Currently, the market is pricing in a quarter-point rate hike, even though some argue for a pause on increases, given the recent banking sector tumult. Therefore, it could be an opportune time to load up some fundamentally sound stocks, United Microelectronics Corporation (UMC), Arcos Dorados Holdings Inc. (ARCO), and Berry Corporation (BRY) trading at attractive valuations.
Last week, the Labor Department reported that the Consumer Price Index (CPI) increased 0.4% in February and 6% year-over-year. Despite persistent tightening over the past year, inflation remains much above the Fed’s desired 2% level.
High inflation and strong nonfarm payroll additions in February will likely keep the Federal Reserve on track for another interest rate hike. On the contrary, the banking sector turmoil of late has kindled speculations that the central bank could pause the rate hikes as capital markets turn jittery.
However, after a nervous week for banks and their customers, Treasury Secretary Janet Yellen’s recent comments instilled some reassurances that the bank collapse fallout will be contained and the government could backstop more deposits if necessary for smaller lenders.
According to CME Group’s FedWatch tool, traders now are pricing in a more than 80% chance of a quarter-point rate hike when the Fed wraps its two-day policy meeting on Wednesday.
Furthermore, as a result of the recent fallout in the financial sector, BofA’s economist Michael Gapen expects a mild recession in the latter half of the year with a 1% peak-to-trough decline in Gross Domestic Product (GDP). Therefore, the stock market will likely remain under pressure in the upcoming months.
However, it might be one of the best times to invest in quality stocks. Therefore, investors looking to buy stocks under $10 could consider UMC, ARCO, and BRY this month. These stocks possess strong fundamentals and solid growth prospects.
United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC is a global semiconductor foundry that operates through two segments: Wafer Fabrication and New Business. It offers high-quality IC fabrication services, focusing on logic and various specialty technologies to all electronics industry sectors.
On March 7, UMC and Infineon Technologies AG (IFNNY) strengthened their automotive partnership with a long-term agreement to increase the production capacity of IFNNY’s high-performance automotive microcontroller to serve in the fast-growing automotive market. This multi-year supply agreement reflects a strong endorsement of UMC’s manufacturing capability and operational excellence over its peers.
In the same month, the company unveiled its 28eHV+ platform, the newest enhancement to its industry-leading 28nm embedded high voltage (eHV) technology. With greater power efficiency and premium visual quality, 28eHV+ is an ideal display driver solution to power next-generation displays in wireless, VR/AR, and IoT applications.
On February 1, UMC and Cadence Design Systems, Inc. (CDNS) announced that the Cadence® 3D-IC reference flow, featuring the Integrity™ 3D-IC Platform, had been certified for UMC’s chip stacking technologies, enabling faster time to market. UMC’s hybrid bonding solutions efficiently support the integration across a broad range of technology nodes suitable for edge AI, image processing, and wireless communication applications.
Osbert Cheng, vice president of device technology development & design support at UMC, stated, “Cost-effectiveness and design reliability are the pillars of UMC’s hybrid bonding technologies, and this collaboration with Cadence provides mutual customers with both, helping them reap the benefits of 3D structures while also accelerating the time needed to complete their integrated designs.”
In terms of forward non-GAAP P/E, UMC is trading at 11x, 45.9% lower than the industry average of 20.35x. Its forward EV/EBITDA multiple of 5.02 is 62.6% lower than the industry average of 13.43x. In addition, the stock’s forward EV/EBIT ratio of 8.46 compare with the industry average of 16.22.
UMC’s operating revenues increased 14.8% year-over-year to NT$67.84 billion ($2.22 billion) for the fourth quarter that ended December 31, 2022. Its gross profit increased 26.1% year-over-year to NT$29.12 billion ($953.10 million). The company’s net income increased 19.6% year-over-year to NT$19.07 billion ($625.71 million), while its EPS came in at NT$1.54, representing an increase of 18.5% year-over-year.
The stock’s trailing-12-month net income margin of 31.29% is significantly higher than the industry average of 2.70%. Likewise, its trailing-12-month ROTA and CAPEX/Sales of 16.36% and 28.75% compare to the industry averages of 1.15% and 2.44%, respectively.
UMC’s EPS and revenue for the fiscal year 2024 are expected to increase 22.4% and 11.3% year-over-year to $0.92 and $8.71 billion, respectively. It surpassed the consensus revenue estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 40% to close the last trading session at $8.75.
UMC’s POWR Ratings reflect this promising outlook. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Quality and a B for Value and Momentum. It is ranked #6 out of 91 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to see the additional ratings of UMC (Growth, Stability, and Sentiment).
