The Theme Of 3rd Quarter Earnings? Upgrades
If the theme of the 2nd quarter earnings cycle was “better than expected” then upgrades will be the theme of the 3rd quarter. It’s only natural. If 2nd quarter earnings and the outlook for the full-year are better than consensus the progression is for the consensus to increase. And it is. The data from Factset shows the consensus estimates for S&P 500 (SPDR S&P 500 (NYSE:SPY)) earnings are rising.
The consensus for the 3rd quarter improved a full percentage point over the last week and the 4th quarter outlook is improving too. Considering the strength of the economic rebound it’s likely this trend will continue into the end of the year and carry the markets higher with it. If we get another round of economic stimulus it’ll be off to the races. Until then, investors should focus on the sectors and names getting the analysts attention.
FedEx And UPS Emerge As Multi-Story Plays
FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) are emerging as a pair of multi-story plays. Not only have the two been successfully increasing pricing their businesses have been accelerated by the pandemic and more. The latest twist in this story is that both are seen as delivery mechanisms for vaccines and treatments for COVID-19. It assured we’ll get one or the other, probably both, and probably with several choices in both categories. Once they’re available there is going to be high demand and it will take a well-established global-quality specialty freight company to handle it.
Deutsche Bank is only the latest in a string of sell-side analysts to issue a flood of complimentary comments on the two. The analysts are generally more-bullish on FedEx but it is also trading at a significant discount to United Parcel Service. Both report earnings on 10/24.
“We see upcoming results for both companies as having (the) potential to exhibit very strong pricing power, the benefits of which are likely still being underappreciated. We project Ground margins to be up at least 300bps – the best yoy improvement in Ground margins in any quarter since at least 2012, reflecting accelerating yield (revenue per shipment) and decelerating cost per shipment."
Snap And Spotify Undervalued Internet Stocks
The analysts at Guggenheim just tagged Snap (NYSE:SNAP) and Spotify (NYSE:SPOT) as undervalued Internet stocks. According to them, the companies are among a host of consumer-facing Internet stocks that have been beaten up by the pandemic. With Americans flocking to the Internet for basically everything the potential for ad-based and other revenues is growing. Snap was upgraded from Neutral to Buy, Spotify from Sell to Neutral, and both received a price hike. Included in the report is an initiation of coverage on Pinterest (NYSE:PINS) with that stock rated a buy.
"At the core, ‘internet’ companies are software development and distribution companies that largely focus on consumer rather than enterprise applications," writes analyst Michael Morris, saying valuations are low based on this comparison.”
The analysts are bullish on Snap but consider it to be fairly valued, at least versus the consensus. The high-price target, and there are more and more analysts with targets in this range, is near $29 giving a 12% upside. Spotify is only rated neutral but offers a better risk-reward profile. The high-price target here, and again there is a growing number of analysts in this camp, is $357 and held by Bank of America. That’s about 50% upside.
Pinterestis a different story, the analysts are bullish on this stock but it is nearly 20% above the consensus now. The high-price target was set today by Guggenheim, $48, and there are not many in agreement.
