Spartan Motors, Occidental, Tesla, Ford and General Motors highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – November 27, 2019 – Zacks Equity Research Spartan Motors SPAR as the Bull of the Day, Occidental Petroleum OXY as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Tesla TSLA, Ford F and General Motors GM.
Here is a synopsis of all five stocks:
When the average investor thinks about the Automotive industry, they probably start with the “Big 3” automakers – Ford, General Motors and Fiat Chrysler. They might consider upstart electric auto manufacturer Tesla , and overseas companies like Toyota, Nissan, BMW and Volkswagen.
All of those companies are doing functionally the same thing – designing and building mass-market passenger cars, trucks and SUVs for the consumer market.
As those name-brand companies with hundreds of billions in collective market capitalization duke it out in a never ending battle to sell the most cars, it’s easy to overlook a much less obvious (but often very profitable) niche market – specialty vehicles and parts for industrial markets.
North Carolina-based Spartan Motors has been consistently growing earnings by selling high-quality and dependable vehicles to the emergency response, government service, defense and delivery markets. They design and manufacture the chassis’ and entire vehicles you see on the road as fire trucks, ambulances, municipal service vehicles and delivery trucks.
To understand how Spartan Motors got to where they are today, we’ll need to examine a bit of the company’s history. During the 1970’s The Form-Rite Corporation had supplied millions of dollars’ worth of molded plastic parts to Diamond REO trucks, which was filing for bankruptcy protection. During the bankruptcy proceedings, Form-Rite learned of a significant contract that soon-to-be-defunct Diamond REO had secured to build custom fire truck chassis.
Recognizing the potential value of that agreement, a small group of Form-Rite executives and engineers joined forces with former Diamond employees, obtained the contract and incorporated Spartan Motors, leveraging basically their entire personal net worth to build their first chassis.
Having made excellent build quality their mission, that first chassis was a huge success and a flood of additional orders poured in - mostly for more fire trucks, but Spartan also fielded requests for other custom heavy industry vehicles.
By 1984, Spartan had outgrown the Form-Rite umbrella and was spun off in an initial public offering, using the proceeds to significantly expand their production capabilities.
Fast forward to today and through a combination of organic growth and strategic acquisitions, Spartan now supplies complete vehicles and parts to huge municipal fire departments – including Chicago, San Francisco, Dallas and Buffalo – as well as delivery vehicles, defense vehicles, lighting products and ladder assemblies.
Thanks to significant earnings growth and recent upward revisions, Spartan is currently a Zacks Rank #1 (Strong Buy).
Spartan shares have significantly outperformed the broad markets in 2019, gaining 145% YTD versus 23% for the S&P 500 and 19% for the small-cap Russell 2000, of which Spartan is a member.
Even after that huge run-up, Spartan still trades at a 12M forward P/E Ratio of just 19.5X – barely higher than the S&P’s 18.8X multiple and a downright bargain for a fast-growing small-cap. That’s thanks to rapidly rising estimates for full year earnings. Even after the big rally, Spartan’s share price hasn’t yet quite caught up with its earnings potential.
Savvy investors love to pick up a little known stocks that have been flying under the radar before they are discovered by the investing public and swell in valuation. Based on its low P/E and Style Score of “A” for growth, Spartan Motors may be just such an opportunity.
Warren Buffet and Carl Icahn are two of the most prolific investors of our time and they both figure into the story of today’s Bear of the Day – Occidental Petroleum.
Icahn is one of Occidental’s largest single shareholders, and he has been locked in a battle with the company’s board after their approval of a $55B takeover of Anadarko Petroleum earlier in 2019 which included the assumption of $40B in debt. Engaged in a bidding war for Anadarko with Chevron, Occidental sold off $9B worth of global assets and secured $10B in financing from Warren Buffet’s Berkshire Hathaway.
Icahn has described the current OXY board as “willing to take inordinate risks and gamble stockholders’ money to further their agendas.” He claims that they “grossly overpaid for Anadarko” in a deal that – because of the Berkshire funding deal – did not require a shareholder vote.
Occidental sold Berkshire 100,000 shares of preferred stock which pay an 8% annual dividend and granted warrants to purchase up to 80 million shares of common stock.
The acquisition of Anadarko’s assets gives Occidental immediate exposure to the shale-oil boom in the Permian Basin in West Texas, but also leaves the company scrambling to continue shedding assets and cut operational costs to shore up their debt-laden balance sheet.
Occidental’s level of debt combined with guaranteed preferred dividends is approximately 4.2X projected annual earnings – more than 4 times the industry average.
Occidental CEO Vicki Hollub defended the acquisition, arguing that the assets that have been acquired will seem cheap in the long run if oil prices rise. That’s a big “if” however - with US producers now pumping out more than 12 million barrels of oil each day, OPECs apparently limited ability to prop up global prices and a seismic shift in public sentiment about the future of fossil fuels.
