builds demand for commercial properties, a rate hike would wipe out all the optimism.
Despite the recent hiccup, the long-term fundamentals of the economy remain strong. Better numbers in the next quarter would lift the spirit of market watchers once again. A rate hike after an economic recovery would significantly benefit REITs. This is because an improving economy would obviously mean more economic activity leading to increased demand for space. And since supply has been slow with tepid economic recovery in the past, this increase in demand would lead to higher rents and occupancies.
Additionally, the Fed cut its median funds rate forecast from 1.125% to 0.625% for the end of this year. Now, the Fed Chair has again emphasized the pace of rate increases would be gradual. This would give the REITs adequate time to adjust. Historically, REITs have a tendency of fitting with the market momentum and performing well over the long-term phase of rising rate. So if investors can gulp the short-term hiccups, the road ahead will drive up to gains.
Adjustments with the rate environment would be comparatively easier for sectors with the advantage of pricing power like hotel, storage and apartment REITs that have shorter-term leases. Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Summit Hotel Properties holds a Zacks Rank #2 (Buy) and has expected earnings growth of 12.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.05.
ChesapeakeLodging Trust ( CHSP - Free Report ) is a self-advised REIT focusing on investments in upper-upscale hotels. These hotels primarily cater to business and convention segments and are located in urban settings in the US.
Apart from a Zacks Rank #2 (Buy), Chesapeake Lodging has expected earnings growth of 11%. It has a P/E (F1) of 14.52x.
Post Properties Inc. ( PPS - Free Report ) is a developer and operator of upscale multi-family apartment communities in the U.S. The company owns several properties in metropolitan Atlanta, Dallas, Georgia, greater Washington D.C., Texas and Tampa, Florida.
Post Properties holds a Zacks Rank #2 (Buy) and has expected earnings growth of 20.8%. It has a P/E (F1) of 19.52x.
Given the long-term perspective on the U.S. economy, prospects for REITs remain strong. Moreover, a rate hike may be a good time to pick up such stocks and benefit from them at a later point. This is why these stocks would make for a prudent choice.
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