First, the good news: companies are beating the expectations more often than not this earnings season. After some 25% of the S&P listed companies have reported Q2 results, the ‘beat rate’ is over 80%. That compares well to the 65% beat rate last quarter. And with another 184 companies reporting this week, about one third off S&P index, we’ll know by Friday if this trend is solid or not.
Either way, however, the high beat rate is an artifact of a low bar, which brings us to the bad news. The COVID-19 epidemic has so reduced expectations that even though stocks are coming in better than forecast, they are still showing serious year-over-year declines in sales and profits. The markets have been forgiving, that is all; the bottom line, however, has been grim in the aftermath of the Q1 economic shutdowns and the unstable recovery in Q2.
With this in mind, investors should be more selective in their stock picks, which lead us to look more closely at the ‘Strong Buy’ stocks from the TipRanks database. Specifically, we’ve pulled up the details on three that are releasing earnings after the markets close today. Let’s find out why they are compelling, and get a hint of what to expect after hours.
NXP Semiconductors (NXPI)
We’ll start in the tech sector. NXP is an international semiconductor manufacturer, with headquarters located in both Texas and the Netherlands. The company reported $8.9 billion in revenues for 2019, and despite a hit to sales in 1H20 the Q1 numbers came in above expectations.
NXP benefits from its position as a supplier of advanced chips for automation and IoT applications. A large portion of the company’s business – nearly half – is with the automobile industry, and the company’s products are integral to radar systems and battery monitors. This sets up NXP to take advantage of automotive’s moves toward self-driving and/or electric cars. Another 21% of NXP’s business is with IoT applications.
Looking ahead, the forecasts for the company’s Q2 numbers exemplify both the good and bad of the coronavirus era. Wall Street expects to see about 86 cents per share tonight, a sharp drop from the $1.90 reported in Q2 2019, and down sequentially form Q1. At the same time, remember that NXP beat the Q1 forecast by 48%, so don’t be surprised if the forecast now is a lowball that NXP will easily clear.
Deutsche Bank’s 5-star analyst Ross Seymore is one of the bulls on NXPI. He rates the stock a Buy, and his $135 price target implies a potential upside of 13%. (To watch Seymore’s track record, click here)
Backing his stance, Seymore writes, “[We] would not be surprised to see NXPI slightly beat its 2Q guidance mid-point as demand largely appeared to be better than feared as the quarter progressed. While NXPI’s Auto-heavy exposure (40-50% of revs) may limit the upside in 2Q… we nonetheless expect the company’s results and likely its 3Q guidance to reflect a solid recovery… we remain impressed by NXPI’s ability to tightly manage its business throughout the cyclical downturn in 2019 and the COVID pandemic this year, with the resulting lean inventory yielding the potential for meaningful improvement in NXPI’s revenues, GM and EPS as demand normalizes.”
Overall, NXPI’s Strong Buy consensus rating is based on 17 reviews, including 13 Buys and only 4 Holds. Meanwhile, at $125.94, the average price target suggests a modest upside of 6% from the current trading price of $118.86. (See NXPI stock analysis on TipRanks)
Alexandria Real Estate Equities (ARE)
Next on our list is a real estate investment trust with a unique niche. Alexandria Real Estate Equities is heavily involved in the life-sciences industry, owning and leasing office and laboratory space used by research companies. The company boasts a market cap of $24 billion, along with more than 41 million square feet of leasable space. Alexandria has a presence in several major US research hubs, including New York and Boston, and San Diego and Seattle.
The value of Alexandria’s niche is clear from the long-term earnings trend. ARE has reported consistently rising quarterly earnings for the last two years, a trend that was enhanced by the COVID-19 epidemic, which put a premium on health and life sciences services. ARE, which had just missed the earnings forecast in Q4, matched it in Q1 at $1.82 per share. Looking ahead, the stock is expected to show a 55% year-over-year earnings gain, based on $253 million in revenue.
A measure of Alexandria’s strength can be seen in its stock and dividend actions taken during Q2. The company put 6.9 million shares of common stock on the market, at a price of $160 per share, during June, with the proceeds of the sale funding forward sale agreements and construction on highly leased development projects. In addition, the company raised its dividend by 3 cents, to $1.06 per share. The new dividend gives a yield of 2.5%, and has a ‘safe’ payout ratio of 49%.
JMP Securities analyst Aaron Hecht notes, “Since the COVID-19 lockdown began, we have seen material demand shifts across real property types as the pandemic/social unrest has changed consumer behavior. Demand is increasing across real estate sectors that provide superior safety from COVID-19…”
Turning to Alexandria, Hecht says, specifically, “[The] company owns a premier portfolio of Life Science properties, with tenants that work in the Biotech and Technology industries. Many ARE tenants are developing COVID-19 therapeutics and the portfolio is trophy-level quality…”
In line with his comments, Hecht rates ARE shares a Buy. His $185 price target suggests the stock has room for 10% growth in the coming 12 months. (To watch Hecht’s track record, click here)
The analyst consensus on Alexandria Real Estate is unanimous; the company has 4 Buy ratings, making the consensus rating a Strong Buy. Shares are selling for $168, and the average price target of $178.75 implies room for a 7% upside. (See Alexandria’s stock analysis on TipRanks)
Universal Health Services (UHS)
Last up is Universal Health Services, a Pennsylvania-based company providing hospital and healthcare services. UHS operates 400 facilities – including hospitals, acute care centers, and surgeries – across the continental US, as well as in Puerto Rico and the UK. The company saw more than $11 billion in revenues last year, and has a market cap of $9.2 billion.
While medical facilities have been in high demand during the pandemic, the social lockdown policies put a damper on elective procedures. UHS saw a decline in earnings in Q1 of 37%, to $1.73 per share. UHS has suspended its profit sharing programs – dividends and stock buybacks – to conserve capital during the pandemic period. Looking ahead, it’s expected that sharp declines in the Acute Care and Behavioral Health segments will drive a 16% sequential reduction in revenues for the quarter.
Covering the stock for Deutsche Bank, analyst Pito Chickering notes several points that favor UHS shares turning around in the near future: “Revenue trends were healthy pre-coronavirus through February, with hospital same-store revenue trends tracking in-line with expectations through mid/late March… Hospital and provider volumes have recovered more quickly than market expectations with admissions within 10% of pre-COVID-19 levels; occupancy rates across the country are elevated… We believe there will be pent-up demand for finite OR capacity with prioritization to urgent / emergent procedures, e.g., cardiac procedures vs hips, knees, etc.”
Chickering’s view is contingent on a further gradual opening of local and state level economies. In the even of an increase in coronavirus cases, however, the analyst does grant, “We also believe the country and hospitals are better equipped to handle a spike in COVID-19 cases at the local level and national, state and local policy measures will continue to adapt.”
Chickering rates UHS a Buy, with a $135 price target that implies a 23% one-year upside potential. (To watch Chickering’s track record, click here)
United Health Services has 8 Buys and 1 Hold, making the analyst consensus rating a Strong Buy. Share are selling for $109.58 heading into earnings, and the average price target of $135 matches Chickering’s. (See United Health’s stock-price forecast TipRanks)
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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.