The ongoing trade dispute with China frightened U.S. investors again this week. When China retaliated with increased tariffs on $60 billion of U.S. goods, the Dow Jones Industrial Average fell 617 points on Monday. However, U.S. markets were able to claw back a majority of those losses by Friday’s close.
While no resolution has been made between the two superpowers, the war of words has since quieted down. In addition, investors cheered solid earnings reports from blue-chips, like Cisco Systems (CSCO) and Wal-Mart (WMT).
Calculating the Tariff Cost
Still, President Trump has vowed to consider tariffs on another $300 billion of Chinese goods next month, if the two countries don’t agree to a truce.
Here’s how Wall Street is envisioning the next steps in the process, which suggests we may not be out of the woods yet:
Deutsche Bank (May 16)- “We continue to see 60% probability that the two sides cannot reach a deal before G20, and the US will impose tariff on the remaining USD300bn Chinese exports to the US. It seems to us the war is indeed spreading beyond tariff.”
Barclays (May 17)- “We maintain our base case S&P 500 price target of 2750; however, in the event of an all-out trade war, we estimate further downside of ~10% is possible.”
The tariffs being slung back and forth across the Pacific Ocean challenge each company differently, but there are other ways the trade conflict is affecting investors. For one, the U.S. yield curve inverted again this week; with the rate of 3-month treasury bills falling below that of 10-year notes.
The perception of slower global growth has also caused Fed funds futures to now price in a 50% chance the FOMC will lower interest rates at the September meeting, up from a probability of just 21% a month ago.
Retail Earnings on Deck
While the first-quarter earnings season is behind us, many retailers report on a different schedule and highlight the reporting calendar next week. Home Depot (HD) and TJX (TJX) kick things off on Tuesday, followed by Lowe’s (LOW) and Target (TGT) on Wednesday.
Investors will certainly be keeping an ear out to see how these companies say they’re being affected by the tariff battle with China, given the amount of consumer goods imported by the U.S.
U.S. markets survived a double dose of dangerous headlines this week, in the form of China tariffs and an inverted yield curve. Some investors are betting that the FOMC could serve as a backstop and lower interest rates in a pinch, but the CBOE Volatility Index (VIX) has regularly moved 10% (or more) daily, since the beginning of May.
However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.
One such consumer name that’s worth a closer look is our Stock of the Week below…
Stock of the Week: Energizer Holdings (ENR)
Most folks know Energizer for the battery business and in fact, the company invented the first dry cell battery and handheld flashlight back in the 1890’s. However, management has re-shaped the company with two recent acquisitions that should help drive growth at Energizer for the next several years.
We recently added ENR to our Smart Investor portfolio and are pleased to see that shares soared 8% in the last week alone. Looking ahead, these gains should keep on coming. Here’s why:
Analysts Have 100% Buy Ratings and See 20%+ Upside
Energizer was upgraded at Citigroup on Tuesday, from Neutral to Buy. Analyst Wendy Nicholson made the call, after spending a day with the management team. Meanwhile Jefferies’ Kevin Grundy spoke of the stock’s ‘compelling valuation’ thanks to strong battery fundamentals coupled with conservative estimates.
Indeed, all four active analysts now rate the stock a Buy and the average price target of $57.25 suggests 22% upside potential from current levels.
Transition Quarter Should Lead to Higher Growth
Management announced lower-than-expected quarterly results back on May 7. The company earned $0.20 a share in the March quarter, as revenue increased 49% from the previous year, to $556.4 million.
The legacy consumer battery business saw higher pricing in the period, offset by lower customer demand. Looking forward, Energizer guided to 2019 profit of $2.90 to $3 a share.
The March quarter was a transition period for the company, as management closed the recent Battery and Auto Care acquisitions, which are a key part of the future growth potential.
Energizer added brands such as Rayovac, Armor All and STP to its product portfolio and management set forth the following goals:
- Growing adjusted free cash flow to $330 to $370 millionin 2020
- Generating adjusted EBITDA of $650 to $675 millionin 2020
- Driving organic sales growththrough pricing, innovation and distribution gains
- Deleveraging to a credit defined net leverage ratio of approximately 4 times at the end of 2020
The stock is currently valued at 14x expected 2020 earnings of $3.36 a share, which is a discount to the 15.9% average growth that consensus analyst estimates project over the next two years. The P/E ratio is also below both the industry average of 19x to 20x and the market multiple of 15x to 16x expected forward profit.
As Energizer integrates these purchases, I believe the stock will garner a premium valuation that is suggested by the bullish average analyst price target.
FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks. You may also want to learn more about how we use TipRanks indicators to find stocks that are primed to outperform. Discover the Smart Investor portfolio here >>
