While the proven Zacks Rank places an emphasis on earnings estimates and estimate revisions to find strong stocks, we also know that investors tend to develop their own individual strategies. With this in mind, we are always looking at value, growth, and momentum trends to discover great companies.
Of these, value investing is easily one of the most popular ways to find great stocks in any market environment. Value investors rely on traditional forms of analysis on key valuation metrics to find stocks that they believe are undervalued, leaving room for profits.
Zacks has developed the innovative Style Scores system to highlight stocks with specific traits. For example, value investors will be interested in stocks with great grades in the “Value” category. When paired with a high Zacks Rank, “A” grades in the Value category are among the strongest value stocks on the market today.
One company value investors might notice is Crocs (CROX – Free Report) . CROX is currently sporting a Zacks Rank of #2 (Buy), as well as a Value grade of A. The stock is trading with P/E ratio of 8.67 right now. For comparison, its industry sports an average P/E of 10.99. Over the past year, CROX’s Forward P/E has been as high as 12.91 and as low as 4.20, with a median of 8.76.
Investors will also notice that CROX has a PEG ratio of 0.58. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company’s expected EPS growth rate. CROX’s PEG compares to its industry’s average PEG of 1.52. Within the past year, CROX’s PEG has been as high as 0.86 and as low as 0.28, with a median of 0.59.
Finally, investors should note that CROX has a P/CF ratio of 9.86. This metric focuses on a firm’s operating cash flow and is often used to find stocks that are undervalued based on the strength of their cash outlook. This company’s current P/CF looks solid when compared to its industry’s average P/CF of 22.10. Within the past 12 months, CROX’s P/CF has been as high as 14.31 and as low as 3.93, with a median of 9.89.
If you’re looking for another solid Textile – Apparel value stock, take a look at Guess (GES – Free Report) . GES is a # 2 (Buy) stock with a Value score of A.
Guess also has a P/B ratio of 1.69 compared to its industry’s price-to-book ratio of 6.01. Over the past year, its P/B ratio has been as high as 2.90, as low as 1.69, with a median of 2.19.
Value investors will likely look at more than just these metrics, but the above data helps show that Crocs and Guess are likely undervalued currently. And when considering the strength of its earnings outlook, CROX and GES sticks out as one of the market’s strongest value stocks.
Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.
Considering these trends, value investing is clearly one of the most preferred ways to find strong stocks in any type of market. Value investors use fundamental analysis and traditional valuation metrics to find stocks that they believe are being undervalued by the market at large.
In addition to the Zacks Rank, investors looking for stocks with specific traits can utilize our Style Scores system. Of course, value investors will be most interested in the system’s “Value” category. Stocks with “A” grades for Value and high Zacks Ranks are among the best value stocks available at any given moment.
One company value investors might notice is Performance Food Group (PFGC – Free Report) . PFGC is currently sporting a Zacks Rank of #2 (Buy) and an A for Value. The stock has a Forward P/E ratio of 13.07. This compares to its industry’s average Forward P/E of 13.54. Over the last 12 months, PFGC’s Forward P/E has been as high as 16.09 and as low as 11.94, with a median of 14.49.
Investors will also notice that PFGC has a PEG ratio of 1.01. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company’s expected earnings growth rate. PFGC’s PEG compares to its industry’s average PEG of 1.28. PFGC’s PEG has been as high as 1.04 and as low as 0.80, with a median of 0.94, all within the past year.
Value investors also use the P/S ratio. The P/S ratio is is calculated as price divided by sales. Some people prefer this metric because sales are harder to manipulate on an income statement. This means it could be a truer performance indicator. PFGC has a P/S ratio of 0.15. This compares to its industry’s average P/S of 0.24.
Value investors will likely look at more than just these metrics, but the above data helps show that Performance Food Group is likely undervalued currently. And when considering the strength of its earnings outlook, PFGC sticks out at as one of the market’s strongest value stocks.
Fox (FOXA – Free Report) announced the premiere date for the second season of Duck Family Treasure at Fox Nation, the subscription-based streaming service owned by FOX News Media.
The show, produced in collaboration with Warm Springs Productions, will follow the Robertson family as they embark on a new adventure in search of hidden treasures.
The five-episode season will debut on Sunday, Jun 11. The second episode will also air on FOX News Channel at 10 PM/ET on the same night.
