Just as the declining Consumer Price Index (CPI) inflation rate was helping a bear market catch a break, a sharper-than-expected decline in retail sales during the holiday month and a third consecutive month of decline in industrial activity have reignited concerns of an economic downturn induced by the single-mindedly hawkish Federal Reserve.
Moreover, with the U.S. economy perilously close to defaulting on its stratospheric debt, unless the representative can agree to buy the government more space by raising the debt ceiling, the market volatility is unlikely to ease anytime soon.
In such a scenario, it would be wise to load up on shares of fundamentally strong businesses which are well-entrenched not just to weather an economic slowdown but also to emerge stronger.
To that end, CVS Health Corporation (CVS), Archer-Daniels-Midland Company (ADM), and Ooma, Inc. (OOMA) appear to be appropriate investments for a stabler and more profitable year ahead.
CVS Health Corporation (CVS)
CVS operates as a health solutions company. The company operates through four segments: Health Care Benefits; Pharmacy Services; Retail/LTC; and Corporate/Other. Its offerings include health & wellness services, health plans, pharmacy services, and prescription drug coverage.
On December 15, 2022, CVS declared its quarterly dividend of $0.61, payable on February 1, 2023. The company pays $2.42 annually as dividends. This translates to a 2.76% yield at its current price, at par with the 4-year average dividend yield. The current dividend payout ratio is 24.57%. Its dividends have grown at a 2.4% CAGR over the past five years.
On September 5, CVS announced its entry into a definitive agreement to acquire Signify Health (SGFY) for approximately $8 billion. According to CVS President and CEO Karen S. Lynch, “Signify Health will play a critical role in advancing our health care services strategy and gives us a platform to accelerate our growth in value-based care.”
For the fiscal 2022 third quarter ended September 30, 2022, CVS’ total revenue increased 10% year-over-year to $81.16 billion, while its adjusted operating income grew 3.9% from the prior-year quarter to $4.23 billion. During the same period, the adjusted income attributable to CVS increased 5.3% and 6.1% year-over-year to $2.76 billion or $2.09 per share, respectively.
Analysts expect CVS’ revenue and EPS for the fiscal year ended December 31, 2022, to increase 7.7% and 2.8% year-over-year to $314.68 billion and $8.64, respectively. Revenue and EPS are expected to increase by a further 3.5% and 2.6% during the current fiscal to come in at $325.68 billion and $8.86, respectively. The company has also surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has dipped 8.1% over the past month to close the last trading session at $87.60. It is trading at 10.14 times its forward earnings, 49.1% lower than the industry average of 19.94.
CVS’ POWR Ratings reflect solid prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
CVS also has an A grade for Growth and a B for Sentiment, Stability, and Value.
Unsurprisingly, it is ranked #1 of four stocks in the B-rated Medical – Drug Stores industry.
Click here to access additional ratings for Momentum and Quality for CVS.
Archer-Daniels-Midland Company (ADM)
ADM operates as an agricultural origination and processing company. It develops sustainable solutions in agriculture, energy, and bio-based alternatives to materials and fuels produced from petroleum products. The company operates through three segments: Ag Services and Oilseeds; Carbohydrate Solutions; and Nutrition.
On December 7, 2022, ADM paid its 364th consecutive quarterly cash dividend of $0.40 per share, marking a record of 91 years of uninterrupted dividend payments.
ADM pays a $1.60 per share dividend annually, translating to a yield of 1.88% at the current price. The company’s dividend payouts have grown at a 4.6% CAGR over the past five years.
On September 14, ADM and PepsiCo (PEP) announced a 7.5-year strategic commercial agreement to collaborate on projects that aim to expand regenerative agriculture. The partnership is expected to reach up to 2 million acres by 2030, and reaching the partnership’s goals could eliminate 1.4 million metric tons of greenhouse gases. This should benefit ADM.
For the fiscal third quarter that ended September 30, 2022, ADM’s revenues increased 21.4% year-over-year to $24.68 billion. Its adjusted net earnings increased 91.2% year-over-year to $1.05 billion. Additionally, its adjusted EPS came in at $1.86, representing a 91.8% increase from the prior-year quarter.
ADM’s revenue and EPS for the fiscal ended December 31, 2022, are expected to increase 18.6% and 45.4% year-over-year to $101.09 billion and $7.55, respectively. The stock has further impressed by surpassing the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 17.2% over the past six months and 19.3% over the past year to close the last trading session at $85.00. It is trading at 11.27 times its forward earnings, 39.6% lower than the industry average of 18.66.
ADM’s strong fundamentals have earned it an overall A rating, which translates to a Strong Buy in our POWR Ratings system. It also has an A grade for Growth and a B for Sentiment.
ADM is ranked #2 of 28 stocks in the Agriculture industry. Additional ratings for ADM’s Value, Momentum, Stability, and Quality for ADM can be found here.
Ooma, Inc. (OOMA)
OOMA provides communications services and related technologies to businesses and residential customers in the United States and Canada. The company’s offerings include Ooma Business, Ooma Office, Ooma Enterprise, and Ooma AirDial. It offers its products through direct sales, distributors, retailers, and resellers, as well as online.
On November 29, 2022, OOMA announced that T-Mobile US, Inc. (TMUS) is now offering Ooma AirDial to replace traditional voice line service, or POTS, as part of its Internet of Things portfolio.
Since analog copper-wire phone lines, also known as plain old telephone service or POTS, are being rapidly phased out by legacy telecommunications providers, OOMA would provide a turnkey replacement for POTS lines by combining the AirDial base station with virtual analog phone service and a data connection through the nationwide TMUS network.
On September 1, OOMA announced its acquisition of Junction Networks Inc., which does business as OnSIP from Intrado Corp., for approximately $9.75 million in cash, subject to customary working capital adjustments. The transaction was completed on July 22, 2022.
OnSIP provides cloud-based phone and unified communications services for small and mid-sized businesses. The acquisition is expected to add slightly more than $10 million in annual revenue to OOMA and make an increasing contribution to its profitability and cash flows as operational synergies are gradually realized.
During the fiscal third quarter ended October 31, 2022, OOMA’s total revenues increased 15.3% year-over-year to $56.68 million, while its adjusted EBITDA increased 11.7% year-over-year to $4.50 million. The company’s non-GAAP net income increased 6.1% year-over-year to $3.5 million during the same period. As a result, non-GAAP quarterly EPS increased 7.7% year-over-year to $0.14.
Analysts expect OOMA’s revenue to come in at $216.06 million for the fiscal year 2023 (ending January 2023), representing a 12.4% rise from the prior year, while its EPS is expected to increase 2.9% year-over-year to come in at $0.53 during the same period.
Furthermore, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is indicative of its impressive earnings surprise history.
The stock has gained 7.7% over the past month and 29.5% over the past six months to close the last trading session at $14.54, above its 200-day moving average of $13.50.
OOMA’s POWR Ratings reflect its bright prospects. The stock has an overall A rating, equating to Strong Buy in our proprietary rating system. It also has an A grade for Growth and a B for Value, Stability, and Sentiment.
OOMA ranks #2 of 19 stocks in the Telecom – Domestic industry. To see additional POWR Ratings for Quality and Momentum for OOMA, click here.
CVS shares were trading at $87.40 per share on Thursday afternoon, down $0.80 (-0.91%). Year-to-date, CVS has declined -6.21%, versus a 2.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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