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US corporate earnings for the fourth quarter are showing more mixed results compared with recent quarters.
Among companies covered by Morningstar analysts to report earnings so far, 34% are within Wall Street expectations, up from the 27% in the third quarter. Just 35% of companies beat estimates by more than 10%, down from 57% in the first quarter of 2021.
While Morningstar stock analysts pay close attention to quarterly earnings, the focus is on long-term results and valuations. A single quarter’s results usually don’t lead to a change in the long-term assumptions behind our assessment of a stock’s fair value, unless a company also comes out with new, material information that those long-term assumptions are based on. For example, new data on a drug that raises the probability of approval, or pricing gains in a key product line could affect an analyst’s long-run thinking.
Morningstar screened for stocks that beat expectations but remained undervalued, to help investors capitalise on the new investment opportunities that arose during earnings season. To keep the focus on those that had truly strong results -- not, for example, beating earnings through accounting gimmicks or one-time factors -- companies were also screened for revenue beats of 5% or more.
That search found 15 undervalued stocks that crushed Wall Street’s fourth-quarter earnings expectations.
In addition to the 15 screened stocks, Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL) are notable mentions. These mega-cap stocks all currently trade at prices analysts see as undervalued. Despite not beating revenue estimates by a notable amount, they’re still worthy of attention. Here’s a summary of their analysts’ takes.
Amazon reported fourth-quarter earnings of $27.75 per share versus consensus estimates of $3.61. Shares have since risen 13.9%. Amazon demonstrated its power with its plans to raise the price of Prime. Morningstar analyst Dan Romanoff sees the company continuing to benefit from the shift towards e-commerce and public cloud services.
Amazon trades at a 23% discount to its fair value.
Microsoft reported fourth-quarter results with EPS of $2.48 versus the consensus of $2.32. Romanoff reported that management sees no sign of demand for the company’s products and services slowing down, with Azure, Windows, and Gaming segments performing well. Shares have risen 4% since earnings but remain 15% undervalued.
Alphabet’s EPS of $30.70 beat the estimate of $27.70. Morningstar senior analyst Ali Mogharabi said the results attest to continued growth in search advertising, YouTube monetisation and the company’s cloud business. While he expects a decline in 2022 margins due to aggressive investment in Google Cloud, that spending should help restore margins in 2023 on rising cloud revenue. Shares are flat since the company reported results, rising only 0.1%, and are 23% undervalued.
Here’s what Morningstar analysts had to say about these picks.
Fanuc is a Japan-based is a global provider of factory automation (FA) products to manufacturers. The company sells industrial robots, computerised numerical control systems (CNCS), and compact machining centers. Their EPS of $0.18 beat a $0.16 forecast.
The company reported revenue growth of 30% year-over-year in the fourth quarter, beating Morningstar analyst Jason Kondo’s expectations. Shares remained flat following earnings results. Kondo points to concerns about factory automation demand in China as a potential negative for the company’s shares. That was seemingly reinforced after orders for the company’s FA business declined quarter-on-quarter.
The company’s management noted that the decline in sales was due to production failing to keep up with orders, creating a backlog and resulting in customers adjusting their purchases.
“We interpret this as customers plan to make purchases, once Fanuc is able to clear out some of its existing backlog to accept new orders going forward” Kondo says. While near-term uncertainties exist, Kondo is keeping his medium-term outlook and wide moat rating intact. As China looks to strengthen its manufacturing prowess, Fanuc is set to benefit as the market leader in providing high-end CNCS, according to Kondo.
“As for the robot business, we expect EV demand will be the main driver, as robots are used for battery-related assembly as well as for welding to make the car sturdy enough to handle the heavy batteries,” Kondo says.
Shares are trading at a 21% discount to fair value.
Intel beat earnings with an EPS of $1.04 versus a forecast of $0.90. “Revenue came in ahead of both guidance and our estimates thanks to PC and data center strength,” says tech strategist Abhinav Davuluri. He points out various headwinds for the firm between Advanced Micro Devices (AMD) pressuring Intel’s market share, Apple (AAPL) using its own chips for its Macs, and the shift to accelerated computing that relies on the likes of Nvidia (NVDA) GPUs. Intel shares fell 6% since its earnings report.
Intel has a plan for a comeback: IDM 2.0, which it announced in March 2021. The company plans on expanding its business as a chipmaker for fabless chip designers--firms that don't manufacture their own chips.
“Intel intends to more meaningfully offer foundry services to fabless chip designers to take advantage of burgeoning demand in AI, automotive, 5G, and other promising end markets,” says Davuluri. The company expanded their capital expenditure budget to $25 billion for this effort, and recently made headlines when it announced plans to purchase Israeli Tower Semiconductor (TSEM) for $5.4 billion.
“Acquiring Tower would kickstart Intel Foundry Services, or IFS, as Intel would gain a fabless customer base, additional global fab capacity, and IP libraries and customer support capabilities. Tower's mature/specialty capacity also complements Intel's leading-edge logic offerings, while Intel would offer Tower the scale to better compete with larger foundry peers.” Intel currently trades at a 26% discount to fair value.
Incyte is a drug manufacturer best known for Jakafi, which treats two types of rare blood cancer. The company’s pipeline includes an array of oncology and dermatology treatments. Shares were hurt after the company said it was withdrawing new drug application filings for parsaclisib, a potential treatment for patients with lymphoma in late January, falling 10% since then. The company posted EPS of $2.54 beating estimates of $0.54.
Incyte reported full-year sales of $2.98 billion, up 12% from $2.66 billion in 2020. Revenue was driven by $2.1 billion from U.S. Jakafi sales, which were up 10% from last year, according to Morningstar healthcare strategist Karen Andersen.
“Management forecasts $2.3-$2.4 billion in US Jakafi sales in 2022, which was slightly below our prior $2.5 billion estimate. However, the firm's strategy for extending the drug's lifecycle appears to be on track,” says Andersen. Data results from combining Jakafi with parsaclisib and ALK2 and BET protein targeting drugs are expected in the next two years, potentially extending Jakafi’s protection beyond its 2027 patent expiration, according to Andersen.
Andersen maintained her fair value estimate of $116 per share after adjusting for slightly higher operating expenses, fewer sales of parsaclisib, and a lower expected tax rate. “Overall, we continue to see Jakafi and a growing portfolio of other oncology and immunology therapies supporting a narrow moat, and shares look significantly undervalued.”
The company trades at a 42% discount to fair value.
Evercore, an investment bank, beat earnings estimates with fourth-quarter EPS of $7.15 and record net income of $296 million. “This is in contrast to other investment banks where their fourth-quarter revenue was their lowest quarter in 2021,” says Morningstar financial services sector director Michael Wong. Shares remained mostly flat, rising only 0.2% since reporting.
Wong says the company’s fourth quarter strength compared with its peers is due to their business being more weighted towards merger advisory work, which has remained strong versus trading and fixed income underwriting that started to normalise after outperforming in early 2021 and 2020.
“Similar to other investment banks, Evercore’s revenue is likely abnormally elevated, and revenue is more likely than not to decline over the next several years,” Wong says. Higher travel and deferred compensation expenses along with declining revenue may also pressure operating margins.
“While we foresee likely headwinds, the company has a strong franchise, and we believe the market may be paying too much attention to near-term headwinds,” Wong says.
Evercore’s fair value was increased to $158 from $142 per share, leaving the firm 20% undervalued.
Jakir Hossain is a data journalist for Morningstar. Analysis as at 16 February 2022. This information has been provided by Firstlinks, a publication of Morningstar Australasia (ABN: 95 090 665 544, AFSL 240892), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.