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Value stocks are preferred by investors because they trade below their intrinsic values.
The reason that this happens could simply be because investors have somehow overlooked them, so there is less money chasing them. But once investors wise up, they flock to the stock and prices then take off, rewarding those who got there first.
Other reasons could be unrelated to the stock itself, such as broader concerns across the industry or market, or bearish sentiments, such as when people are expecting a recession.
That’s why I thought it made sense to discuss how a couple of these stocks have done this earnings season. Both of them have topped analyst estimates, so they’re worth discussing in some more detail.
PulteGroup is a homebuilder that beat estimated earnings by 5.8% on revenue that missed by 2.5%.
Digging deeper we find that the company missed analyst estimates on both home and land sales this quarter, suggesting continued slowdown in the housing market. Analysts have been overly optimistic about home sales in prior quarters as well (average surprise in the last five quarters is just +0.02%). But land sales surprises have been more consistent and this was the first time in five quarters that the company missed analyst estimates (the five-quarter average is +38.4%).
The negative surprise in land sales is a concern because it’s a clear indication of slowing demand for housing.
Continuing the trend in the last five quarters, the financing side of the business also suffered, missing analyst estimates by 25.0% (average five-quarter surprise is -16.2%).
Income before taxes in the homebuilding (including land sales) business still beat analyst estimates by 4.5% with the financing side remaining a drag.
New order units shrank from both previous and year-ago quarters (missing estimates by over 20%), the cancellation rate was more than expected. New order value was also lower than both quarters, but the 5% miss indicates that pricing was stronger than expected. And sure enough, the average selling price continued to increase to the highest level in five quarters, ahead of analyst estimates.
Backlog units shrank from both the previous and year-ago quarters, missing analyst estimates by 7.2%.
Worth noting is the fact that analysts expect new order and backlog units as well as average selling prices to increase in the current quarter with cancellation rates declining. Active communities are also expected to increase.
Overall, the results indicate that the high prices are turning some customers away while the low inventories are keeping prices high. Since land sales are softening it doesn’t look like inventory will pick up quickly, so prices are likely to remain high.
QUALCOMM beat the Zacks Consensus Estimate on earnings by 3.2% and on sales by 0.5%. While this cant be called exciting by any stretch, it isn’t bad considering the difficult operating environment.
Equipment and leasing revenue grew 44.2% from the year-ago quarter, but missed analyst expectations by 2.3%. Licensing and royalty fees grew 2.3%, but this was 12.9% better than what analysts were expecting.
All four product lines within the QCT segment grew: Handsets 59% (beating analyst estimates by 1.3%), RF Front-end 9% (missing by 7.7%), Automotive 38% (missing by 1.4%) and IoT 31% (beating by 0.6%).
QCT income before taxes increased 66.9% but missed analyst expectations by 1.1%.
QTL income before taxes increased 2.6%, 1.2% better than expected.
It’s clear from the results that QUALCOMM had a rather solid quarter and the only reason that the beat percentages are so low is because analysts have high expectations of it.
Conclusion
Both PulteGroup and QUALCOMM have topped analyst estimates this quarter and both have a Zacks Rank #3 (Hold). But if I had to pick one, I would go for QUALCOMM and the reasons are quite obvious.
PulteGroup is in a complicated situation. The market in which it operates is being targeted by the Fed. The pressure will be unrelenting until demand comes down. And the company will have to see its business shrink despite the positive fundamentals. But after this phase is over, things will improve rapidly provided the labor is available and inventory can be built up (the supply chain is expected to normalize this year).
Since it also sells land, PulteGroup will probably not be lot-constrained. because demand really is there. But there is a risk there. What if there is a protracted downturn spurred by the Fed’s actions? It could be some years before the situation rights itself.
QUALCOMM, however, I feel good about because the products it sells are going to remain in demand. And while it cant remain unscathed in a broad recession, it will take more to disrupt its growth engine.
One-Month Price Performance
Image Source: Zacks Investment Research
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2 Value Stocks That Just Beat on Earnings
Value stocks are preferred by investors because they trade below their intrinsic values.