In the upcoming season of Duck Family Treasure, viewers will be reintroduced to Jase and Jep, accompanied by their wives Missy and Jessica, as well as Uncle Si and history expert Murry Crowe. They will embark on a quest to uncover hidden treasures scattered throughout the southern region.
Warm Springs Productions, in collaboration with executive producer Jase Robertson and Tread Lively Production’s Korie Robertson and Zach Dasher, is producing the second season of Duck Family Treasure.
Fox Faces Stiff Competition in the Streaming Market
Fox has been facing tough competition from the likes of Apple (AAPL – Free Report) , Netflix (NFLX – Free Report) and Amazon (AMZN – Free Report) in the saturated streaming market. Moreover, saturation in the streaming market has been stifling growth.
Nevertheless, Fox Nation, despite being relatively newer streaming service (launched in 2018), has done well thanks to its strong content portfolio.
Fox Nation offers a vast library of content comprising more than 5,000 hours. The subscription service encompasses a range of programming, including conservative opinion shows, lifestyle and entertainment content, historical documentaries and investigative series featuring various FOX News personalities. The subscription is priced at $5.99 per month or $64.99 per year.
However, Netflix and Amazon prime video continues to dominate the streaming market. Apple’s Apple TV+ has also been gaining recognition thanks to a strong content portfolio with award wining movies and shows like CODA and Ted Lasso.
In the streaming industry it is very difficult to retain customers. Streaming service providers create franchises which keep customers hooked on to them. Big players have been doing that since some time now and has created a good number of loyal customers.
Going forward Fox is also focusing on creating franchises which would make customers loyal to them. This would in-turn boost the number of subscribers in the long term
Fox’s Upcoming Contents to Aid Growth
Shares of FOXA have gained 2.2% year to date compared with the Zacks Consumer & Discretionary sector’s growth of 5.2% over the same time frame.
This Zacks Rank #3 (Hold) company’s upcoming contents include 9-1-1: Lone Star, Cleaning Lady, Call Me Kat and Welcome To Flatch.
The Zacks Consensus Estimate for FOXA’s fourth-quarter fiscal 2023 earnings is pegged at a profit of 72 cents per share, indicating a year-over-year decline of 2.7%. The Zacks Consensus Estimate for revenues is pegged at $14.91 billion, indicating year-over-year growth of 6.69%.
More than a year after announcing plans to exit its consumer, small business and middle-market banking operations in Mexico — Banco Nacional de México (“Banamex”), Citigroup Inc. (C – Free Report) has decided to pursue an initial public offering (IPO) of the business.
The wall street biggie will continue to operate a locally-licensed banking business in Mexico through its Institutional Clients Group (“ICG”), and Citi Private Bank for ultra-high-net-worth individuals and families.
Citigroup has been pursuing a carve-out of the ICG business since announcing the plan to exit the business through a sale or a public market alternative. The company expects the separation of the businesses to be completed in the second half of 2024 and the IPO to take place in 2025.
Banamex will continue to be reported as part of the bank’s continuing operations until ownership falls below a 50% voting interest, at which point it will be deconsolidated.
The bank suspended common share repurchases from third-quarter 2022 through first-quarter 2023 in anticipation of any temporary negative capital impacts related to potential sales. But now, Mark Mason, CFO of Citigroup, remarked that the company would resume “a modest level of share buybacks” in second-quarter 2023. However, owing to the uncertainty regarding regulatory capital requirements, the bank will continue to assess buybacks on a quarterly basis.
Jane Fraser, CEO of Citigroup, noted, “After careful consideration, we concluded the optimal path to maximizing the value of Banamex for our shareholders and advancing our goal to simplify our firm is to pivot from our dual path approach to focus solely on an IPO of the business. Citi has operated in Mexico for over a century, and we will further invest and grow our industry-leading institutional franchise in this critical global hub, delivering the full power of Citi’s global network to our institutional and private banking clients in this priority market.”
Our Take
Since the announcement of the broader strategic actions to exit consumer banking across 14 markets in Asia, Europe, the Middle East and Mexico, Citigroup has signed deals to divest consumer businesses in nine markets and completed sales in seven markets, including Australia, Bahrain, Malaysia, the Philippines, Thailand, Vietnam and India.