Arcos Dorados Holdings Inc. (ARCO)
Headquartered in Montevideo, Uruguay, ARCO functions as a franchisee of McDonald’s restaurants. The company has the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in 20 countries and territories.
On February 1, ARCO outlined its 2023 outlook in which it expects to open 75 to 80 restaurants and modernize at least 250 existing restaurants in 2023, with around 90% of openings being free-standing units. Also, the total capital expenditures this year are expected to be about $350 million.
Moreover, the company recorded strong sales growth throughout 2022, thanks to its three D’s strategy of Digital, Delivery, and Drive-thru, combined with increasing on-premise restaurant traffic.
Marcelo Rabach, ARCO’s Chief Executive Officer, said, “We have a robust openings pipeline for 2023 and continue to believe we can open at least 1,000 McDonald’s restaurants in our footprint over the next ten years.”
In terms of forward non-GAAP PEG, ARCO is trading at 0.56x, 57.7% lower than the industry average of 1.31x. The stock’s forward EV/Sales multiple of 0.75 is 31.9% below the industry average of 1.11. Also, its forward Price/Sales multiple of 0.42 compares to the industry average of 0.85.
ARCO’s trailing-12-month ROCE of 51.59% is 366.9% higher than the 11.05% industry average. Likewise, its trailing-12-month CAPEX/Sales of 6% is 85.9% higher than the industry average of 3.23%.
For the fiscal fourth quarter that ended December 31, 2022, ARCO’s total revenues increased 30.5% year-over-year to $1.02 billion. The company’s adjusted EBITDA increased 2.4% year-over-year to $114.06 million, while its attributable net income came in at $54.49 million, up 19.6% year-over-year. Also, its EPS increased 18.2% year-over-year to $0.26.
Analysts expect ARCO’s EPS and revenue to increase 39.2% and 5.7% year-over-year to $0.17 and $835.79 million, respectively, for the first quarter (ending March 31, 2023). It surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive.
ARCO’s shares have gained 10.1% over the past nine months to close the last trading day at $7.71.
It is no surprise that ARCO has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It has an A grade for Value and a B for Growth and Sentiment. Out of 46 stocks in the A-rated Restaurants industry, it is ranked first.
In addition to the POWR Ratings stated above, we have also given ARCO grades for Momentum, Stability, and Quality. Get all ARCO ratings here.
Berry Corporation (BRY)
BRY is an independent upstream energy company that develops and produces conventional oil reserves in the western United States. It operates in two segments: Development and Production; and Well Servicing and Abandonment.
In February, the company declared a dividend of $0.50 per share on its outstanding common stock, comprising a fixed dividend of $0.06 per share and a variable dividend of $0.44 per share, payable to its shareholders on March 23, 2023. BRY’s four-year average dividend yield is 7.05%, and its forward annual dividend of $0.24 translates to a 3.25% yield on prevailing prices.
The stock’s forward EV/Sales and EV/EBITDA of 1.18x and 3.12x are 29.9% and 34.6% lower than the industry averages of 1.68x and 4.76x, respectively. Also, its forward Price/Sales of 0.55x compares with the 1.06x industry average.
In terms of trailing-12-month BRY’s net income margin of 23.70% is 71% higher than the industry average of 13.86%. In addition, its trailing-12-month ROTA and levered FCF margin of 15.34% and 15.41% compare to the industry averages of 7.40% and 6.74%, respectively.
During the fourth quarter that ended on December 31, 2022, BRY’s total expenses and other decreased 11.6% year-over-year to $167.12 million. Its adjusted net income increased 841.5% from the year-ago value to $76.45 million, while its adjusted earnings per share came in at $0.55, representing an 850% year-over-year improvement. In addition, its adjusted EBITDA increased 28.3% from the year-ago value to $77.51 million.
The consensus revenue estimate of $183 million for the current quarter (ending March 31, 2023) represents a 94.5% improvement year-over-year, while its EPS is expected to be $0.13 for the same quarter. Also, its EPS is expected to increase by 15% per annum over the next five years. BRY has an impressive earnings surprise history, surpassing the consensus EPS and revenue estimates in three of the trailing four quarters.
The stock has gained 2.7% over the past nine months to close the last trading session at $7.38.
BRY’s POWR Ratings reflect its solid prospects. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Value. Among the 90 stocks in the B-rated Energy - Oil & Gas industry, it is ranked #18. Click here to see the other ratings of BRY for Growth, Momentum, Stability, Sentiment, and Quality.
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UMC shares were trading at $8.66 per share on Tuesday afternoon, down $0.09 (-1.03%). Year-to-date, UMC has gained 32.62%, versus a 3.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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