When an earnings season winds down, it’s a good chance for investors to take inventory of what opportunities may be available.
Corporate financial results in the second quarter taught us two things. One, the economic recovery is alive and well. And two, there are many companies that are doing better than they were prior to the pandemic.
Among S&P 500 members, nearly 90% have exceeded consensus earnings estimates. Typically, when a company beats earnings forecasts, its stock moves higher. But that’s not always the case.
Here we look at three companies who topped Q2 earnings expectations only to see their share prices decline. Taking a step back to see the bigger picture reveals that in each case more attractive entry points have been formed.
Is the Autodesk Selloff a Buy Opportunity?
Last week Autodesk (NASDAQ: ADSK) matched second quarter revenue estimates of $1.1 billion and outperformed on the bottom line. Earnings per share (EPS) came in 10% ahead of the Street at $1.24. The software provider benefitted from the digital transformation taking place in several industries that is spurring demand for its cloud-based productivity solutions.
Despite the strong results, the market chose to focus on the fact that Autodesk’s operating margin contracted from 16% to 14%. The stock also gapped lower because management’s forecast for third-quarter EPS of $1.25 at the midpoint was a nickel short of the consensus forecast.
This was a classic case of investors being nearsighted. Had the market been viewing the forest from the trees, it would’ve given more weight to management’s upwardly revised guidance for the full year. It hiked both its revenue and earnings outlook for fiscal 2022 largely due to none other than margin expansion expectations.
Looking beyond the numbers, Autodesk should continue to derive growth from the improving economic backdrop which is supporting accelerating subscription rates. The company’s value-added software will likely see increasing demand from global construction and manufacturing customers over the next few years building its stock back up to new record highs.
Is Dell a Good Play on Hybrid Work?
Dell Technologies (NYSE: DELL) slid back below the $100 level on Friday after it reported Q2 results. The 2.0 version of the old personal computing company topped earnings expectations of $2.05 by 9% and beat on revenue as well but the stock dropped 4.5% in above-average volume.
The issue in the eyes of the sellers is that PC sales growth slowed during the period. Keep in mind, however, that in the second quarter of last year Dell was benefitting from hyper demand for desktops and laptops as workforces scrambled to operate remotely. Sustaining that pace in a business environment that is gradually adopting hybrid work models wasn’t realistic.
In Dell’s case, there are some important near-term catalysts that investors have overlooked in dumping the stock. First, the recent quarter displayed increasing operating leverage and a more favorable business mix that have profit margins on the rise. Record sales growth in the Client Solutions division was a big part of this.
Second, earlier this year Dell announced a plan to spinoff its VMWare business which is expected to wrap up later this year. As VMWare will be issuing a cash dividend, Dell will receive approximately $9.5 billion which it can use to pay down debt and improve its financial position. More importantly, post-spinoff, Dell will be able to better focus on its core competencies.
There is a place for Dell in the post-pandemic world. With many experts saying hybrid work and education environments are here to stay, desktops and laptops will stay in demand and coexist with tablets and smartphones. Dell will also have growth levers to pull as the AI data center, Internet-of-Things, and everything-as-a-service markets evolve. As less than 19x earnings, Dell is a bargain given the role it can play in the new economy.
Is Abercrombie & Fitch Undervalued?
Abercrombie & Fitch (NYSE: ANF) fell 10% on Thursday following its second-quarter report. The clothing retailer grew revenue 24% year-over-year and beat the Street on the bottom line, but it wasn’t enough to please the market.
The good news is that consumers are returning to Abercrombie & Fitch stores and in the process, online sales have help up well. In fact, digital sales accounted for almost half of total sales for the quarter. Also very positive was the expanding gross margin which not only improved from a year ago but from the pre-COVID period due to better cost management.
What the market didn’t like was management’s tepid third-quarter outlook. Part of this relates to its key teen customer base holding off on buying clothes amid uncertainty as to how often they’ll be learning in person. Adding to investors’ concerns, Abercrombie & Fitch is being challenged by global supply chain constraints that is weighing on inventory. Its manufacturing plants in Vietnam have faced repeated closures due to Covid outbreaks and may not be back online until next quarter.
These issues are indeed risks but should be temporary. Both tie into pandemic headwinds that are largely out of management’s control and that should subside over time. This means that long-term investors willing to ride out these storms can buy a leading youth clothing retailer at a discounted price. At less than 9x current year earnings, Abercrombie & Fitch belongs on the bargain rack.
Before you consider Abercrombie & Fitch, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Abercrombie & Fitch wasn't on the list.
While Abercrombie & Fitch currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.
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