Value stocks

2 Value Stocks That Just Beat Earnings

Value stocks are preferred by investors because they trade below their intrinsic values.

The reason this is happening could simply be because investors have somehow ignored them, so there is less money chasing them. But once investors are aware, they flock to the action and prices soar, rewarding those who got there first.

Other reasons could be unrelated to the stock itself, such as broader industry or market concerns, or bearish sentiments, such as when people expect a recession.

That’s why I thought it made sense to discuss how a few of these stocks have performed this earnings season. Both exceeded analysts’ estimates, so they deserve to be discussed in more detail.

PulteGroup, Inc. PHM

PulteGroup is a homebuilder that beat its estimated earnings by 5.8% on revenue that fell by 2.5%.

Digging deeper, we find that the company missed analysts’ estimates for home and land sales this quarter, suggesting a continued slowdown in the housing market. Analysts have also been overly bullish on home sales in previous quarters (the average surprise over the past five quarters is just +0.02%). But the land sales surprises were more consistent, and it was the first time in five quarters that the company missed analysts’ estimates (the five-quarter average is +38.4%).

The negative surprise in land sales is worrying as it clearly indicates a slowdown in housing demand.

Continuing the trend of the past five quarters, the financing side of the business also suffered, missing analyst estimates by 25.0% (five-quarter average surprise is -16.2%).

Pre-tax earnings in the homebuilding sector (including land sales) have consistently exceeded analysts’ estimates of 4.5%, with financing remaining a drag.

New order units were down from previous quarters and a year ago (more than 20% missing estimates) the cancellation rate was higher than expected. The value of new orders was also lower in both quarters, but the 5% loss indicates that prices were higher than expected. And sure enough, the average selling price continued to rise to its highest level in five quarters, ahead of analysts’ estimates.

Backlog units were down from both the prior quarter and the prior year, missing analyst estimates by 7.2%.

It should be noted that analysts expect new order and backlog units as well as average selling prices to increase in the current quarter, as cancellation rates decline. Active communities should also increase.

Overall, the results indicate that high prices drive away some customers while low inventory keeps prices high. With land sales slowing, it doesn’t look like inventory will increase quickly, so prices are likely to stay high.

QUALCOMM Inc. QCOM

QUALCOMM beat Zacks consensus estimate for earnings by 3.2% and sales by 0.5%. While that can’t be called exciting, it’s not bad considering the harsh operating environment.

Equipment and rental revenue rose 44.2% from the prior year quarter, but beat analysts’ expectations of 2.3%. License and royalty fees rose 2.3%, but that was 12.9% better than analysts expected.

All four product lines in the QCT segment grew: Handsets 59% (beating analyst estimates by 1.3%), RF Front Ends 9% (missing by 7.7%), Automotive 38% (missing by 1.4% ) and IoT 31% (beating 0.6%).

Overall QCT segment revenue increased by 45% while QTL segment revenue increased by 2%.

QCT’s pretax profit rose 66.9%, but beat analysts’ expectations of 1.1%.

QTL’s pre-tax income grew 2.6%, 1.2% better than expected.

It’s clear from the results that QUALCOMM had a pretty strong quarter and the only reason the beat percentages are so low is because analysts have high expectations.

Conclusion

PulteGroup and QUALCOMM both beat analyst estimates this quarter and both have a Zacks #3 (Hold) rank. But if I had to choose one, I would choose QUALCOMM and the reasons are pretty obvious.

PulteGroup is in a complicated situation. The market in which it operates is targeted by the Fed. The pressure will be unrelenting until demand drops. And the company will have to see its activity contract despite positive fundamentals. But once this phase is over, things will quickly improve provided that labor is available and inventory can be built up (the supply chain should normalize this year).

Since it also sells land, PulteGroup will probably not be limited by the lot. because the demand is really there. But there is a risk here. What happens if there is a prolonged downturn spurred by Fed actions? It could take a few years for the situation to recover.

QUALCOMM, however, feels good because the products it sells are going to stay in demand. And even if it cannot stay unscathed from a broad recession, it will take more to disrupt its engine of growth.

One month price performance

Image source: Zacks Investment Research

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.