The company is also in the process of winding down its consumer business in China and Korea, whereas, in Russia, it is wrapping up all its business.
Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth. These efforts will likely help augment the company’s profitability and efficiency over the long term.
Also, supported by decent capital metrics and earnings strength, C’s capital deployment activities seem sustainable and will stoke investor confidence in the stock.
Over the past year, shares of Citigroup have lost 17.7% compared with a decline of 16.1% recorded by the industry.
Amid a challenging operating backdrop due to expectations of economic slowdown, banks are undertaking expansion moves through acquisitions. Recently, LCNB Corp. (LCNB – Free Report) entered an agreement to acquire Cincinnati Bancorp, Inc. (CNNB – Free Report) in a stock-and-cash transaction. Closing of the deal (subject to regulatory approval, CNNB shareholder approval and other customary conditions) is expected in the fourth quarter of 2023. The approval of LCNB shareholders is not required.
The deal is expected to significantly increase LCNB’s existing presence in the Cincinnati market and expand its community banking franchise across the Ohio River into the compelling Northern Kentucky market. Excluding one-time transaction costs, LCNB expects the transaction to be 18.2% and 26.2% accretive to 2024 and 2025 fully diluted earnings per share, respectively.
Steadily rising non-interest expenses will likely continue to hurt Comerica Incorporated’s (CMA – Free Report) bottom-line growth. Also, a lack of loan portfolio diversification may hurt amid an uncertain economy and competitive markets. Nonetheless, rising loan balances are expected to aid growth in the near term. With ample liquidity, debt repayments seem manageable and capital deployment activities may be sustainable.
The escalating cost base is concerning for Comerica. The company’s non-interest expenses saw a compound annual growth rate (CAGR) of 2.6% over the last five years (2018-2022), with the increasing trend continuing first-quarter 2023 mostly due to rising pension expenses.
Management expects a rise of 7% in expenses in 2023 primarily due to the higher pension expenses. Such rising costs may hinder bottom-line growth in the upcoming quarters.
Comerica has substantial exposure to commercial and commercial mortgage loans. As of first-quarter 2023, the company’s exposure to such loans was 83.3% of the total loans. Such a lack of diversification can be risky for the company amid an uncertain economy and competitive markets.
Though Comerica is trying to diversify its geographical footprint, it has notable business exposure in California and Michigan, where the economic environment has been increasingly challenging over the past few years. Going forward, any economic or political doldrums in these markets will likely affect the company’s performance.
Furthermore, the company’s high leverage than the industry, makes it an unsafe bet. The company’s debt/equity ratio stands at 1.26 compared with the industry average of 1.07. This reflects that it has a higher debt burden relative to its peers and will unlikely be able to fare well in a dynamic business environment.
Additionally, analysts seem to be bearish on the company’s prospects. Over the past month, the Zacks Consensus estimate for earnings has been revised 1.9% and 2.1% lower for 2023 and 2024, respectively. CMA currently carries a Zacks Rank #4 (Sell).
Shares of CMA have lost 40.6% so far this year compared with the industry’s decline of 9.9%.
Image Source: Zacks Investment Research
Nonetheless, higher interest rates and improving loan commitments will drive net interest income in the upcoming period. Moreover, its improving performance and decent liquidity reflect that such capital deployment activities are sustainable in the future.
Earnings estimates for MUFG have been revised 1.3% upward for fiscal 2023 over the past 60 days. The company’s shares have gained 23.5% over the past six months.
The consensus estimate for CASH’s fiscal 2023 earnings has been revised 1.8% upward over the past 30 days. Over the past six months, the company’s share price has increased 5.9%.
W.W. Grainger, Inc. (GWW – Free Report) has been benefiting from volume growth in the High Touch Solutions segment and customer growth in the Endless Assortment segment. This is impressive amid elevated costs and supply shortages. Grainger’s initiatives to manage inventory effectively and invest in marketing are also driving profitability.
Let’s delve deeper and analyze the factors that make this Zacks Rank #2 (Buy) stock a strong investment option at the moment.
Solid Q1 Results: Grainger has reported earnings per share of $9.61 in first-quarter 2023, beating the Zacks Consensus Estimate of $8.57. The bottom line improved 36% year over year, aided by margin improvement in the High-Touch Solutions North America (N.A.) and Endless Assortment segments, and a strong operating performance.
