What are the best-value stocks to buy ahead of earnings reports?

Goldman Sachs has screened its list of buy-rated stocks, checked to see which ones have underperformed the S&P 500 this year, and has announced which ones it believes could beat consensus EPS estimates ahead of earnings reports.

Its list of 20 potential movers and shakers is heavy on financial services and energy sectors. It features investment management company State Street [STT], banks BNYM [BK] and Morgan Stanley [MS], power suppliers such as FirstEnergy [FE] and Eaton [ETN] and hydrocarbon explorers Concho Resources [CXO]. The list also features aerospace company Honeywell [HON], home renovation businesses Owens Corning [OC] and Fortune Brands [FBHS], FMCG conglomerate Mondelez International [MDLZ], equipment companies Johnson Controls [JCI] and United Rentals [URI], and health insurance firm Cigna [CI]. Goldman Sachs recommends each of the stocks on its list as a ‘buy’ ahead of their earnings announcements.

Some of these stocks have already reported, but here are the remaining six that Opto finds particularly interesting.

Dover Corporation [DOV]
Reporting 22 July

The manufacturer of industrial products ranging from clamps and electronic monitoring systems to retail fridge displays and gas station fuel pumps has had a challenging year so far. Dover Corporation’s share price started 2020 at $116.87, before dropping to $65.37 in mid-March as the market plunged. The stock rallied to $108.97 on 8 June before falling again to close at $103.58 on 17 July.

Demand for Dover Corporation’s goods have been hit by the pandemic as factories shut their doors and locked down drivers stayed away from gas stations. But now that cities are starting to reopen, its anticipated demand could not only pick up, but a robust backlog of orders could in fact exist. This is particularly true regarding Dover Corporation’s waste handling and fuel equipment segments — pump providers will want to take advantage of a spike in demand from low oil prices.

According to Zacks, Dover Corporation has an expected long-term earnings per share growth rate of 11.5%, exceeding the wider industry’s 10.8%.

Morgan Stanley currently holds a $107 price target on the stock, a slight increase on the  $103.58 at close on 17 July.

Whirlpool [WHR]
Reporting 23 July

Shares in the washing machine and home appliances maker took a rinsing in the first quarter of the year, dropping from $148.45 in early January to just $64 in mid-March.

The company has since recovered to $143.06 (through 20 July) as hopes of economic bounce-back increase. Analysts have highlighted its HEPA Air Purifier, which takes particles from the air and may help prevent the spread of the virus, as a product which is likely to do well in the near term. Whirlpool is also boosting its e-commerce offerings while improving its margins through cost-containment efforts to lessen the impact of the coronavirus.

However, according to Zacks, the company is still unlikely to report stellar numbers. The research publication estimates that Whirlpool is on track to report earnings per share of $0.65, representing an 83.8% fall year-on-year on revenues of $3.47bn, also down 33.2%.

Kellogg Company [K]

Reporting 30 July

As of 20 July, the iconic Kellogg Company’s share price was $67.42 — almost exactly the same value at which the iconic cereal maker started the year.

However, this stable performance masks a swift drop and then swift recovery from the mid-March pandemic panic that saw Kellogg’s share price dip to $53 before rising 28%.

The company reported a 23% rise in net income in the first quarter to $347m, with a 3% fall in sales to $3.41bn. Earnings per share came in at $1.01. Encouragingly, it noted strong demand for pantry-type products such as crackers and cereals as households stocked up for the lockdown.

But as shoppers remain cautious in the face of economic woes, Kellogg Company is expected to report a subdued EPS of $0.93 in the second quarter. For the full year, the company has warned that EPS could fall by as much at 4%, while sales will be up by 1–2%.

Verizon Communications [VZ]
Reporting 24 July

Shares in the communications giant have not yet recovered from their Q1 slump, closing at $55.87 on 20 July — down 8.5% for the year-to-date.

In its first quarter, total sales dropped 1.6% after they were hit by a 1.7% fall in consumer revenues and 0.5% lower business sales as the lockdown took hold.

There are concerns that the delays in the construction of 5G infrastructure because of social distancing regulations will hit margins in the short term. Taking a longer view it is expected that the roll-out of 5G will be the “secret sauce” that helps internet of things applications live up to their full potential, according to Hargreaves Lansdown analyst Nicholas Hyett.

Some analysts point to Verizon’s stable and predictable long-term service contracts to help it through the crisis. However, others believe its earnings growth will not keep up with inflation over the next five years, impacting long-term shareholder value. Indeed, the company expects that EPS for 2020 will be anywhere between 2% lower and 2% higher than $4.65 in 2019.

In the second quarter, analysts expect it to post earnings of $1.15 per share, down 6.5% from this time last year. Revenues are expected to come in at $29.91, down 6.7% year-on-year.

Bunge [BG]

Reporting 29 July

Agricultural commodities trader Bunge is currently down 27.2% for the year, with its share price closing at $41.9 on 20 July.

The agricultural giant has been affected by issues ranging from African swine fever to US-China trade wars and then, if that wasn’t enough, a drop in demand for products such as edible oils in the restaurant trade during the pandemic.

Bunge posted a loss of $184m in the first quarter of 2020. But, it has set out a turnaround plan to land between $50m and $60m of savings by the end of 2021 and between $20m and $25m on an annual basis. To achieve this, it is targeting a 5% annual productivity improvement in its plants, increasing from 3% in 2019 and will jettison unprofitable non-core businesses.

The company believes demand is set for a comeback buoyed by biofuel growth, the rising trend of plant-based meats and a post swine flu herd rebuild.

Norfolk Southern [NSC]
Reporting 29 July

Shares in the rail freight operator have gone off track this year, dropping 13.3% from a high of $214.83 on 29 January to $186.17 on 20 July. Reduced rail traffic, including the transport of industrial goods, has cut demand for the company during the pandemic.

Deutsche Bank analyst Amit Mehrotra expects the group to post a 33% dip in earnings in the second quarter and a 22% revenue decline, according to Benzinga. He predicts that EPS is will be $1.24, considerably, below a consensus estimate of $1.62.

However, Norfolk Southern did reduce operating expenses by $202m in its first quarter due to increased efficiency, which is likely to continue into the second quarter.

There are also signals that rail volumes are beginning to improve in the US as the economy and society begins to reopen.