The current market outlook remains uncertain due to factors such as high inflation and concerns about a potential economic downturn, causing investors to feel less confident about the market's near-term future.
Given the prevailing circumstances, it may be wise to explore stocks that demonstrate strong fundamentals and robust profitability, such as VMware, Inc. (VMW), Utah Medical Products, Inc. (UTMD), and Overseas Shipholding Group, Inc. (OSG).
The Personal Consumption Expenditures (PCE) price index, closely observed by the Federal Reserve, indicated a 0.4% increase in prices from March to April, surpassing the previous month's 0.1% rise. On a year-over-year basis, prices rose by 4.4% in April, compared to 4.2% in March.
After the central bank increased the key federal funds rate to over 5%, reaching a level not seen in 16 years, Fed officials indicated a rate hike pause in June. However, this is observed as a “hawkish pause,” with anticipations of the rate hike cycle resuming later in the year.
Moreover, although the debt crisis has been averted, the outlook is still gloomy, with a possible global growth slowdown on the horizon. Moody's, a leading rating agency, has issued a warning stating that the persistently high inflation and increased borrowing costs can potentially push the U.K., Germany, and U.S. economies into a recession.
Given this backdrop, investors could consider investing in quality stocks VMW, UTMD, and OSG, which appear well-prepared to withstand various market challenges. With that being said, let us evaluate the fundamentals of the stocks mentioned above in detail.
VMware, Inc. (VMW)
VMW provides software solutions in the areas of modern applications, cloud management and infrastructure, networking, security, and digital workspaces. It offers VMware multi-cloud solutions, including VMware vSphere, a data center infrastructure that provides the fundamental compute layer.
On February 28, VMW and Samsung expanded their collaboration to integrate Samsung’s O-RAN-compliant virtualized RAN solutions with VMware Telco Cloud Platform for the DISH Wireless 5G network buildout. This partnership marks VMW’s first step toward achieving full network programmability and realizing the vision of networking on demand for dynamic applications.
On the same day, VMW and NTT DATA Corporation (NTDTY) announced an expanded collaboration to speed up software-defined, large-scale Open RAN deployments via combined solutions and services. This partnership should enable VMW to aid service providers in broadening their service portfolios, simplifying their networks, and increasing profitability.
In terms of trailing-12-month ROCE and ROTA, VMW’s 399.39% and 4.21% are significantly higher than the industry averages of 0.63% and 0.06%, respectively. Likewise, its trailing-12-month levered FCF margin of 31.06% is 333% higher than the industry average of 7.17%.
VMW’s revenue increased 6.1% year-over-year to $3.28 billion in the fiscal 2024 first quarter (ended May 5, 2023), while its non-GAAP operating income rose 6.2% from the year-ago value to $819 million.
The company’s non-GAAP net income and non-GAAP net income per weighted average share grew 18.8% and 16.4% from the prior-year quarter to $644 million and $1.49, respectively. Also, its free cash flow increased 83% from the year-ago value to $1.65 billion.
The consensus EPS estimate of $1.74 for the fiscal 2024 second quarter (ending July 2023) represents a 6.3% improvement year-over-year. The consensus revenue estimate of $3.50 billion for the ongoing quarter represents a 4.9% increase from the same period last year.
Its revenue and EBIT have increased at CAGRs of 7.3% and 6.4% over the past three years, respectively. Likewise, its total assets and levered FCF have improved at CAGRs of 5.9% and 8.3% in the same period, respectively.
The stock has gained 21.7% over the past three months to close the last trading session at $133.94.
VMW’s POWR Ratings reflect this robust outlook. The stock has an overall A rating, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Value, Stability, and Sentiment. In the 50-stock Software - Business industry, it is ranked first. To see additional POWR Ratings of VMW for Growth and Momentum, click here.
Utah Medical Products, Inc. (UTMD)
UTMD is engaged in developing, manufacturing, and distributing medical devices for the healthcare industry. The company offers fetal monitoring accessories, vacuum-assisted delivery systems, and other labor and delivery tools, serving neonatal intensive care units, labor and delivery departments, women's health centers in hospitals, etc.
On May 9, UTMD announced a quarterly dividend of $0.295 per share of common stock, payable to shareholders on July 6, 2023. The company’s annual dividend of $1.18 translates to a 1.26% yield on the prevailing prices, while its four-year average dividend yield is 1.76%.
In terms of the trailing-12-month gross profit margin, UTMD’s 61.94% is 11.1% higher than the 55.77% industry average. Likewise, its trailing-12-month asset turnover ratio of 0.42x compares to the industry average of 0.35x. Its trailing-12-month EBITDA margin of 52.80% is significantly higher than the 2.18% industry average.
UTMD’s net sales increased 1.6% year-over-year to $12.52 million in the first quarter (ended March 31, 2023), while its gross profit rose 4.1% from the year-ago value to $7.84 million.
The company’s net income and EPS amounted to $4.21 million and $1.16, representing increases of 19.2% and 20.2% from the prior-year quarter, respectively. Also, its income before tax increased 13% from the year-ago value to $5.12 million.
Its revenue, levered FCF, and tang book value have increased at CAGRs of 3.7%,7.2%, and 21.7% over the past three years, respectively. Its total assets and EPS have improved at CAGRs of 7.4% and 6.2% over the same period, respectively.
Over the past year, the stock has gained 10.4% to close the last trading session at $93.92.
UTMD’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Stability and Sentiment, Within the 140-stock Medical - Devices & Equipment industry, it is ranked #6. Click here to see UTMD’s ratings for Growth, Value, and Momentum.
Overseas Shipholding Group, Inc. (OSG)
OSG owns and operates a fleet of oceangoing vessels, which are engaged in the transportation of crude oil and petroleum products in the United States flag trade. It serves independent oil traders, refinery operators, and the United States and international government entities.
In March, OSG announced that its Board of Directors had authorized a program to purchase up to 10 million shares of its common stock. This is expected to provide the company with greater flexibility to manage its cash flow to create value for shareholders.
OSG’s trailing-12-month levered FCF margin of 25.62% is 333.7% higher than the 5.91% industry average. Its trailing-12-month cash per share of $1.32 is 69.7% higher than the $0.78 industry average.
For the first quarter that ended March 31, 2023, OSG’s shipping revenues increased 9.4% year-over-year to $113.79 million. Its operating income rose 192.7% from the year-ago value to $22.54 million.
The company’s net income and EPS amounted to $12.14 million and $0.14, versus a net loss of $509 thousand and $0.01, respectively, in the same period last year. Also, its adjusted EBITDA increased 61% from the year-ago value to $40.90 million.
In addition, its revenue and EBIT have grown at CAGRs of 8.9% and 27.7% over the past three years, respectively, while its EBITDA has improved at a CAGR of 17.4% in the same period.
OSG’s shares have gained 31.8% over the past six months to close the last trading session at $3.81.
It’s no surprise that OSG has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Quality and a B for Growth, Value, Momentum, and Sentiment. Out of 41 stocks in the B-rated Shipping industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have OSG’s rating for Stability. Get all OSG ratings here.
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VMW shares were trading at $136.23 per share on Friday morning, up $2.29 (+1.71%). Year-to-date, VMW has gained 10.97%, versus a 12.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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