Positive Earnings Surprise History: Grainger’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 9.2%.
Upbeat Growth Projections: The Zacks Consensus Estimate for the company’s 2023 earnings has moved 7% upward over the past 60 days and is pegged at $35.53 per share. It suggests growth of 19.79% from the year-ago reported figure.
The consensus mark for fiscal 2024 earnings is pegged at $37.54 per share, indicating a year-over-year improvement of 5.7%. The Zacks Consensus Estimate has moved up 5% over the past 60 days.
Upbeat Outlook: Backed by the strong first-quarter performance, Grainger expects net sales for the current year between $16.2 billion and $16.8 billion. The company raised its earnings per share guidance to $34.25-$36.75 from the prior mentioned $32-$34.50. The mid-point of the updated guidance indicates 20% growth from the 2022 reported figure. Grainger’s initiatives and supply-chain advantages are likely to aid the company in meeting its guidance.
Strong Segment Performance & Top-Line Growth: In first-quarter 2023, the company reported strong results in both segments. The High-Touch Solutions North America N.A. segment gained from continued volume growth across all geographies and strong price realization. The gross margin was driven by an improved product mix and a favorable price spread, realizing a timing benefit. Daily sales of this segment were up 14.5% from the prior-year quarter’s level. The segment will continue to benefit from pricing actions and strength in commercial, transportation and heavy manufacturing.
The Endless Assortment segment’s daily sales for the first quarter moved up 3.8% from the year-ago quarter. This segment’s net sales were aided by core small business growth with new and repeat customers at Zoro U.S. The segment’s revenues also gained from customer acquisition, repeat business and enterprise customer growth at MonotaRO.
Effective Growth Strategies: The company’s margin will continue to gain traction from improved non-pandemic product mix, lower freight costs, pricing actions and its ability to navigate supply-chain challenges. Grainger’s strategic initiatives and efforts to increase market share across the business are driving growth.
Price Performance
In the past year, Grainger’s shares have gained 39.9% compared with the industry’s growth of 12.2%.
Worthington Industries has an average trailing four-quarter earnings surprise of 27.5%. The Zacks Consensus Estimate for WOR’s fiscal 2023 earnings is pegged at $4.93 per share, up 17.7% in the past 60 days. WOR has gained 27.8% in the past year.
Manitowoc has an average trailing four-quarter earnings surprise of 38.8%. The Zacks Consensus Estimate for MTW’s 2023 earnings is pegged at 85 cents per share, up 63.5% in the past 60 days. MTW’s shares have gained 20.8% in the past year.
The Zacks Consensus Estimate for Pentair’s 2023 earnings per share is pegged at $3.66, up 3% in the past 60 days. It has a trailing four-quarter average earnings surprise of 7.2%. PNR gained 14.9% in the last year.
EnerSys (ENS – Free Report) reported impressive results for fourth-quarter fiscal 2023 (ended Mar 31, 2023). ENS reported adjusted earnings of $1.82 per share, which beat the Zacks Consensus Estimate of $1.38 per share by 31.9% while sales beat the same by 3.9%.
The bottom line increased 51.7% from the year-ago figure of $1.20 per share driven by higher sales generation across all segments.
Revenue Details
EnerSys’ revenues were $989.9 million in the quarter under review, up 9.1% from the year-ago quarter. Organic sales in the quarter grew 4% on the back of strengthening markets. Pricing positively impacted sales by 7% while forex woes left a negative impact of 2%.
ENS revenues beat the Zacks Consensus Estimate of $953 million.
Geographically, ENS’ net sales increased 12% year over year to $719 million in the Americas, while the metric witnessed a rise of 5% to $216 million in Europe, the Middle East and Africa. Sales in Asia were $55 million, declining 6% year over year.
Segmental performance for the fiscal fourth quarter is briefly discussed below:
The Energy Systems segment’s sales were $458 million, contributing 46.3% to net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues increased 12%. Volume was up 8% while pricing had a positive impact of 6%. Adverse foreign currency translations hurt 2%.
The Motive Power segment generated revenues of $384 million, contributing 38.8% to net revenues in the reported quarter. The figure increased 5% year over year based on an 8% contribution from pricing. Forex woes left a negative impact of 3%.
