All the companies that we follow here at 24/7 Wall St. keep a list for their institutional and high net worth retail clients of high-conviction stock picks. Generally, analysts like these companies on a longer-term basis, and they usually have big upside to the assigned target prices. Since the beginning of the year, many Wall Street firms have tweaked their lists to account for potential changes in 2020, and one company has added some outstanding stocks we feel could have outsized upside.
In a recent Jefferies research note, the analysts make a big move by adding a top retail leader, an outstanding defense play and a storied electrical equipment and parts maker to the Franchise Picks family. Here we cover these new additions and also highlight two additional stocks that were added to the list recently and in December.
Lowe’s
This company has a low 6% of foreign sales, which has helped in a strong-dollar scenario. Lowe’s Companies Inc. (NYSE: LOW | LOW Price Prediction) is a leading home improvement retailer with more than 2,000 stores in North America. The company has tempered its new store opening plans and is focusing investments on technology and e-commerce capabilities, in addition to improving its retail store productivity.
Lowes offers products for maintenance, repair, remodeling and home decorating. It provides home improvement products under the categories of kitchens and appliances, lumber and building materials, tools and hardware, fashion fixtures, rough plumbing and electrical, lawn and garden, seasonal living, paint, home fashions, storage and cleaning, flooring, millwork, and outdoor power equipment. The company also offers installation services through independent contractors in various product categories.
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Jefferies likes the setup for this year and noted this in its report:
Analyst Jonathan Matuszewski adds Lowes to the Franchise Pick list as he believes evidence of the company’s transformational turnaround will continue to unfold. In addition, he believes the backdrop for remodeling demand remains conducive, due to aging household inventory, millennial household formation and increasing home equity values. He expects that comp sales to grow in the ~3% range, aided by improved execution, better merchandising, enhanced in-stock inventory positions, a greater focus on the Pro and localization efforts.
Investors receive a 1.84% dividend. The Jefferies price target for the stock is $143, while the Wall Street consensus target is $132.52. The stock was last seen trading at $119.63.
Energizer
Everybody is familiar with the Energizer Bunny, and most investors have used the company’s battery products. Energizer Holdings Inc. (NYSE: ENR) is primarily a battery company. With a 33% global market share and its strong brand name and experienced management team, it is focused on maintaining category health and profitability, and ultimately employing its strong free-cash-flow to drive shareholder returns through dividends, share buybacks and growth-accretive mergers and acquisitions.
Last year the company acquired Spectrum Brands’ battery and auto care businesses, adding the Rayovac, Armor All and STP brands to the company’s portfolio. Jefferies likes the growth potential and its report said this:
Battery fundamentals have improved markedly in recent years, owing to growth in Internet of Things and devices, demographics, mix and an increase in storms. Management sufficiently de-risked its fiscal year 2020 guidance, issued a better than anticipated outlook for fiscal 2022, and noted that the auto/battery integration is progressing well.
Shareholders receive a 2.43% dividend. Jefferies has a $65 price objective, and the consensus target price is $55.27. Tuesday’s last trade came in at $49.48.
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L3Harris
This recently merged company is now the sixth-largest defense outfit, as well as the third new member of the Franchise Picks list. L3Harris Technologies Inc. (NYSE: LHX) is an agile global aerospace and defense technology innovator that engages in the provision of defense and commercial technologies across air, land, sea, space and cyber domains.
The Integrated Mission Systems segment includes intelligence, surveillance and reconnaissance; advanced electro optical and infrared; and maritime power and navigation. The Space and Airborne Systems segment includes space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare.
The Communication Systems segment consists of tactical communications; broadband communications; L3’s night vision; and public safety. The Aviation Systems segment is composed of defense aviation products; security, detection and other commercial aviation products; air traffic management; and commercial and military pilot training.
Jefferies loves the merged company and said this when adding it to the Franchise Picks list:
The analyst expects that the company’s shares can sustain momentum over the next several years, and projects an 8% top-line compound annual growth rate through 2021 driven by share gains. In addition, she models an adjusted EPS CAGR of 18% through 2022, driven by revenue growth and synergies, which could also offer potential upside. Meanwhile, a cumulative free cash flow yield of 19.5% from 2020 to 2022 provides considerable flexibility to deploy capital, translating to capacity to execute $2-2.5 billion of share repos/year, equating to retiring 5% of shares annually.
Investors receive a 1.42% dividend. The $250 Jefferies price target compares with a $245.24 consensus figure. The stock closed Tuesday at $212.73.
Gentex
This was another recent addition to the Franchise Picks List in January. Gentex Corp. (NASDAQ: GNTX) is a leading supplier of auto-dimming mirrors to the global automotive industry, and it also manufactures rear camera displays and other visioning technology.
The company was formed in 1974 as a manufacturer of smoke detectors for the residential market, although research and development allowed it to develop proprietary technology to produce automatic dimming mirrors for the automotive market, known as electrochromic or EC mirrors, where it maintains a leading market share.
The analyst likes the setup for 2020 and beyond and noted this:
Management has guided to gross margins of 35-36% in part due to softer volumes/lower production and unfavorable product mix from the impact of the General Motors strike. Normalized margins post-strike should provide a sequential lift in first quarter 2020 while ongoing exterior mirror shipment outgrowth and demand for advanced features should prove longer-term margin accretive. A phase one trade agreement would also drive upside to consensus margin estimates, which currently bake in a 1.1% impact in 2020.
The dividend yield is 1.56%. Jefferies has set a $37 price objective. The consensus target is $26.75, but the stock was last seen trading at $29.43.
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Equitrans Midstream
This high distribution paying C corporation structured energy play was added to the list in December. Equitrans Midstream Corp. (NYSE: ETRN) primarily engages in natural gas transmission, storage and gathering in the Appalachian Basin. The company’s only asset is its controlling 60% interest in EQM Midstream Partners.
The analysts are positive on the large payout to shareholders and noted this:
The company was added to the Franchise Pick list in December 2019. Shares offer a sizable yield, and the analyst forecasts modest dividend growth ahead and sees a catalyst-rich 2020 as the company works to bring the ~$5.5 billion Mountain Valley Pipeline into service (90% complete today), renegotiates gathering contracts with its largest counter party (EQT), and adapts to a significantly moderated Northeast production profile.
The current distribution is a massive 13.10%. The Jefferies price target is $20. The consensus target is much lower at $16, and shares closed at $13.74.
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Four brand new stocks for 2020 and a December addition to the Jefferies top-performing Franchise Picks list. Note that the Franchise Picks list outperformed the S&P 500 by 3.4% in 2019, and since inception it has outperformed the index by 16%.
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