Despite all the fear and uncertainty, the earnings season is turning out to be much better than feared, with estimate revisions for the third quarter of 2020 and beyond continuing to move up. While the majority of companies are still unable to provide full-year guidance, management commentary has turned increasingly positive this quarter, signaling what we guessed (and hoped) about the second quarter being a bottom.
Some companies of course stand out from the rest in terms of earnings quality and growth prospects. These are captured in Zacks methodology like the Zacks Rank, Zacks Industry Rank, VGM Score and more. Here are a few I like particularly because they also beat estimates that were on the rise, along with a brief discussion of their numbers-
Aarons, Inc. AAN
Aaron’s is a major omni-channel provider of lease-purchase solutions, mainly to underserved and credit-challenged customers. Through its various business segments, the company primarily deals in sales and lease ownership, apart from specialty retailing in furniture, home appliances, consumer electronics, as well as accessories. Popular brands at Aaron’s include Philips, Samsung, Whirlpool, Hewlett-Packard, LG, Simmons, and Ashley, among others.
The company announced that it is splitting into two (Progressive and Aaron’s) by way of a tax-free distribution of shares to improve focus and increase long-term shareholder value. The reconstruction is expected to be completed by year-end.
Zacks Rank #1
VGM A
Industry: Retail – Consumer Electronics (top 11%)
Revenue beat of 4.7% was driven by strong customer payment activity and higher 90-day buyouts, likely helped by the government stimulus package. The decline from last year was related to various pandemic-induced situations such as increased store closures, lower deliveries and a more limited product portfolio. Lease decisioning remains more conservative than in normal times because uncertainties related to the pandemic persist and a second wave looks like a possibility.
Earnings beat of 43.9% was because of higher revenue and cost control on the SG&A front as offset by a lower gross margin.
While the full-year outlook remains withdrawn, management expects third-quarter earnings of 85 cents at the mid-point, much better than the 59 cents Zacks Consensus Estimate.
The Zacks Consensus Estimate for the June quarter increased 3 cents 7 days before the earnings release and another 9 cents since then. The company thrashed these higher expectations. 2020 earnings were expected to decline 16.71% from 2019 levels to $3.24 going into the announcement.
Valuation: At 15.15X forward earnings, the shares are trading relatively close to the six-month high of 16.51X. However, they remain attractive in comparison to the S&P 500, especially considering the fact that estimates should move significantly higher.
Anthem, Inc. ANTM
Formed through the merger of Anthem Inc. and WellPoint Health Networks Inc. in Nov 2004, Anthem is one of the largest publicly traded managed care organizations in terms of membership. The company was previously named WellPoint Inc. (WLP).
Zacks Rank #2
VGM A
Industry: Medical – HMOs (top 20%)
Revenue miss of less than 1%. Revenues were driven by pharmacy product revenue related to the launch of IngenioRx and higher premium revenue due to growth in Medicaid and Medicare and the return of the health insurance tax in 2020, partially offset by a decrease in experience-rated premiums in the Federal Health Products & Services business.
Earnings beat of 4.9%
Management expects to meet the original full-year adjusted earnings per share guidance of greater than $22.30 for the year.
The Zacks Consensus Estimate for the June quarter jumped 80 cents (10.0%) 7 days before the earnings release and the company swept past these higher expectations. 2020 earnings were expected to grow 15.07% over 2019 levels to $22.37 going into the announcement, which looks okay considering the guidance.
Valuation: On a price to forward earnings (P/E) basis, the shares are trading at an 11.66X multiple, which is close to the median value of 11.51X in the last six months. The S&P 500 is trading at its six-month high. Therefore, there appears to be significant room for upside.
United Rentals, Inc. URI
United Rentals is the largest equipment rental company in the world, with an integrated network of 1,181 rental locations in North America and Europe. The company offers 4,000 classes of equipment for rent at a total original equipment cost (“OEC”) of $14.3 billion to construction and industrial companies, utilities, municipalities, government agencies, independent contractors, homeowners and other individuals that use equipment for projects that range from simple repairs to major renovations.
Zacks Rank #1
VGM A
Industry: Building Products – Miscellaneous (top 27%)
Revenue beat by 7.0% despite pandemic-induced reduced rental revenue, lower fleet productivity and weaker pricing.
Earnings beat by 90.7%, mainly because of aggressive cost management.
However, management commentary was encouraging. CEO Flannery said that volumes began recovering in mid-April, providing it momentum going into the busy season. Moreover, while visibility remains limited, near-term indicators point to the second half tracking normal seasonality in a majority of the served markets. As a result, guidance was re-introduced.
While full-year earnings guidance wasn’t provided, revenue guidance of $8.25 billion at the mid-point was a shade better than the Zacks Consensus Estimate of $8.23 billion.
The Zacks Consensus Estimate jumped 12 cents (7.1%) 7 days ago and another 11 cents since. The company still went on to beat these raised expectations. 2020 earnings were expected to decline 33.67% from 2019 levels to $12.95 going into the announcement.
