Syntel, Sherwin Williams, Wells Fargo, Berkshire Hathaway and KeyCorp highlighted as Zacks Bull and Bear of the Day
CHICAGO, July 30, 2013 /PRNewswire/ -- Zacks Equity Research highlights Syntel (Nasdaq: SYNT-Free Report) as the Bull of the Day and Sherwin Williams (NYSE: SHW-Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis onthe Wells Fargo & Company (NYSE: WFC-Free Report), Berkshire Hathaway Inc. (NYSE: BRK.B-Free Report) and KeyCorp. (NYSE: KEY-Free Report).
Here is a synopsis of all five stocks:
If you are looking to profit from corporate cost cutting and regulatory burden, then Syntel (Nasdaq: SYNT-Free Report), Zacks Rank #1 (Strong Buy), may be your play. This global information technology services and knowledge process outsourcing company with a focus on the healthcare and financial industries has been a hot performer in 2013. It is up about 32% year to date. Although Syntel has posted a strong return, it is reasonably priced given a rising trend in earnings estimates and track record of vibrant sales growth.
Syntel is trading at about 14.8 times 12 month forward expected earnings per share compared to a ten year average of 17.7. The forward multiple is discount to average and near the S&P 500's 12 month forward PE ratio of 14.5. Additionally the PEG Ratio, price to earnings ratio to earnings growth rate, is 0.88 compared to a ten year average of 1.02. The market is cautious about pricing the company's growth rate suggesting the bar is low for Syntel to impress investors. The wall of worry for the stock seems to rest in concerns over falling margins and customer concentration. Syntel's top 10 clients account for about 80% of revenues.
In the past month, the Zacks Consensus Earnings per Share Estimate for the September 2013 quarter has risen from $1.12 to $1.23, while the 2013 Zacks Consensus Earnings per Share Estimate has increased $0.34 to $4.74. There was also a strong bump higher for 2014 with the estimate rising $0.26 to $4.99.
For the coming quarter, Syntel has seen its earnings estimates revised higher nine times in the past thirty days. Likewise, 2013 and 2014 estimates have both increased eight times in the last 30 days. There have been no downward revisions.
Sherwin Williams (NYSE: SHW-Free Report), Zacks Rank #5 (Strong Sell), is a manufacturer and distributor of paints and coating products. Given that conventional wisdom favors growth in the housing sector, it feels awkward painting a negative outlook for Sherwin Williams. However, the company is richly valued and seeing its earnings estimates cut. The combination could leave your portfolio colored red instead of black.
The trade is extremely optimistic toward Sherwin Williams based on the forward earnings outlook, and as a result the bar for exceeding earnings estimates may be high. The stock is priced at about 19.5 times forward 12 month earnings. This compares to a 10 year average of 14.8 and minimum and maximum values of 10.2 and 22.3 respectively. The stock is less expensive based on its PEG ratio (price to earnings ratio to earnings growth) of 1.33, which is near average. However, no one wants average in their portfolio. The recent rise in mortgage rates and slowdown in pending home sales suggest there is risk that the growth rate in earnings slows. Higher mortgage rates may not only reduce new home buying, but the drop in refinance activity may cut household spending power and the dollars available for remodel.
The Zacks Consensus EPS Estimate for the September 2013 quarter has fallen $0.20 over the past 30 days, while the December 2012 quarter estimate has declined $0.23 to $1.37. There have also been notable declines for the outlook for 2014 earnings where the Zacks Consensus Estimate has dropped $0.60 to $9.24.
No analysts have revised earnings estimates up for the coming quarters or 2014 for the past 30 days, while estimates have declined in the past 30 days for 2013 and 2014. There is strong agreement for a reduction in the earnings outlook.
Wells Fargo to Exit 8 Joint Ventures
Wells Fargo & Company (NYSE: WFC-Free Report) plans to terminate 8 mortgage joint ventures (JVs) including an alliance with HomeServices Lending, an affiliate of Berkshire Hathaway Inc. (NYSE: BRK.B-Free Report). The move is part of the largest U.S. mortgage lender's attempt to adjust to changes in the regulatory environment.
The termination, which is expected to result in 300 job cuts, will close in the next one and a half years. Additionally, on completion, Wells Fargo's partners may seek to directly finance homeowners, sign agreements to make the bank a preferred lender, or exit the market.
The 8 JVs are Bankers Funding, Colorado Mortgage Alliance, DE Capital Mortgage, HomeServices Lending, Military Family Home Loans, Prosperity Mortgage (a JV with real estate firm Long & Foster), Premia Mortgage and Private Mortgage Advisors.
Among these, HomeServices of America Inc. – the real estate brokerage unit of Berkshire Hathaway – has agreed to take over Wells Fargo's stake in HomeServices Lending, which was the largest JV.
Why Exit The Mortgage JV?
Wells Fargo's decision to exit the JVs follows the U.S. government's increased scrutiny of mortgage lenders after the 2007 mortgage crisis that led to the collapse of the United States housing sector. Moreover, the mortgage industry has been embroiled in legal conflicts with authorities regarding their risky dealings.
Additionally, The Dodd-Frank Act worsened the scenario. Under this act, the JVs could be subject to state regulation, in addition to the current federal regulations. This will likely result in new licensing agreements and additional complexities that could increase compliance costs.
Moreover, the lucrative U.S. home-loan business has started to wane, given the weakening of the refinancing boom and rising long-term interest rates. Notably, the average fixed rate on a 30-year home loan increased almost 100 basis points to 4.31% in the last 3 months.
Like most of its peers, Wells Fargo experienced declining volumes in its home loan business. Notably, income from mortgages was down 3% to $2.8 billion in the second quarter when compared with the prior-year quarter figure.
Our Viewpoint With a constantly changing regulatory landscape and a volatile macro economy, many banks are revising their business models to maximize profitability. A couple of years ago, Wells Fargo had more than 80 JVs. The bank closed all of them, except for the aforementioned 8, which accounted for the maximum share of the JV loan volumes.
Further, Wells Fargo has been aggressively seeking cost cuts and plans to exit troubled businesses, which entail legal or regulatory risks.
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