Earnings season was supposed to be something of a flop this quarter, as Wall Street was forecasting a 3% to 4% revenue drop for Q1 2019. The Cassandra’s have been right on one point, reported revenues are slightly lower than Q4, but 75% of the S&P 500 companies that have reported so far have beaten their estimates. If that rate holds, this earnings season may itself beat the bearish prediction, and run just about flat with last quarter. It’s still early, but that’s a distinct possibility.
We’ll take a close look at five stocks that have reported recently and done better than expected, dipping into the TipRanks database to see what Wall Street’s top analysts have to say about them.
Boeing Company (BA – Research Report)
Boeing is a solid buy, one of Wall Street’s most reliable stocks, that has hit a rough patch in the road of late. The difficulties came to a head with the March 10 crash of an Ethiopian Airlines Boeing 737 MAX 8 just minutes after takeoff, the second such fatal crash of that model airliner in just five months. In the wake of the Ethiopian Air crash, investigations traced the cause to a flaw in the MAX 8’s autopilot system and all MAX 8 aircraft, worldwide, have been grounded in response. Boeing, for its part, suspended construction on new 737 planes until the autopilot flaw can be resolved. The company is currently developing a software fix to resolve the issue, and is engaged in simulator and flight testing of the MAX 8 with the new autopilot control system.
That’s Boeing’s bad news. The company has had plenty of good news, too, ranging from continued orders and upgrades to the F/A-18E/F Super Hornet fighter to increased orders for the 777 and 787 wide-body airliners. While this has not fully made up for the financial hit caused by the 737 investigations, groundings, and construction suspension, it has ameliorated the damage.
On April 24, Boeing reported Q1 2019 earnings in line with expectations. EPS was 1.5% higher than expected, at $3.16 compared to $3.11, while quarterly revenues of $22.92 billion just missed the forecast $22.98 billion. Management noted $1 billion in increased costs due to shutting down production of the 737, a hit reflected in the company’s cash flow, which was down 10% from last quarter. In positive news, Boeing reported 18 new orders for 777X airliners, along with 30 orders for 787 planes.
The immediate reaction to the earnings report was a drop, but BA rebounded as investors digested the facts: Boeing maintains a steady production line and the fix for the MAX 8 is in the works and on track for implementation before the end of Q2. By the end of the day, BA shares were up 1% from their pre-report close. On April 26, BA was still up 1.3% since the
Five-star Baird analyst Peter Arment (Track Record & Ratings) lays out a clear case for Boeing to recover from the 737 crash and grounding in a strong position. He says, “While the 2019 outlook was suspended stemming from the 737-MAX grounding, the software fix is tracking to be certified within a few weeks with regulatory approval following and then 737 deliveries can commence exiting 2Q19. Our model still reflects no 737-MAX deliveries in 2Q19 and as a result there are no material changes to our estimates post 1Q19 results. We continue to see the risks to the 737-MAX issue being priced in and remain comfortable recommending buying BA at current levels for the long term.” Arment gives Boeing a price target of $470, indicating confidence in a 23% upside to the stock.
Overall, Boeing holds a ‘Moderate Buy’ rating from the analyst consensus, based on 18 ratings from the best-performing analyst over the last three months. 13 of those are buy ratings, while 5 are holds; 6 of the buys have come since the Q1 earnings report. Boeing’s average price target, $443, suggests room for a 16% upside when compared to the $380 current share price.
BorgWarner, Inc. (BWA – Research Report)
From Seattle, let’s head cross-country to Michigan, where BorgWarner, one of Detroit’s largest powertrain suppliers and a major manufacturer of automotive transmissions, shows us that old-style industrial muscle is alive and still turning a profit. While the automotive industry has had its swings over the years, Detroit has proven itself adaptable to changing situations.
BorgWarner, for its part, has carved out a space in the industry providing essential components for the automotive assembly lines. The guaranteed industrial customer base provides Borg with a solid foundation – the company has consistently beaten earnings expectations going all the way back to 2016.
Q1 2019 showed both good and bad news for BWA. On the down side, earnings and revenues were lower than the year-ago quarter. On the plus side, the $1 EPS was a 6% beat of the estimate, and reflected a solid performance. Revenues came in at $2.57 billion, well above the $2.47 billion forecast. BWA’s average beat in quarterly estimates over the past year has been 7%, so these results are in line with past reports.
BorgWarner is taking a steady note in regard to the full year guidance, building on this good quarter without hyping expectations. Company CEO Frederic Lissalde said in the conference call, “…we are encouraged by the stronger Q1 performance, we're maintaining our full year guidance. We continue to expect revenue to be down 2.5% to up 2% organically, and this represents an outgrowth of 250 basis points to 400 basis points… We continue to expect our adjusted earnings per share to be at $4 to $4.35.”
The Q1 results were good enough for BWA to keep its ‘buy’ rating from Oppenheimer. Analyst Noah Kaye (Track Record & Ratings) wrote of the company’s current state and future outlook, “.We saw several positives in 1Q results and guide. First, the company is maintaining a conservative market outlook despite a better than expected start to the year on both light vehicle production and outgrowth metrics. Second, we believe management’s explanation of key tailwinds for back-half margin improvement was cogent. Third, from a strategic perspective, we are encouraged that BWA’s restructuring decision links explicitly to higher win rates and customer demand it sees for hybrid and electric propulsion solutions. While demand uptake for these architectures remains in early innings, the company’s willingness to recalibrate for growth opportunities while attending to margin trajectory is a positive in our view.”