The Specialty segment’s sales were $148 million, contributing 14.9% to net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues increased 12%. Volume and pricing had a positive impact of 6% and 7%, respectively, on the quarter, while foreign currency translations had a negative impact of 1%.
Margin Profile
In the reported quarter, EnerSys’ cost of sales increased 4.4% year over year to $743.9 million. The cost of sales was 75.1% of the quarter’s net sales. The adjusted gross profit in the quarter increased 15.6% year over year to $246.0 million, while the gross margin increased 180 basis points (bps) year over year to 24.9%.
Operating expenses increased 4.1% year over year to $146.1 million. The metric represented 14.8% of net sales in the reported quarter, compared with 15.5% in the year-ago quarter. Adjusted operating earnings were $107.1 million, increasing 40.3% year over year. The margin increased 340 bps year over year to 10.8%.
Balance Sheet and Cash Flow
While exiting the fourth quarter of fiscal 2023, EnerSys had cash and cash equivalents of $346.7 million, down 13.9% from $402.5 million recorded in the fourth quarter of fiscal 2022. Long-term debt decreased 16.2% to $1,042 million from $1,243 million recorded in the fourth quarter of fiscal 2022.
In fiscal 2023, ENS repaid short-term debt of $21.7 million and revolving credit borrowings of $500.5 million. However, proceeds for revolving credit borrowings were $310.5 million in fiscal 2023.
EnerSys generated net cash of $279.9 million for its operating activities in fiscal 2023 against $65.6 million used in the year-ago period. Capital expenditure totaled $88.8 million, compared with $74 million in the previous year’s period.
ENS rewarded its shareholders with a dividend payout of $28.5 million in fiscal 2023. Treasury stock repurchase amounted to $22.9 million.
Dividend
EnerSys’ board of directors approved a quarterly cash dividend of 17.5 cents per share to its shareholders of record as of Jun 16, 2023. The disbursement will be made on Jun 30, 2023.
Outlook
EnerSys anticipates gaining from robust customer demand in diverse end markets. However, forex woes, geopolitical tensions, supply-chain challenges and inflation are worrisome. Earnings for the first quarter of fiscal 2024 are expected to be $1.77-$1.87 per share, inclusive of 40 cents-50 cents per share from IRA benefits. This compares favorably with the year-ago quarter’s figure of $1.15 per share. The gross margin is expected to be in the range of 24.5%-26.5%. For fiscal 2024, capital expenditure is anticipated to be approximately $120 million.
Zacks Rank & Stocks to Consider
ENS currently carries a Zacks Rank #3 (Hold). Some top-ranked companies from the Industrial Products sector are discussed below:
IR delivered a trailing four-quarter earnings surprise of 12.6%, on average. In the past 60 days, estimates for Ingersoll Rand’s 2023 earnings have increased 6%. The stock has improved 7.1% in the past six months.
Alamo Group Inc. (ALG – Free Report) presently sports a Zacks Rank of 1. ALG delivered a trailing four-quarter earnings surprise of 17.7%, on average.
In the past 60 days, estimates for Alamo’s 2023 earnings have increased 12.7%. The stock has gained 19.4% in the past six months.
Axon Enterprise (AXON – Free Report) sports a Zacks Rank of 1. The company has a trailing four-quarter earnings surprise of 44.4%, on average.
In the past 60 days, estimates for Axon’s 2023 earnings have increased 13%. The stock has rallied 4.9% in the past six months.
It has been about a month since the last earnings report for Alphabet (GOOGL – Free Report) . Shares have added about 16.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Alphabet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Alphabet Earnings Beat Q1 Estimates
Alphabet’s first-quarter 2023 earnings of $1.17 per share beat the Zacks Consensus Estimate by 10.4%. The figure declined by 4.9% year over year.
Revenues of $69.8 billion increased 3% year over year (6% at constant currency).
Net revenues, excluding total traffic acquisition costs or TAC (the portion of revenues shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website), were $58.1 billion, which surpassed the consensus mark of $57.2 billion. The figure rose 3.7% from the year-ago quarter’s level.
TAC of $11.7 billion was down 2.2% year over year.
Top-line growth was driven by the solid momentum in GOOGL’s cloud business and improvements in the Search performance.
Alphabet witnessed sluggishness in YouTube ads and Google Network ads due to a slowdown in digital advertisement spending. This remained a major concern. Also, softness in the Other Bets segment was a negative.
