In a volatile market environment, with stocks getting buffeted about by a variety of conflicting forces, investors are looking to the expert commentators for some guidance. Covering the macro situation from banking giant JPMorgan, quant strategist Marko Kolanovic believes that we’re in for continued gains in stocks.
Kolanovic doesn’t dismiss the recent dips in the S&P 500 and the NASDAQ; rather, he sees them as temporary. Kolanovic points out that we’re approaching the end of Q1 and will soon see the first earnings reports of 2021. He expects that to build momentum for stocks going into the summer, boosting the market indexes and keeping inflation at a steady state with bond yields stabilizing.
Kolanovic has set a 4,400 year-end price target for the S&P 500, which suggests ~13% growth in the market’s benchmark index.
Taking Kolanovic’s outlook to heart, J.P. Morgan analysts are offering up concrete recommendations, pointing to two names that look compelling. As the firm’s analysts are forecasting at least 30% upside potential for each, we used TipRanks’ database to dig a bit deeper.
BorgWarner, Inc. (BWA)
The first JPM pick we’re looking at is BorgWarner, a major manufacturer of drivetrain components, especially transmissions and air management systems, which has long been a stalwart of Detroit’s automotive industry. The company has, in recent years, been a leader in the development of powertrains and motors for electric vehicles, and is committed to accelerating that development. The company announced this week that it intends to expand its EV revenues to 45% of the company total by 2030.
The company’s plan, called Charging Forward, would see a focus on developing componentry for electric commercial vehicles while optimizing the combustion portfolio, and scaling the EV business up to deliver the projected higher demand. Management expects to maintain BorgWarner’s high margin performance while generating a strong free cash flow.
Current performance gives BorgWarner a solid foundation for its ambitious EV plans. The company saw a strong beat in 4Q20 on several key metrics. BWA reported revenues of $3.93 billion, a 53% gain year-over-year. EPS came in at $1.52, up from $1.06 in the year-ago quarter.
Turning to full-year numbers, 2020 ended with BWA showing $10.17 billion at the top line, about equal to last year’s total. 2020 earnings were down, to $2.34 from $3.61 in 2019. Despite the lower earnings, BWA’s cash position improved in 2020. Free cash flow was $743 million for the year, and the company increased its cash and cash equivalent holdings by $818 million year-over-year.
Among the bulls is JPMorgan analyst Ryan Brinkman who wrote: “Demand for BWA products is strong, driven by both consumer ‘pull’ and government ‘push’ elements, and we believe will only increase over time as the rising amount of vehicles in emerging markets upwardly pressures fuel prices. BWA already enjoys the second-highest margins in the sector, in part driven by the fact that many of the products it manufactures are of a highly engineered nature, leading to high technical barriers to entry and market concentration. Still, we expect the combination of rapid top-line growth and financial discipline to allow for top-tier operating margin expansion.”
To this end, Brinkman rates BWA an Overweight (i.e. Buy), and his $58 price target implies a potential upside of 33% for the coming year. (To watch Brinkman’s track record, click here)
Brinkman is not an outlier in his bullish stance, but there is some division on Wall Street regarding BWA. The analyst consensus view is a Moderate Buy, based on 14 recent reviews breaking down to 8 Buys, 5 Holds and 1 Sell. The shares are priced at $43.70 and their $49.69 average price target suggests a one-year upside of ~14%. (See BWA stock analysis on TipRanks)
Adobe, Inc. (ADBE)
Shifting gears, we’ll move from automotive to software. Adobe is a name we’re all familiar with, and rightly so. The company created the PDF format, and among its product line-up are Photoshop, Illustrator, and InDesign, among many, many others. In recent years, Adobe has shifted to a subscription SaaS model, offering its products as a bundle on Adobe Creative Cloud.
Adobe saw gains last year, as its cloud-based model was well suited to 2020’s shift to remote work and telecommuting. The company’s fiscal 2020 revenues hit $12.8 billion, up nearly 14% from 2019, and growth has continued into its first quarter of fiscal 2021. The company reported $3.9 billion in Q1’s top line, a company record and up 26% year-over-year. EPS, at $2.61 per share, was up 33% yoy.
That guidance was updated based on the Q1 results. Management sees the company bringing in $15.45 billion in total revenue for fiscal 2021, which would represent a 20% yoy increase from the published 2020 figure. Digital media, a major driver of the 2020 numbers, is expected to deliver 22% yoy growth and show annualized recurring revenue of $1.8 billion.
Covering this stock for JPM is 5-star analyst Sterling Auty, who sees a clear path forward for Adobe.
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