Kay gives BWA a $51 price target to go along with his ‘buy’ rating, indicating his confidence in the company and a 20% upside potential to the stock.
BWA maintains a ‘Moderate Buy’ rating from the analyst consensus, based on 3 buys and 2 holds given in the past three months. The company’s shares trade at $42, so the average price target of $45 suggests a 5.8% upside to the stock.
Discover Financial Services (DFS – Research Report)
You may remember Discover’s ad slogan from back in the day: “It pays to discover.” DFS offered customers one of the first reward programs on a credit card. The Discover Card paid users back a small percentage of their total charges; the program helped the company develop and expand market share in an industry dominated by Visa, Mastercard, and American Express.
Today, Discover also operates Discover Bank, offering checking and savings accounts, student loans, and home equity loans in addition to credit cards. Unlike most major card brands, Discover directly issues its credit cards, and is the sixth largest card issuer in the US.
DFS showed a strong 7% earnings beat in Q1, posting EPS of $2.15 against the expected $2. This was also well ahead of the $1.82 posted in Q1 2018. Revenues were in line with expectations, with the $2.76 billion reported only a half-percent higher than forecast. Reported revenues were, however, 7% higher than a year ago. In the earnings call, company CEO Roger Hochschild pointed out strong growth of 9% in the payment services and private student loan segments. DFS shares have gained 5% since the earnings report went public.
Market analysts were generally pleased with DFS’ performance for the quarter. Writing from Oppenheimer, Dominick Gabriele (Track Record & Ratings) said, “DFS reported 1Q19 EPS of $2.15 vs. our consensus [of] $2.01/$2.02. It was a clean beat… DFS continues to provide high capital return to shareholders and improving ROE.” Gabriele may not have been optimistic enough, however, as DFS shares have already matched his price target of $81.
Four-star analysts Mark Devries (Track Record & Ratings) of Barclays and Betsy Graseck (Track Record & Ratings) of Morgan Stanley, also took an upbeat view of Discover, and raised their price targets to $87 and $93 respectively. The average price target for this stock is $90, suggesting an upside of 10%. The analyst consensus is a unanimous ‘Strong Buy,’ based on the ratings given after the quarterly report.
Waste Connections (WCN – Research Report)
Waste Connections, as its name implies, is a garbage disposal company, the third-largest such company operating in North America. It also represents a straightforward case of a stock performance reflecting a modest earnings beat, which in turn was based on solid company performance. The report came out on April 24.
By the numbers, WCN posted $1.245 billion in quarterly revenues, against an expectation of $1.24 billion. EPS was 2 cents better than forecast, at 62 cents. In the words of company president Worthing Jackman, “We are extremely pleased with the strong start to the year which, along with expected sequential improvement in volume growth and recently completed acquisitions, positions us well for the remainder of 2019… Our strong financial profile and free cash flow generation provide us the flexibility to fund continuing outsized acquisition activity while increasing the return of capital to shareholders.” Mr. Jackman also notes that his company is “solidly on track to achieve our full year outlook of $950 million [free cash flow].”
It’s a rosy picture, and the market analysts agree. Stifel’s four-star analyst Michael Hoffman (Track Record & Ratings), in a research note on WCN, anticipates “annualized free cash flow growth of 7%-8% for the foreseeable future. The latest quarter highlighted the power of Waste Connections' operating model, namely its market selection, asset position and contract structure.” Hoffman’s sets a $105 price target on WCN, implying an upside of 14%.
Of the three stocks in this article, WCN gets a unanimous consensus rating – it is a ‘Strong Buy,’ based on 6 buy ratings. The stock trades for $91, with an average price target of $101. This suggests room for an 11% upside to the shares.
Waste Management, Inc. (WM – Research Report)
Waste Management offers a wide network of landfill sites and recycling plants for disposal of all forms of waste collected from more than 21 customers. The company serves residential areas, as well as commercial, industrial, and municipal customers, with the waste collections industry’s largest fleet of truck, totally over 26,000 vehicles. WM is the largest trach collector in North America, and the chief competitor to Waste Connections (shown above).
Like WCN, Waste Management also topped earnings estimates in the first quarter. At 94 cents, EPS was 3% higher than the 91 cents predicted. This was the third of the last four quarters to see an earnings beat. Revenues also came in slightly above expectations, at $3.696 billion compared to the $3.670 billion predicted. The Q1 2019 figure was significantly higher than the year ago quarter’s $3.511 billion.
Company CEO Jim Fish summed up the strong quarter in his introduction to the conference call, saying, “Our excellent first quarter results that demonstrate continued strength in our business as well as the agreement we announced last week to acquire Advanced Disposal Services.” That deal, which includes WM paying $3 billion in cash to take over its competitor, represents an important expansion of WM’s market share and operational footprint, and will solidify WM’s position at the top of the waste collection and disposal ecosystem.
Oppenheimer analyst Noah Kaye (quoted above in re: BWA) pointed out both the quarterly earnings and the Advanced Disposal (ADSW) agreement. He raised his price target on WM to $115, and in his noted specified the “better organic growth trends and Advanced Disposal Services (ADSW) acquisition benefits. The combined Waste Management-Advanced Disposal Services entity can generate $40M-$50M in year one incremental free cash flow.” Kaye’s price target indicates a possible upside of 8.7% to WM.
Waste Management’s analyst consensus rating is a ‘Strong Buy,’ with 4 buy reviews and 1 hold given over the past three months. At $112, the average price target implies an upside of 6% from the current share price of $105.