Alphabet’s growing investments in AI, strong efforts to boost Search business and expanding cloud services portfolio, which is expected to yield huge returns in the days ahead, remain major positives. This, in turn, is expected to instill investor optimism in the stock in the days ahead.
The company has announced a massive $70 billion share repurchase plan. This remains a major positive.
Segments in Detail
Alphabet reports revenues under Google Services, Google Cloud and Other Bets.
Google Services:
Revenues from the Google Services business increased 0.8% year over year to $61.96 billion, accounting for 88.8% of the total revenues.
Under this business, search revenues from Google-owned sites increased 1.9% year over year to $40.36 billion.
YouTube’s advertising revenues declined 2.6% year over year to $6.7 billion, while Network advertising revenues decreased 8.3% to $7.5 billion.
Total Google advertising revenues fell 0.2% year over year to $54.5 billion and accounted for 78.2% of the total revenues.
Google’s Other revenues, consisting of Google Play and YouTube non-advertising revenues, were $7.4 billion for the first quarter, up 8.8% year over year.
Google Cloud:
Google Cloud revenues rose 28% year over year to $7.45 billion, accounting for 10.7% of the quarter’s total revenues.
Other Bets:
Other Bets’ revenues were $288 million, down 34.5% year over year and accounted for 0.4% of the total first-quarter revenues.
Regional Details
EMEA (30.2% of total revenues): GOOGL generated $21.1 billion in revenues from the region, increasing 4% year over year.
APAC (16.7% of total revenues): The region generated $11.7 billion in revenues, down 1% from the year-ago quarter’s level.
Other Americas (5.8% of total revenues): The region generated $4.1 billion in revenues, up 6% on a year-over-year basis.
United States (47.1% of total revenues): Alphabet generated $32.9 billion in revenues from the region, which increased 4% from the prior-year quarter’s level.
Operating Details
Costs and operating expenses were $52.4 billion, up 9.3% year over year. As a percentage of revenues, the figure expanded 459 basis points (bps) from the year-ago quarter’s level.
The operating margin was 24.9%, which contracted 460 bps year over year. Segment-wise, Google Services’ operating margin of 35.1% contracted 60 bps from the prior-year quarter’s level.
Google Cloud reported operating income of $191 million compared with a loss of $706 million in the year-ago quarter.
Other Bets reported a loss of $1.2 billion compared with a loss of $835 million in the prior-year quarter.
Balance Sheet
As of Mar 31, 2023, cash and cash equivalents and marketable securities were $115.1 billion, up from $113.8 billion as of Dec 31, 2022.
Long-term debt was $13.7 billion at the end of the reported quarter compared with $14.7 billion at the end of the previous quarter.
Alphabet generated $23.5 billion of cash from operations in first-quarter 2023 compared with $23.6 billion in fourth-quarter 2022.
GOOGL spent $6.3 billion on capex, netting a free cash flow of $17.2 billion in the reported quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
The consensus estimate has shifted 6.09% due to these changes.
VGM Scores
At this time, Alphabet has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Alphabet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
A month has gone by since the last earnings report for Moody’s (MCO – Free Report) . Shares have added about 1.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Moody’s due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Moody’s reported first-quarter 2023 adjusted earnings of $2.99 per share, which handily beat the Zacks Consensus Estimate of $2.31. The bottom line also grew 3% from the year-ago quarter figure.
Lower operating expenses and Moody’s Analytics segment’s solid performance supported Moody’s results. The company’s liquidity position was robust during the quarter. Yet, subdued issuance volume was a major headwind, which hurt Moody’s top line.
After taking into consideration certain non-recurring items, net income attributable to Moody’s was $501 million or $2.72 per share, up from $498 million or $2.68 per share in the prior-year quarter.
Revenues Down, Costs Rise
Quarterly revenues were $1.47 billion, which outpaced the Zacks Consensus Estimate of $1.43 billion. The top line, however, declined 3% year over year. Foreign currency translation unfavorably impacted revenues by 2%.
Total expenses were $916 million, up 6%.
Adjusted operating income of $656 million was down 11%. Adjusted operating margin was 44.6%, down from 48.2% a year ago.
Mixed Segment Performance
Moody’s Investors Service revenues declined 11% year over year to $733 million. The fall was mainly due to muted capital market activities. Foreign currency translation affected the segment’s revenues by 1%.
