We enter the heart of Q1 earnings season with the VIX trading above 30.
The combination of headline noise with skittish market sentiment sets up for volatile price action.
Tracking the winners and losers can be difficult as price action will not necessarily match fundamentals.
We want to break down some key earnings and price performance. The end goal will be to create a shopping list of names to buy when the dust settles.
Here are some notable performers from Monday night and Tuesday morning:
Valero (VLO)
Crack Spreads are at elevated levels as global supply chain issues weigh heavily on oil deliveries. This led to a strong performance at the refiner.
VLO beat EPS expectations by approx. 25% ($0.57 cents). Revenues came in at $38.5 billion, an 85% increase from the prior year period, and well above $32 million expectations.
Shares are up 35% year-to-date, making it one of the top performers in 2022. It may surprise you that it remains cheap at 12x forward earnings. It also provides a solid dividend yield at 3.89%.
Given the strength of the business, the cheap valuation, and the strong income, VLO sets up as a great area to park some money in a choppy trading environment.
D.R. Horton (DHI)
Homebuilders are interesting. The fundamentals are in great shape. Valuations are cheap. Yet they can not find a bid due to the negative sentiment around rising mortgage rates and the idea that housing is in a bubble like 2007.
The rising mortgage rates certainly have merit, but we have not seen any evidence of an over stretched consumer like we did during the Great Financial Crisis.
DHI reported a solid bottom line beat in the first quarter. EPS was $4.03 per share, $0.63 better than expectations. Revenues increased 24% from the prior year period to hit $8 billion. The company guided FY2022 revenues in the range of $35.3-36.1 billion which has the midpoint firmly above $35.3 billion expectations.
DHI is cheap as it trades at 4.4x forward earnings. The negative sentiment around mortgage rates can not be ignored but that does not change the reality that inventory remains extremely low. I would note that the Cancellation Rate at 16% (compared to the prior year level of 15%) does not reflect a consumer that is running for the hills.
The stock has been trading in the $70-75 area for the past few weeks. It is attempting to break above this level and sets up as a nice breakout candidate. The good thing is that your risk is well-defined- if it breaks back below $70 then you can head for the exit and wait for sentiment to turn.
Sherwin-Williams (SHW)
SHW was a big winner during COVID. People were locked down in their homes and decided to do some upgrades. Stocks like SHW, Home Depot (HD) and Lowes (LOW) were beneficiaries.
SHW shares rallied from $108 in March 2020 to an all-time high of $354 in December 2021. Shares have been under pressure in 2022, declining over 30% in the first four months. The stock did start to establish a base around the $240-250 area in the weeks ahead of earnings.
The company beat bottom line expectations by 8 cents. Revenue was $5 billion. The 7.4% growth was slightly better than expected.
SHW reaffirmed its FY22 earnings per share outlook of $9.25-9.65 which is encouraging in this environment. Margins remained under pressure as “significant price actions previously announced in all businesses have not yet fully caught up to offset highly elevated raw material costs”.
One item of interest, SHW noted it saw a “meaningful” improvement of raw material availability in the final weeks of the quarter. This is a hint that supply chain issues are starting to recede in some areas.
The stock parlayed these results into a breakout above the $240-260 range. Holding above that level will be paramount. It may be difficult though as the stock trades at forward earnings of 22x, making it expensive in this market.
We would be cautious chasing this breakout.
UPS Inc (UPS)
The supply chain issues have been front and center for the market. UPS’ bellwether status as a transport makes this a good read for the markets.
The results were steady with a $0.17 beat on the bottom line. Revenue was $24.4 billion, up 6.5% from the prior year period and slightly better than analyst expectations.
UPS reiterated its fiscal year Revenue outlook for 2022. It also reaffirmed operating margin, Return on Invested Capital, and Capital Expenditure outlooks. The fact that it reaffirmed these key guidance metrics in a tough environment is a positive for the markets. Companies tend to low ball expectations to create a lower bar.
The company doubled its share buyback to $2 billion.
Overall, a good report. This makes the stock break down below the $185-195 area a little disconcerting. Shares are cheap at 14x forward earnings. It pays a decent dividend yield of 2.15%.
This is one we would have on the radar to buy the dip.
General Electric (GE)
There are a lot of moving parts to General Electric. The supply chain issues can wreak havoc given all the different companies.
The Q1 numbers were not terrible as it beat by $0.05 on the bottom line. Revenues declined 0.2% y/y but were in line with expectations.
The Healthcare unit was a notable outperformer. Aviation, Power, and Renewable Energy segments fell short of top line expectations.
CEO Lawrence Culp said, “We are holding the outlook range we shared in January, but as we continue to work through inflation and other evolving pressures, we’re currently trending toward the low end of the range.”
The stock has been trending lower since November 2021. Shares are down 26% over that period. It still trades at 17x forward earnings, so it is not cheap. It barely pays a dividend as it continues to work through its restructuring.
Culp is one of the best CEOs out there, but this is a name that you can remain patient on and buy at a cheaper level down the road.
Whirlpool (WHR)
There were serious questions about Whirlpool heading into this report. Rising inflation costs have cut into consumer wallets.
The results can be categorized as better than feared. EPS came in at $5.31, $0.52 better than street expectations. Revenues declined 8% from the prior year to $4.92 billion. This missed the consensus estimate of $5.3 billion.
WHR lowered its FY22 EPS outlook to $24-26 from the prior expectation of $27-29. The revenue outlook was cut to +2-3% from +5-6%. The lower earnings outlook reflected the on-going inflationary pressures. The lower revenue outlook suggests a slow down in demand. This is not a good combination.
The price action to earnings is a bit of a head scratcher. The stock slipped to test the 200-weekly moving average ($165) in after hours trade on Monday. It then bounced off that level and rallied all the way to $190. It is holding these gains on Tuesday while the broader market sells off.
What gives?
The stock trades at a forward earning of 6.4x so it is cheap (even with the lower earnings expectations). It pays a decent dividend yield at 3.91%. It has a small float at 58 million and a high short interest at 14% which creates volatility.
We would not read too much into this initial reaction and would prefer to let shares settle before getting aggressive. But the valuation and dividend payment make it an intriguing name to put on the shopping list.
