It is earnings season for many companies, and a few welcoming surprises have emerged as several have successfully beaten estimates.
It has to be considered that corporate earnings softened in early 2023 due to arduous economic headwinds faced by many companies. Therefore, earnings beaters in today's climate deserve additional praise.
Two stocks that have recently illustrated an ability to surpass their earnings estimates and economic headwinds with flying colors are FactSet Research Systems Inc. (FDS, Financial) and Commercial Metals Co. (CMC, Financial).
FactSet Research Systems
FactSet Research Systems (FDS, Financial) is a leading market analytics provider that serves a consumer base seeking cost efficiency.
Although the company caters to do-it-yourself-type individuals, it provides comprehensive research spanning various spheres within the financial services sector. FactSet is growing at a compound annual rate of more than 8% while possessing a lean income statement.
FactSet released its third-quarter financial report on Thursday, revealing an earnings beat of 19 cents per share, which followed a revenue surplus of $1.74 million. The key driver behind its strong results was sustained support from corporate solutions such as ASV plus professional services, which is set to be accommodated by growth in individual client offerings in the coming years.
Further, FactSet provided positive guidance, with management stating it is likely to achieve a full-year operating profit margin of approximately 35% to 36%.
One of FactSet's primary attractions is its lean business model, which includes low-cost distribution, allowing continuous increases in shareholders' residual value.
Such benefits are conveyed within FactSet's key operating metrics. For instance, the company possesses a good return on equity ratio of 32.46%, accommodated by a high return on invested capital ratio of 17.8%. For those unfamiliar with these ratios, the latter often reveals a company's competitive advantage within its industry, while the prior conveys residual returns to investors.
In essence, FactSet generally produces robust profits throughout the economic cycle, which is why its stock has gained approximately 94% in the last five years and carries a forward dividend payout of 1.07%.
Commercial Metals
Commercial Metals (CMC, Financial) is a North American midstream steel company whose operations span milling, recycling and fabrication. The company's stock recently exceeded $50 for the first time in its history, adding up to a 10-year return of roughly 222%.
As with FactSet, Commercial Metals recently strolled past its quarterly earnings estimates by delivering an earnings per share beat of 20 cents as well as a revenue surplus of $105 million.
Readers must consider the significance of Commercial Metals' earnings beat given the slowing industrial production seen since the start of the year, which has presented manufacturers with tremendous headwinds. Furthermore, recognition needs to be granted to Commercial Metals for widening its Ebitda by 29% year over year while faced with exceptionally high input costs. Combined, these factors illustrate the company's robustness and resilience against external pressures.
A forward-looking vantage point suggests Commercial Metals might sustain its 14.2% compound annual growth rate. For example, the company's expansionary capital expenditure is well aligned, as illustrated by the pending launch of a micro mill in Arizona, which could add to topline revenue. Moreover, its market-leading cost structure within Europe might allow it to phase out regional risks arising from falling purchasing manufacturing index numbers.
Commercial Metals' stock is superbly valued with a price-earnings to growth ratio of 0.14, conveying a potential growth at a reasonable price, or GARP, opportunity. In addition, the stock has a forward dividend yield of 1.23%, adding allure for income-seeking investors.
The stock is highly cyclical, but the company's best-in-class business model suggests its approximate 283% 10-year return might extend in the coming years.
Noteworthy risks
Betting on stocks that recently beat earnings can raise the risk of look-ahead bias because retrospective results are not guaranteed to reoccur. Moreover, as revealed this week, global producer manufacturer indexes have slowed considerably in the past month, raising the possibility of pending consumer weakness, which might affect both stocks adversely.
Lastly, many believe the stock market is set for a technical pullback after its year-to-date rally. If such an event had to occur, both FactSet and Commercial Metals would lose value.
Final word
FactSet and Commercial Metals recently buffed up their income statements and beat analysts' earnings estimates. Despite the ongoing challenges embedded in the economy, both companies are in top shape, illustrating the robustness of their internal operations.
Furthermore, FactSet presents best-in-class profit margins, concurrently passing through residual income to its investors. On the other hand, Commercial Metals is growing at a steady pace, lending the argument that its stock might be a GARP opportunity.
Although risks persist, key metrics and recent events imply that both FactSet and Commercial Metals present compelling prospects.