Moody’s Analytics revenues grew 6% to $747 million. This was mainly driven by the steady demand for Know Your Customer solutions and credit research. Foreign currency translation unfavorably impacted the segment’s revenues by 3%.
Strong Balance Sheet
As of Mar 31, 2023, Moody’s had total cash, cash equivalents and short-term investments of $2.2 billion, up from $1.86 billion as of Dec 31, 2022.
The company had $7.5 billion in outstanding debt and $1.25 billion in additional borrowing capacity under the revolving credit facility.
Share Repurchase Update
During the quarter, Moody’s repurchased 0.1 million shares at an average price of $297.30 per share.
2023 Guidance
Moody’s expects adjusted earnings in the range of $9.50-$10.00 per share, up from the earlier projection of $9.00-$9.50. On a GAAP basis, earnings are projected within $8.45-$8.95 per share, rising from the prior target of $8.05-$8.55.
Moody’s projects revenues to increase in the mid-to-high-single-digit percent range.
Operating expenses are expected to rise in the mid-single-digit percent range, an increase from the low-single-digit percent range provided previously.
Net interest expenses are expected to be $275-$295 million, changed from the previous guidance range of $290-$310 million.
Adjusted operating margin is expected to be 44-45%. The operating margin is likely to be nearly 37%.
Moody’s expects cash flow from operations in the range of $1.7-$1.9 billion. Similarly, free cash flow is projected to be $1.4-$1.6 billion.
The company will likely repurchase shares worth $250 million.
The effective tax rate is projected to be 15-17%, changed from the 20-22% projected earlier.
Segment Outlook for 2023
MIS segment revenues are anticipated to increase low-to-mid-single-digit percent range.
Adjusted operating margin is expected to be mid-50s.
Coming to the MA segment, Moody’s anticipates revenues to grow 10%.
Adjusted operating margin is expected to be roughly 31%. Further, the segment’s organic Annualized Recurring Revenue (ARR) is projected to rise in the low-double-digit percent range.
2022-2023 Geolocation Restructuring Program
Management expects the program to help the company further adapt to the new global workplace and talent realities. Also, the restructuring plan will accelerate a number of ongoing cost-efficiency initiatives, and includes real estate optimization and increased utilization of lower-cost operational hubs.
The program is expected to result in annualized savings of $100-$135 million per year.
The exit from certain leased office spaces is expected to result in $50-$70 million of pre-tax charges to either terminate or sublease the affected real estate leases.
The program also includes $75-$100 million of pre-tax personnel-related restructuring charges, an amount that includes severance and related costs primarily determined under the company’s existing severance plans.
Cash outlays associated with the program are expected to be $75-$100 million, which are expected to be paid through 2024.
The program is expected to be substantially complete by the end of 2023.
Medium-Term Targets
Moody’s projects total revenue growth of at least 10%, with adjusted operating margin in the low-50s range. Adjusted earnings per share are anticipated to increase in the low double-digit percentage range.
MA segment revenues are projected to grow in the low-to-mid teen percentage range, with adjusted operating margin in the mid-30s range.
MIS segment revenues are anticipated to rise in the low-to-mid-single-digit percentage range, with adjusted operating margin in the low-60s range.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
VGM Scores
At this time, Moody’s has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Moody’s has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Moody’s is part of the Zacks Financial – Miscellaneous Services industry. Over the past month, Synchrony (SYF – Free Report) , a stock from the same industry, has gained 3.2%. The company reported its results for the quarter ended March 2023 more than a month ago.
Synchrony reported revenues of $4.05 billion in the last reported quarter, representing a year-over-year change of +6.9%. EPS of $1.35 for the same period compares with $1.73 a year ago.
Synchrony is expected to post earnings of $1.19 per share for the current quarter, representing a year-over-year change of -25.6%. Over the last 30 days, the Zacks Consensus Estimate has changed +0.6%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Synchrony. Also, the stock has a VGM Score of A.
A month has gone by since the last earnings report for Verizon Communications (VZ – Free Report) . Shares have lost about 2.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Verizon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Verizon Beats on Q1 Earnings Despite Lower Revenues
Verizon reported mixed first-quarter 2023 results with the bottom line beating the Zacks Consensus Estimate but the top line missing the same. The telecom giant is witnessing significant 5G adoption and fixed wireless broadband momentum. Strong demand for Fios and fixed wireless products also led to the best total broadband quarterly performance in over a decade with total broadband net additions of 437,000.
