Jacob Sonenshine
Stocks have performed poorly after earnings reports, leaving investors with opportunities.
The average stock-price reaction the day after earnings for S&P 500 companies is down 0.4%, according to Evercore. That's even with aggregate earnings per share beating expectations by 11%. Sales have more narrowly beaten estimates and margins have been stronger than forecast. Expenses such as cost of goods aren't rising much, and firms are only moderately raising prices.
The problem is that the S&P 500 came into earnings reports up a lot, having risen about 10% in the first quarter. Stocks were reflecting a fairly large profit stream, so it would require especially large beats of expectations -- and significantly higher profit guidance from management teams -- to lift shares.
Companies that are missing expectations are seeing their stocks get outright punished. The average stock movement for firms that miss on both top and bottom lines is down 4.5%, versus a five-year average of down 3.1%.
The drops, especially for companies that are growing, should smell like opportunity to investors.
Two quick examples are Sherwin-Williams and Caterpillar, both of which remain lower post-earnings this week. Sherwin's sales are vulnerable to fluctuations in consumer demand and Caterpillar is sensitive to demand changes from construction companies, transportation firms and energy producers. But, with the economy continuing to grow, analysts still expect sales and earnings per share to grow for the next two years, according to FactSet, especially as both companies continue to buy back stock.
Meta Platforms looks like an opportunity, with the stock down 11% since reporting earnings Wednesday after the market closed. Shares had just risen too fast, coming into earnings having gained 40% for the year. Better-than-expected results weren't enough.
But the business looks strong. Sure, the midpoint of guidance for second-quarter revenue of $37.8 billion puts the company on pace to hit $149 billion for the full year, below analyst's previous forecast for $158 billion. But some of the weakness is because of a stronger dollar, and it's still better than last year's $134.9 billion.
Most of the growth is coming from user monetization; ad prices rose 6% in the first quarter, while ad impressions rose 20%, a result of more ads on Instagram, and users spending more time on the app. Meta is using artificial intelligence to identify the experiences and products users want, thus increasing time spent on Instagram and enticing advertisers to pay top dollar to market their products. That's why analysts still forecast sales growth in the low double-digit-percentages for the next several years.
That will push earnings higher. Meta increased its spending plans, making it difficult for the company to increase profit margins this year. But Meta's spending is meant to maintain its competitive advantage in AI. The investments will help margins expand in the future, with analysts expecting operating margin to rise to more than 40% by 2029, from below 39% this year. That means earnings per share can grow at about 13% annually to more than $35 by 2029.
Considering that, the current share price of $442 may be a bargain. If, by the end of 2028, the stock trades at just 20 times 2029 earnings per share -- not even its current 21 times multiple -- shares would hit $700.
"Valuation is now becoming very attractive," writes Evercore analyst, Mark Mahaney, who reiterated his Outperform rating on Meta stock with a $550 target price.
Netflix stock is in the same boat, down 9% since last week's earnings, which beat expectations. Shares had gained 26% for the year to date ahead of the first-quarter report.
Analysts forecast sales growth in the low-double-digit percentages to about $52 billion by 2027. Subscriber growth in the U.S. has seen its best days, but the bullish thesis begins with international subscriber growth in the high-single-digit percentages from this year though 2027, with some areas seeing rising subscription prices. Netflix expects a continued ramp up in advertising revenue, which should contribute to top-line growth, especially if the ads don't dissuade people from signing up and paying healthy subscriptions.
The growth can lift profit margins. Netflix should increase marketing expenses by only a mid-single-digit percentage each year, so earnings can grow more than 25% annually to over $30 by 2027.
If the stock, which trades at 28 times next year's earnings per share, trades at just 25 times by the end of 2026, it would still hit $763, up almost 40% from its current level. It's another Buy, according to Mahaney, who has a $650 price target.
It's time to go stock-picking.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 26, 2024 14:01 ET (18:01 GMT)
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