The somewhat self-induced collapse of the economy from the COVID-19 pandemic has been a huge struggle for many top U.S. companies. Some that have taken the worst hits had pre-existing issues that were compounded with the arrival of the recession. While the economy is slowly reviving (first-time unemployment filings dropped below a million last week for the first time since March), we still have a long way to go.
A new Jefferies research report focuses on six companies the firm feels could be big winners when the economic recovery strengthens and life starts to return to what most consider normal.
The Jefferies analysts noted this in the report.
With signs that fear of a backsliding recovery might be overdone, Jefferies identifies a basket of stocks that stand to benefit from recent economic momentum. This selection of stocks represents industries that have been hardest hit by the pandemic and whose performance has significantly lagged the broader market. For these stocks, we see the potential for significant upside versus expectations through 2022 and beyond.
While all these stocks are rated Buy at Jefferies, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This company has had a public relations nightmare due to the 737 Max issues. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. It is also one of the most valuable brands in the world.
The different segments in the company are Commercial Airplanes, Boeing Defense, Space & Security and Boeing Capital. The latter provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites and launch vehicles.
Jefferies said this about the aerospace and defense giant:
We believe the commercial aerospace duopoly should provide some opportunity as the market improves, despite constrained widebody demand. In addition, we think free-cash-flow should start to normalize in 2022 as deliveries move in line with production and Boeing sees the benefit of inventory burndown. Shares currently trade at a 12% 2023 free-cash-flow yield.
While the macro environment is still highly uncertain, many on Wall Street believe Boeing will be able to communicate greater visibility and confidence in all of the key matters the company is facing. Recertification test flights have begun, customers have had more time to make near and long-term fleet planning decisions, and Boeing secured $25 billion of additional liquidity with the May bond issuance.
The Jefferies price objective for the shares is $270, and the Wall Street consensus target is just $173.50. Boeing stock closed trading on Friday at $178.08.
Bright Horizons Family Solutions
A return to offices will be huge for the childcare industry, and this is a leader. Bright Horizons Family Solutions Inc. (NYSE: BFAM) is the leader in the U.S. employer-sponsored childcare market. As of 2019, it operated 1,084 centers with a total capacity of 120,000. In addition, it is the largest and one of the only multinational providers of backup dependent care services. The company also provides educational advisory services, and it currently partners with over 1,100 corporations, including 150 of the Fortune 500 companies.
Jefferies is very optimistic on the prospects for the company:
We expect 85% of centers to reopen by the third quarter of 2020, with utilization rates fully ramping in 2022. We estimate the company has ~30% share in daycare centers, but highlight that the addressable market keeps growing. Pre-COVID, the company saw 8-10% annual organic revenue growth, with 50-100 basis points of margin expansion and double-digit earnings per share growth. Shares trade at ~7 turn discount to its 2019 peak on an EV/EBITDA basis.
Jefferies has a $165 price target, while the consensus target is $136.22 and shares closed at $130.31 on Friday.
This well-known old-school gaming company offers solid upside, and a reopening of the economy and casinos could be huge. Caesars Entertainment Corp. (NASDAQ: CZR) announced in July that it has entered into a definitive merger agreement with Eldorado Resorts to create the largest U.S. gaming company.
The proposed transaction will combine two leading gaming companies with complementary national operating platforms, strong brands, strategic industry alliances and a collective commitment to enhancing guest service and shareholder value. The combined company will provide its guests with access to approximately 60 domestic casino–resorts and gaming facilities across 16 states.
The transaction is transformational for each company’s shareholders, employees and customers, combining Eldorado’s operational expertise with Caesars industry-leading loyalty program, regional network and Las Vegas assets.
Jefferies liked the merger and said this:
Caesars is now a combined entity with Eldorado, led by the Eldorado leadership team, which had been among the most productive acquirers in the gaming sector over the past several years. Prior to 2015, Eldorado was a single-property operator generating $124 million of EBITDA and rent costs, and as of the completion of the merger on July 20 is now 37 properties in 16 states generating approximately $3 billion in EBITDA and rent costs. The current merger brings some important steps beyond the boundaries of prior mergers that we believe add manageable risk. They are: 1) entry into the Las Vegas Strip market, which is about 30% of total EBITDA, and 2) Elevated leverage of 7.7x and 6.4x in 2022, according to our estimates.
The $54 Jefferies target compares to a clearly outdated $11.96 consensus figure. Caesars stock ended last week at $41.32 a share.
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