Earnings expectations for 2023 have been dropping lower with recent announcements, as most analysts have been expecting a slowdown if not a recession this year. And if the IMF is to be believed, there’s reason to think that inflation peaked last year and a recession may be avoidable in 2023 and also 2024, even if interest rates move above 5% and the unemployment rate also reaches thereabouts.
So while we may have to live with more layoffs and high interest rates for the rest of the year, the main point to note here is inflation, which is supposed to continue to be brought down. Of course, we’ve only seen a couple of positive prints and things could still go awry, as oil prices and geopolitics are unknowns.
The layoffs are clearly visible in the tech sector, where several companies are downsizing in anticipation of softer demand and also with a view to adjust the workforce with future goals. Of the technology stocks that have reported thus far, Microsoft and Intel have fared the worst.
The weakness is mainly on the PC/consumer side, although cloud/data center is also softer. This is not to be confused with weakness however but instead a slowdown in growth (Microsoft’s cloud revenue grew 32% in the last quarter). Intel’s business is more complicated because it is losing share in some segments and undergoing a transformation that is also impacting its results. Therefore, Intel’s 33% decline can’t be representative of industry conditions.
Another company that had a miserable quarter was Micron, which reported a huge miss and layoffs, mainly related to an inventory glut in the memory market as consumer-type demand dropped off sharply some time last year.
Taiwan Semiconductor also missed expectations, but by a lower margin.
The only exception was Texas Instruments, which continued to beat on both top and bottom lines. TI is one of my favorite defensive plays and it almost never fails.
But a common concern for all is the outlook for 2023, which is getting decidedly murkier. And that’s why the following stocks caught my attention. While they may be part of this whole softening story, analysts appear to be optimistic on them, going by the estimate revisions trend:
Infineon Technologies AG ( IFNNY Quick Quote IFNNY - Free Report)
Infineon, which makes a whole range of semiconductor devices for multiple markets including automotive, industrial, communications infrastructure, IoT and other markets has seen its 2023 and 2024 estimates rise a couple of cents each in the last seven days.
The Zacks Consensus Estimates for both years have been edging up gradually over the last 60 days. Since it carries a Zacks Rank #1 (Strong Buy) and has an earnings Expected Surprise Prediction (ESP) of 0.0%, there’s a good chance that the company will beat estimates when it reports on Feb 2.
The Electronics – Semiconductors industry to which it belongs is in the bottom 29% of 249 Zacks-classified industries. Therefore, although it is not immune to industrywide concerns, there are compelling reasons for analyst optimism.
Dassault Systèmes SE ( DASTY Quick Quote DASTY - Free Report)
Dassault is a global provider of software solutions and services, including for 3D design, electrical and printed circuit board design, product data management, simulation, manufacturing, and technical communication worldwide.
Like Infineon, Dassault’s 2023 and 2024 estimate have moved up a couple of cents in the last seven days. And since it also belongs to the Computer Software industry, which is in the top 38% of Zacks-classified industries, it is likely to face lower adversities in its operating environment.
The Zacks Rank #2 (Buy) stock has an earnings ESP of 1.49%. Therefore, it may be expected to beat estimates when it reports on Feb 2.
Paylocity Holding Corp. ( PCTY Quick Quote PCTY - Free Report)
Paylocity Holding provides cloud-based human capital management and payroll software solutions in the United States.
The Zacks Consensus Estimate for 2023 (ending June) remains unchanged while the estimate for 2024 is up a couple of cents in the last 30 days. This looks particularly good since analysts expect 2023 earnings to grow 24.6% and 2024 earnings to grow 20.4%.
Paylocity belongs to the Internet – Software industry (top 24%), indicating that there are industry-wide positives it can benefit from.
The Zacks Rank #1 stock has an earnings ESP of 0.0%, increasing the odds of an earnings beat when it reports on Feb 2.
Cirrus Logic, Inc. ( CRUS Quick Quote CRUS - Free Report)
Cirrus Logic is a fabless semiconductor company, providing low-power and high-precision mixed-signal processing solutions that are used in audio products for consumer electronics (67% revenue share), and other products for industrial and energy markets.
For the year ending in March 2023, the Zacks Consensus Estimate has declined 3 cents in the last 30 days. The 2024 estimate has however increased 24 cents in the same time period. Analysts expect a 14.4% earnings decline this fiscal year followed by 10.9% growth in the next.
The Zacks Rank #2 stock has an earnings ESP of -4.79%. Therefore, we are unable to predict a surprise when it reports on Feb 2.
Since it belongs to the Electronics – Semiconductors industry (bottom 29%), there would be industrywide issues that would be troubling the company as well.
Three-Month Price Performance Image Source: Zacks Investment Research