Lucky Losers: 3 Earnings Losers to Buy on Sale
Sometimes earnings come in below estimates because of transitory issues that are likely to subside over time.Here are three examples of companies that posted negative earnings surprises to wrap up...
According to Factset, approximately one-fourth of S&P 500 companies fell short of fourth quarter earnings expectations. Bottom line estimates for the current quarter are heading lower with the Russia-Ukraine war wreaking havoc on already elevated commodity prices and supply chain constraints.
More often than not, companies that miss consensus profit forecasts see their stock prices decline and are left to the wolves. Such harsh market reactions aren't always justified.
Sometimes earnings come in below estimates because of transitory issues that are likely to subside over time. Lately, supply chain challenges and cost inflation have been popular scapegoats that many expect to dissipate in the second half.
So while a disappointing quarter shouldn't be ignored, the bigger picture in the form of longer-term growth prospects can be more important when you're a long-term investor. This means a post-earnings drop can actually be a good thing when you're viewing the forest from the trees.
Here are three examples of companies that posted negative earnings surprises to wrap up 2021—and are now less expensive buys.
Is Ford a Good Value Stock?
Ford Motor Co.'s (NYSE: F) fourth-quarter EPS of $0.26 was surprising not just because it missed consensus by 40% but because it abruptly ended a streak of six consecutive beats. The shortfall was a result of less profitable North American operations and weakness in Europe where the automaker recorded a pretax loss. Ford's share price dropped $2 on the news and a month later it has yet to recover.
There were some silver linings in the quarterly update but with recent market sentiment low they haven't yet moved the needle. Ford's sales were up 5% in Q4 which was no small feat given the difficulty car manufacturers continue to face in securing supplies for production. Markets outside of North America fared poorly but revenue climbed 17% in Ford's domestic markets.
A 25% increase in free cash flow and confidence in a recovery overseas led management to reinstate a dividend after a pandemic-induced 18-month hiatus. It also said vehicle wholesale volumes are expected to increase 10% to 15% in 2022 with the semiconductor supply crunch easing as the year progresses. A plan to produce 600,000 electric vehicles by next year was also glazed over.
Short-term pain will amount to long-term gain for patient Ford shareholders. The stock's 2.4% forward dividend yield and 8x forward P/E make it well worth taking for a spin.
Is The Dip in TJX Stock a Buy Opportunity?
The TJX Cos., Inc. (NYSE: TJX) reported Q4 earnings that fell 13% short of the Street's $0.90 estimate and missed on revenue as well. Its stock plunged to a 52-week low of around $60.
After having advanced for an incredible 13 straight years, the operator of T.J. Maxx, Marshalls, HomeGoods and other retail brands is in jeopardy of seeing its stock finish in the red for the first time since 2008. It's early, but TJX will have to dig itself out of an 18% hole to keep its industry-leading streak alive.
The bar will once again be set high as this year's quarterly results roll in. This is something where the apparel and home products retailer is accustomed to having repeatedly topped analyst expectations—and after growing sales more than 50% to $48.5 billion last year.
Management refrained from offering guidance for this year due to the uncertainty around high inflation. Ongoing supply chain disruptions are also making it difficult to predict inventory levels and the company's ability to meet demand.
What is easier to predict is that underlying demand for TJX's popular retail outlets will remain strong. Supported by higher wages and unfazed by higher prices, consumers have shown a willingness to pay a bit more for clothing, footwear, jewelry, and home furnishings.
At a time when brick-and-mortar retailers are battling the 5,000-pound gorilla that is Amazon, TJX is performing remarkably well. Bargain-minded shoppers love getting their hands on brand-named merchandise for less and will keep flocking to TJX stores to get the most bang for their buck. Buying the stock during this rare moment of weakness should prove to be a bargain of its own.
Will Yum! Brands Stock Recover?
Yum! Brands, Inc. (NYSE: YUM) was $0.06 shy of the Street's $1.08 fourth-quarter EPS estimate but exceeded top line expectations. The mixed result was initially followed by a gap up in the share price, but the potential impact of the war in Ukraine on Yum Brands' international operations and broad market weakness has since sent it 10% lower.
Now at its lowest level since July 2021, this has created a good entry point for a proven fast-food restaurant operator with solid growth numbers. After recording double-digit top and bottom-line growth last year, sales and profits are expected to be up 7% and 8% respectively in 2022.
The franchisor of some 48,000 KFC, Pizza Hut, and Taco Bell locations worldwide is positioned to benefit from not only loosened travel restrictions but also a booming digital business. With hungry consumers becoming increasingly comfortable with ordering food online, Yum should reap the rewards of its exclusive partnership with GrubHub for home and office delivery.
Sell-side analysts see Yum Brands continuing to trend higher over the long haul as economies reopen and e-commerce sales grow. Even including the more cautious "hold' rating issuers, Yum price targets posted since its Q4 report range from $137 to $153. So, with the stock trading back below $120, some tasty returns may be ahead for buyers.
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