Where oil is going to be trading in the future is anybody’s guess, which is why Occidental’s bet is so risky for shareholders like Icahn. He has recently sold approximately 1/3 of his original stake in OXY, but still owns about 22 million shares.
It hasn’t been a great year in the Oil and Gas industry which has seen share prices basically flat even as the S&P 500 has gained 23%, but it’s been much worse for Occidental which is down more than 35% since making the winning bid for Anadarko. The Icahn sales aren’t the only factor – plenty of analysts have made similar observations about the debt load – but the fact that Icahn still owns $850 million worth of OXY shares could put additional pressure on the price if he continues to sell.
What about Buffett?
It might seem ill-advised to bet against a company that has the apparent support of the Oracle of Omaha, and Buffett has profited handily in the past by providing huge-money financing to companies with limited options. His $5B backstop of Goldman Sachs during the financial crisis was legendary and also earned Berkshire a tidy $3.7B profit – thanks largely to the exercise of warrants as GS shares recovered.
Buffet’s participation suggests he believes in Occidental’s prospects, but unlike institutional equity investors like Icahn, T Rowe Price and BlackRock, the stock doesn’t have to appreciate for Berkshire to make money. The 8% yield on his preferred shares is more than double the industry average and the warrants – which will only pay off if the shares rally considerably – could also cause significant dilution to owners of common shares.
The Oil and Gas industry can be a dicey place to invest, with the potential for windfall profits offset by a host of risks that are completely out of control of industry participants.
Tesla (TSLA) Rebounds: Is It Cybertruck Redemption?
Tesla shares edged higher Monday after a botched Friday debut of its new pickup truck that Elon Musk has dubbed Cybertruck. The unveiling went off course when Musk asked his head of design to throw a small metal ball at the vehicle’s side window.
The metal ball ended up cracking the window much to the surprise of the audience and Musk. After the debacle at the premier, TSLA shares slipped Friday as Wall Street was hardly impressed with the design. Despite the eccentric showcase, Musk announced Monday that orders for the new truck were doing better than most expected.
Tesla’s Pickup Makes the Rounds
Footage of the window of the electric pickup truck shattering made its rounds on social media as the public all shared their opinions on the uniquely shaped automobile.
The unveiling in LA focused on demonstrating the new vehicle and its ability to compete in the pickup space dominated by Ford and General Motors. Tesla’s Cybertruck pickup is polarizing, with its angular design that makes it stand out and hard to describe. The price of the new vehicle is set to start at $39,900, which is about $10,000 less than expected.
However, while the entry-level rear-wheel drive Cybertruck is set to cost less than $40,000, the higher-end, more-capable all-wheel-drive versions will be priced up to $69,900. The priciest version of the electric pickup boasts a zero-to-sixty acceleration time in 2.9 seconds, up to 500 miles of range, and can tow 14,000 pounds.
Tesla didn’t seem to skimp on the performance capabilities that most pickup consumers look for, but some worry that the odd design might not have mass appeal. During the production of the pickup, some inside the company worried that Musk would let his personal preferences overly influence the design. Despite the design backlash, Tesla has already received 200,000 orders for the new Cybertruck according to Musk.
Can the Cybertruck Transcend the Nascent Market?
Putting aside the failure and unconventional design, can Tesla’s new pickup truck appeal to a broad audience? Tesla first defied conventional automotive industry wisdom by betting that consumers would be willing to pay a premium to drive an electric car.
A sleek design was a central part of the formula, as Tesla aimed to inspire consumers to buy an unconventionally modern looking car. It seems Tesla adopted the same strategy with its unique Cybertruck design that it hopes can attract the pickup truck consumer.
The automotive company has time for its Cybertruck to grow on consumers despite the initial backlash as most don't expect a release until the latter half of 2021 and the electric pickup truck market is just entering its infancy. Research firm IHS Markit projects electric vehicles will account for about 9% of the US automobile market in 2026, up from less than 2% today. Joseph Spak, an analyst with RBC Capital Markets, called the Tesla pickup “a Hummer for the green millennial generation; really the ultimate virtue and vice signaling machine.”
Apart from the unorthodox design and embarrassing accident at the showcase, the capabilities of the truck seem to be in line with what pickup truck enthusiasts would look for. Additionally, the strong preorder numbers reported by Musk may indicate that consumers have looked past Wall Street’s initial worries.
However, investors should note that Ford and GM have already announced plans to design their own electric pickups, with GM set to release its vehicle in the fall of 2021. This may not bode well for Tesla as pickup consumers are known to be brand loyal, and Ford and GM have long dominated the pickup truck landscape.
On top of all that, TSLA remains a volatile stock that has been on a roller coaster ride year-to-date. However, the automaker’s recent performance has helped make up for some of the losses it endured earlier as it is has gained over 55% in the past 12 weeks. Our Q4 estimates forecast a 35.75% bottom-line decline to $1.24 per share and for sales to slip 1.82% to $7.09 billion.
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