Valuation: At 11.87X forward earnings, the shares are trading relatively close to the six-month high of 12.88X. However, they remain attractive in comparison to the S&P 500.
Sprouts Farmers Market, Inc. SFM
Sprouts Farmers Market, which operates in the highly fragmented grocery store industry, has a unique model that features fresh produce at the center of the store, an expansive bulk foods section, and a vitamin department focused on overall wellness. Moreover, the company has been diversifying its offerings to meet changing preferences of consumers, who are looking for more health and wellness products. These products are generally plant-based, gluten-free, keto-friendly, and grass-fed. The company is focusing on natural and organic food, which is one of the fastest growing segments in the industry.
Zacks Rank #1
VGM A
Industry: Food – Natural Foods Products (top 6%)
Revenue beat by 2.2%. Comp sales peaked in May and normalized in June (were notably higher than guidance for the quarter). Grocery, meat and frozen categories were strongest. E-commerce was 12% of sales, up more than 500% year on year.
Earnings beat of 47.5% was partly because of strong revenue and partly on account of more efficient use of funds for promotion/advertising as offset by higher SG&A.
Both revenue and earnings represent significant increase from 2019 levels.
Guidance remains withdrawn due to uncertainties. Management said that sales are tracking above normal along with related cost although gross margin will be higher. Some but not all COVID-related benefits are expected to remain after the pandemic has blown over.
The Zacks Consensus Estimate for the June quarter increased a couple of cents in the few days before the earnings release and the company blew past these higher expectations. 2020 earnings were expected to grow 38.4% over 2019 levels to $1.73 going into the quarter.
Valuation: At 16.79X forward earnings, the shares are trading relatively close to the six-month high of 17.67X. However, they remain attractive in comparison to the S&P 500, especially considering that estimates should move up from these levels.
OReilly Automotive, Inc. ORLY
O’Reilly Automotive is a leading specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company sells products to both Do-it-Yourself (DIY) customers and Do-it-for-Me (DIFM) customers that need professional installers. The extensive product range includes new and remanufactured automotive hard parts (such as mufflers, brakes and shock absorbers), maintenance items, accessories, a complete range of auto body paint and related materials, automotive tools and professional service equipment.
Zacks Rank #2
VGM B
Industry: Automotive – Retail and Wholesale – Parts (top 17%)
Revenue beat of 23.6% came on the back of comparable store sales increase of 16.2%. COVID impacted no more than the first two weeks, after which sales came back strongly, especially in DIY. DIFM continued to improve through the quarter. The stimulus helped results.
Earnings beat of 73.2% on good cost control, although this is expected to tick up through the rest of the year.
Full-year guidance remains withdrawn.
The Zacks Consensus Estimate for the June quarter jumped 33 cents (9.7%) 7 days ago and another 16 cents before the earnings release but the company blew past the higher expectations. 2020 earnings were expected to drop 6.0% from 2019 levels to $16.80 going into the announcement.
Valuation: At 24.69X forward earnings, the shares are trading relatively close to the six-month high of 24.82X. However, they remain attractive in comparison to the S&P 500, especially considering that estimates should move up from these levels.
Kinross Gold Corporation KGC
Based in Ontario, Canada, Kinross Gold Corporation is primarily involved in the exploration and operation of gold mines. It ranks among the top 10 gold mining companies in the world with 2019 production of around 2.5 million gold equivalent ounces. The company’s operations are located in three core regions – the Americas (56% of 2019 production), Russia (21%) and West Africa (23%). It holds major assets in Canada, the U.S. and Russia, and is primarily involved in the exploration and operation of gold mines. Kinross also produces and sells silver.
Zacks Rank #2
VGM B
Industry: Mining – Gold (top 28%)
Revenue beat by 23.6%, as all its mines continued production through the quarter.
Earnings beat by a penny, helped by margins that increased 53% year-over-year, well above the 31% increase in the average realized gold price. Paracatu, Kupol and Tasiast, the three lowest-cost mines contributed 63% of total production.
A notable development during the quarter was the completion of the Lobo-Marte pre-feasibility study, which allowed the addition of 6.4 million ounces to the company’s gold reserve estimates, ,increased its reserve life index and enhanced its long-term development project pipeline.
While full-year guidance remains withdrawn as a precautionary measure, production, cost of sales per ounce, all-in sustaining cost per ounce and capital expenditures are on track to meet its original 2020 guidance.
The Zacks Consensus Estimate for the June quarter increased a couple of cents 7 days before the earnings release and the company beat the higher expectations. 2020 earnings are expected to grow 85.3% from 2019 levels to 63 cents.
Valuation: At 12.67X forward earnings, the shares are trading relatively close to the median value of 12.13X over the last six months. Additionally, they remain attractive in comparison to the S&P 500.
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