However, the Consumer wireless business struggled with 263,000 retail postpaid phone net losses in the quarter. This dragged the shares down in pre-market trading as investors probably expected healthy subscriber growth.
Net Income
On a GAAP basis, net income in the quarter was $5,018 million or $1.17 per share compared with $4,711 million or $1.09 per share in the prior-year quarter. The year-over-year increase despite top-line contraction was primarily attributable to high expenses in the year-ago quarter. Excluding non-recurring items, quarterly adjusted earnings per share were $1.20 compared with $1.35 in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by a penny.
Revenues
Quarterly total operating revenues decreased to $32,912 million from $33,554 million in the prior year owing to lower wireless equipment revenues driven by a challenging macroeconomic environment. The lower year-over-year revenue was also attributable to the shutdown of the company’s 3G network, resulting in the removal of approximately 1.1 million retail connections. The top line missed the consensus estimate of $33,709 million.
Quarterly Segment Results
Consumer: Total revenues from this segment declined 1.7% year over year to $24,857 million, as higher service revenues were more than offset by lower equipment revenues in the quarter. Service revenues were up 1.8% to $18,456 million, while wireless equipment revenues slumped 9.2% to $4,878 million. Other revenues totaled $1,523 million, down 15% year over year.
The segment recorded 263,000 wireless retail postpaid phone net losses and 351,000 wireless retail prepaid net losses in the quarter. Wireless retail postpaid churn was 1.05%, while retail postpaid phone churn was 0.84%. The company recorded 63,000 Fios Internet net additions as high demand for reliable fiber optic broadband was spurred by increasing work-from-home trend. Fixed wireless broadband net additions were 256,000 for the quarter. However, Verizon registered 74,000 Fios Video net losses in the quarter, reflecting the ongoing shift from traditional linear video to over-the-top offerings. The segment’s operating income declined 3% to $7,099 million with a margin of 28.6%, down from 28.9% in the year-ago quarter. EBITDA decreased 1.6% to $10,313 million with a margin of 41.5% compared with 41.4% in the prior-year quarter due to higher marketing expenses.
Business: The segment revenues were down 2.8% to $7,494 million due to lower wireline and wireless equipment revenues, partially offset by growth in wireless service revenue. The segment had 312,000 wireless retail postpaid net additions in the quarter, including 136,000 postpaid phone net additions. Wireless retail postpaid churn was 1.50%, while retail postpaid phone churn was 1.16%. Fixed wireless broadband net additions were 137,000 for the quarter. Operating income declined to $551 million from $673 million in the year-ago quarter with respective margins of 7.4% and 8.7%. EBITDA was down 5.1% to $1,645 million owing to higher subsidies for a margin of 22% compared with 22.5% in the year-earlier quarter.
Other Quarterly Details
Total operating expenses decreased 1.7% year over year to $25,328 million, while operating income was down 2.7% to $7,584 million. Consolidated adjusted EBITDA declined to $11,902 million from $12,032 million for respective margins of 36.2% and 35.9%.
Cash Flow & Liquidity
Verizon generated $8,289 million of net cash from operating activities in the quarter compared with $6,821 million in the year-ago period. The improvement was primarily due to working capital improvements driven by lower inventory levels, fewer phone upgrades and a modest improvement in customer payment patterns. Free cash flow was $2,331 million compared with $1,000 million in the prior-year period. As of Mar 31, 2023, the company had $2,234 million in cash and cash equivalents with $140,772 million of long-term debt. Capital expenditure totaled $5,958 million, up from $5,821 million in prior-year period, driven by expenses related to C-Band deployment. The continued build out of OneFiber and C-Band spectrum expansion will expand the reach and capacity of its 5G Ultra Wideband network across the country.
Guidance Reiterated
Verizon has reiterated its guidance for 2023 and expects wireless service revenue growth in the range of 2.5%-4.5%. Adjusted EBITDA is likely to be $47-$48.5 billion. The company expects adjusted earnings in the range of $4.55 to $4.85 per share. Capital expenditure is estimated between $18.25 billion and $19.25 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
VGM Scores
Currently, Verizon has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Verizon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
