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The second quarter is turning out to be a really strong quarter overall. The broad trends are pretty clear from here with the S&P 500 (as a representative group) showing big revenue increases and smaller earnings beats than we have been seeing of late.
But some companies have stood out from the rest, reporting record revenue and earnings with more to come. And this has happened despite the supply-side constraints because demand has been overwhelmingly strong.
The delta variant remains a concern however, which could be why some stocks are still undervalued. And to be undervalued on the basis of earnings growth is actually an investment opportunity.
Here are a few examples-
Dillard’s, Inc. DDS
Dillard's is a large departmental store chain featuring fashion apparel and home furnishings. As of Jul 31, 2021, it had about 249 namesake outlets and 31 clearance centers across 29 states mainly in the Southwest, Southeast and Midwest regions of the United States. Merchandize is also sold through the Internet at www.dillards.com.
Inventory management has been a core component of the company’s strong results over the last few quarters. Lower inventories have helped it maintain stronger pricing, which in turn led to significantly stronger margins (and therefore earnings) as demand picked up in response to broader inoculation. A rationalization/optimization of the workforce has also helped.
Raw material price inflation is a common theme for most retailers and Dillard’s is no different. But lower inventories and significant demand haven’t allowed price erosion thus far. Since the squeezed supply chains and overburdened transporters are expected to be short-lived, things should improve as we go through the year and into 2022. Its ecommerce channel is not up to speed with the competing players, but may not be a big problem in the current environment.
The Zacks Rank #1 (Strong Buy) company with a VGM Score of A beat the Zacks Consensus Estimate by 259.6%. As a result, its 2022 and 2023 estimates have jumped $8.37 (55.2%) and $2.40 (43.2%), respectively in the last seven days. It belongs to the Retail - Regional Department Stores industry (top 1%).
The price to earnings growth (PEG) ratio for the company is just 0.36 whereas a PEG ratio of 1 would indicate a fair valuation. Therefore it does appear that investors are discounting the company’s earnings growth potential.
Sonos, Inc. SONO
Sonos is a consumer electronics company primarily manufacturing and selling smart speakers with an immersive sound experience. Its products are sold in more than 50 countries through 10,000+ third-party physical retail stores, online (on sonos.com) and through select e-commerce retailers.
Its state-of-the-art offerings and software platform deliver a seamless customer experience in a multi-user and open platform environment, which along with a solid base of developers, content partners and customers positions it to capitalize on potential market opportunities in the booming home audio market. The well-known brand and product range have helped it capture significant market share and forge important relationships to further drive results.
The pandemic has had a positive impact on the company’s business because it drove more people to work and entertain at home, both of which require better audio technology. Looking to the future, it is apparent that technology will continue to drive people to do more from home and spend more time and money on their homes. There will be a trickle-through to Sonos from this spend.
The Zacks Rank #1 company with a VGM Score of C belongs to the Audio Video Production industry (top 35%). In the last quarter, it beat earnings estimates by 258.8%. The Zacks Consensus Estimate for 2021 is up 26 cents (30.6%) in the last seven days.
The PEG ratio of 0.86 indicates that the shares are undervalued.
Avis Budget Group, Inc. CAR
Avis Budget Group operates as a leading vehicle rental operator in North America, Europe and Australasia with an average rental fleet of nearly 650,000 vehicles. The company has a leading share of airport car rental revenue in North America, Europe and Australasia, and operates one of the leading truck rental businesses in the United States.
The company had a record quarter in June with revenues jumping 212% year over year, with both Americas and international growing at triple-digit percentage rates. The strong momentum is expected to continue through the summer. As people get out more, its utilization also continues to improve, which in turn drives profitability.
The Zacks Rank #1 company with a VGM Score of B belongs to the Business – Services industry (top 39%). It beat June quarter results y 161.1%. The Zacks Consensus Estimate for 2021 has gone from $4.44 to $11.78 (up 165.3%) in the last 30 days.
Avis has a PEG ratio of 0.14X, indicating significant undervaluation.
JMP Group LLC JMP
JMP is a full-service investment banking and asset management firm that provides investment banking, sales and trading, and equity research services to corporate and institutional clients and alternative asset management products to institutional and high-net-worth investors.
JMP Group’s operating earnings of 29 cents were the second-best in company history, as strong advisory revenues at JMP Securities combined with record results in the asset management business and better-than-expected investment income in the quarter. Joe Jolson, chairman and CEO of JMP Group said, “On a trailing-four-quarters basis, our operating earnings were a record $1.00 per share, representing a 32.9% return on average equity.”
The Zacks Rank #2 (Buy) company with a VGM Score of A belongs to the Financial - Investment Bank industry (top 43%). It beat June quarter estimates by 141.7% (there were triple digit beats in each of the last four quarters, averaging 305.4%). The 2021 estimate jumped 26 cents (45.6%) in the last 30 days.
Given the PEG ratio of 0.87X, the shares could be worth picking up today.
Stride, Inc. LRN
Stride offers tech-enabled education programs (curriculum, systems, instruction and support services) to K-12 students and adult learners through both fully virtual and blended formats. Its education partners (primarily public and private schools, school districts and charter boards) are provided the tools to attract, enroll, educate, track progress and support students.
Other customers that mainly cater to the adult learner segment include employers, government agencies and consumers themselves. Products are sold as a comprehensive offering (school-as-a-service) or a la carte, depending on individual needs.
Given the nature of the business, it has been an obvious beneficiary of the pandemic. But while the pandemic may have created some momentum, management sees a long-term opportunity in the number of students that are increasingly opting for the flexibility and convenience that online learning brings. Most like the hybrid model best, where you come in for some things while doing other stuff at home.
The adult learner business looks brighter still because it caters to the nondegree postsecondary education market that the Bureau of Labor Statistics expects will grow at almost twice the rate of overall employment through 2029. The company offers the kind of support that ultimately helps students to acquire degrees. Another encouraging trend is companies increasingly funding the training required for entry-level positions as well as increasing budgets for upskilling and reskilling their existing workforce.
Given these trends, the company was able to generate nearly 48% revenue growth in its fiscal year that ended in June. Moreover, adjusted operating income grew 160%, net income 192% and per share earnings 185%. June quarter earnings topped expectations by 47.1%.
The company belongs to the Schools industry, which hasn’t had a particularly great year and is therefore positioned in the bottom 6% of Zacks-classified industries. But it’s important to remember that this isn’t a traditional school, so the dynamics are somewhat different for LRN.
The Zacks Rank #1 stock has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2022 is up 59 cents (41.3%) in the last 7 days. The 2022 estimate is up 54 cents (31.4%).
LRN also has a PEG ratio of 0.87X. Consequently, it looks like a good by right now.
One-Month Price Performance
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Avis Budget Group, Inc. (CAR) : Free Stock Analysis Report
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JMP Group LLC (JMP) : Free Stock Analysis Report
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