The third quarter wasn’t a kind one for corporate profits.
“Third-quarter earnings are the weakest they have been, with more misses and less beats, since the first quarter of 2020,” wrote Jakir Hossain, an associate data journalist for Morningstar.
As of Nov. 11, 671 of U.S.-listed stocks covered by Morningstar analysts had reported their earnings. And just 29% beat FactSet consensus estimates by 10% or more, 4 percentage points less than in the second quarter and 12 percentage points less than a year ago.
So Morningstar thought it would be helpful to compile a list of companies that exceeded earnings estimates and are undervalued.
To make sure the companies that beat earnings estimates didn’t do it through accounting gimmicks or one-time factors, Morningstar also screened for companies that topped revenue estimates by at least 5%.
It then filtered for stocks with Morningstar ratings of 4 or 5 stars. That means the stocks are significantly undervalued according to Morningstar analysts’ estimates.
And then Morningstar screened for stocks to which its analysts assign a wide moat. That means these companies have a durable competitive advantage over their peers.
Here’s the list, starting with the most undervalued stock.
- GSK (GSK), the drug giant;
- Polaris (PII), the recreational vehicle company;
- Sanofi (SNY), the drug company;
- Constellation Brands (STZ), the alcoholic beverage company;
- Thermo Fisher Scientific (TMO), the scientific equipment company.
GSK: Morningstar analyst Damien Conover puts fair value for the stock at $50. It recently traded at $32.
There’s “too much investor concern on the Zantac litigation,” he wrote in a commentary. “With the majority of scientific data showing no consistent link between the drug and cancer, we view the risk of a settlement over $10 billion … as unlikely.”
As for GSK’s pipeline, the company is “reinforcing its wide moat,” Conover said. “GSK’s RSV vaccine will likely enter the market next year with potentially leading efficacy in adults.”
Polaris: Morningstar analyst Jaime Katz puts fair value for the stock at $175. It recently traded at $110.
“Polaris’ brands, innovative products, and lean manufacturing yield the firm a wide economic moat. And it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy,” she wrote in a commentary.
“However, Polaris' brands do not benefit from switching costs, and with peers innovating more quickly than in the past, that could jeopardize the firm's ability to take price and share consistently.”
Sanofi: Conover puts fair value for the stock at $57. It recently traded at $44.
The market “doesn’t fully appreciate the long-term growth outlook for the firm supported by immunology drug Dupixent and new pipeline drugs,” he wrote in a commentary.
As for the pipeline, “Sanofi is making mixed progress, but with limited near-term patent losses, … the firm has time to develop its next-generation drugs,” Conover said.
“Additionally, we continue to view stock valuation loss earlier in the year surrounding concerns on potential Zantac litigation as excessive.” (Both GSK and Sanofi have sold Zantac).