The reason that this happens could simply be because investors have somehow overlooked them, so there is less money chasing them. But once investors wise up, they flock to the stock and prices then take off, rewarding those who got there first.
Other reasons could be unrelated to the stock itself, such as broader concerns across the industry or market, or bearish sentiments, such as when people are expecting a recession.
That’s why I thought it made sense to discuss how a couple of these stocks have done this earnings season. Both of them have topped analyst estimates, so they’re worth discussing in some more detail.
PulteGroup, Inc. (PHM - Free Report)
PulteGroup is a homebuilder that beat estimated earnings by 5.8% on revenue that missed by 2.5%.
Digging deeper we find that the company missed analyst estimates on both home and land sales this quarter, suggesting continued slowdown in the housing market. Analysts have been overly optimistic about home sales in prior quarters as well (average surprise in the last five quarters is just +0.02%). But land sales surprises have been more consistent and this was the first time in five quarters that the company missed analyst estimates (the five-quarter average is +38.4%).
The negative surprise in land sales is a concern because it’s a clear indication of slowing demand for housing.
Continuing the trend in the last five quarters, the financing side of the business also suffered, missing analyst estimates by 25.0% (average five-quarter surprise is -16.2%).
Income before taxes in the homebuilding (including land sales) business still beat analyst estimates by 4.5% with the financing side remaining a drag.
New order units shrank from both previous and year-ago quarters (missing estimates by over 20%), the cancellation rate was more than expected. New order value was also lower than both quarters, but the 5% miss indicates that pricing was stronger than expected. And sure enough, the average selling price continued to increase to the highest level in five quarters, ahead of analyst estimates.
Backlog units shrank from both the previous and year-ago quarters, missing analyst estimates by 7.2%.
Worth noting is the fact that analysts expect new order and backlog units as well as average selling prices to increase in the current quarter with cancellation rates declining. Active communities are also expected to increase.
Overall, the results indicate that the high prices are turning some customers away while the low inventories are keeping prices high. Since land sales are softening it doesn’t look like inventory will pick up quickly, so prices are likely to remain high.
QUALCOMM Inc. (QCOM - Free Report)
QUALCOMM beat the Zacks Consensus Estimate on earnings by 3.2% and on sales by 0.5%. While this cant be called exciting by any stretch, it isn’t bad considering the difficult operating environment.
Equipment and leasing revenue grew 44.2% from the year-ago quarter, but missed analyst expectations by 2.3%. Licensing and royalty fees grew 2.3%, but this was 12.9% better than what analysts were expecting.
All four product lines within the QCT segment grew: Handsets 59% (beating analyst estimates by 1.3%), RF Front-end 9% (missing by 7.7%), Automotive 38% (missing by 1.4%) and IoT 31% (beating by 0.6%).
Overall QCT segment revenues increased 45% while QTL segment revenue increased 2%.
QCT income before taxes increased 66.9% but missed analyst expectations by 1.1%.
QTL income before taxes increased 2.6%, 1.2% better than expected.
It’s clear from the results that QUALCOMM had a rather solid quarter and the only reason that the beat percentages are so low is because analysts have high expectations of it.
Conclusion
Both PulteGroup and QUALCOMM have topped analyst estimates this quarter and both have a Zacks Rank #3 (Hold). But if I had to pick one, I would go for QUALCOMM and the reasons are quite obvious.
PulteGroup is in a complicated situation. The market in which it operates is being targeted by the Fed. The pressure will be unrelenting until demand comes down. And the company will have to see its business shrink despite the positive fundamentals. But after this phase is over, things will improve rapidly provided the labor is available and inventory can be built up (the supply chain is expected to normalize this year).
Since it also sells land, PulteGroup will probably not be lot-constrained. because demand really is there. But there is a risk there. What if there is a protracted downturn spurred by the Fed’s actions? It could be some years before the situation rights itself.
QUALCOMM, however, I feel good about because the products it sells are going to remain in demand. And while it cant remain unscathed in a broad recession, it will take more to disrupt its growth engine.
One-Month Price Performance
Image Source: Zacks Investment Research