Stock of the week: Value stocks to prove their worth with Q4 results
We have frequently mentioned how we favour value stocks instead of growth stocks in the current environment, due to their ability to maintain profits in an inflationary environment where the Fed is poised to embark on an aggressive rate hiking cycle. Now it is time for the value stalwarts to report earnings for Q4, including Pfizer, Walt Disney and Coca Cola. Earnings season was fairly chaotic last week, Facebook parent Meta experienced the worst ever decline in its share price after it reported a downbeat assessment for 2022, while Amazon shares surged more than 13% on Friday after reporting upbeat results. With the tech sector looking increasingly fragmented, will earnings season support the relative outperformance by the value sector vs. the growth sector and will value stocks be able to continue to steal the limelight? See below for our top three value picks for this week.
1) Disney:
We have liked Disney from the start of this year, and it was one of our top picks for 2022. Disney will report earnings after the US markets closes on Wednesday, at approx. 21.05 GMT. Q3 2021’s earnings report was unpleasant for anyone who holds Disney’s stock. Earnings missed expectations, and crucially the company saw slowing streaming growth for its Disney + brand, that is a rival to the likes of Netflix and Amazon. Its share price is down YTD, it was close to $180 a share in November, and now the stock is trading around $143. But there could be some good news this earnings season, which may provide Disney with the boost that it needs. Analysts expect Disney’s earnings to nearly double year on year, as the easing of pandemic restrictions across the Western world led to the re-opening of movie theatres and theme parks, which should boost revenue. While Disney’s streaming service could continue to see hard times as fewer consumers stay home to watch new movies, Disney is no worse than its competitors who are also struggling to boost growth and subscriber bases in the post-pandemic world. New content could boost Disney + and lead to an upswing in subscribers, however, that may not reap dividends until the second half of this year.
Historically, Disney’s share price rises the day after a Q4 earnings report, with an average gain of 2%, according to research house Bespoke. Leading up to the earnings release, Disney’s shares outperformed the market last week, and while it was volatile, the stock managed to end the week on a high, rising more than 1.1% on Friday.
2) Pfizer:
Healthcare has been another of our top picks for 2022, and Pfizer, in particular, is one of our favourites in this sector because it is fast becoming the central pharma giant in the global fight against Covid. It is expected to report that both earnings and revenue doubled compared with Q4 2020. The market expects good earnings from Pfizer this week, thus where its stock price goes next depends on its updates about the future. The market will be listening out for any update on the latest vaccine that can target Covid variants, including the highly transmissible Omicron variant, which is expected by March. There could also be an announcement about whether the FDA in the US will accelerate the rollout of vaccines to children under 5. Lastly, we expect an update about sales and production of its Covid treatment pill called Paxlovid. For the past three quarters, Pfizer has seen its share price rise in the day after its earnings report, and if it can deliver another upbeat assessment of its longer-term outlook then we may see the same happen this week. Pfizer will report earnings on Tuesday at approx. 1045GMT.
3) Coca Cola:
The consumer giant reports earnings just before the US market opens at 1200 GMT on Thursday. After reporting a surge in sales in Q3, analysts are expecting a 12% decline in EPS for Q4. Coca Cola is facing a number of challenges that could limit earnings growth for Q4: rising inflation of input ingredients, rising pandemic uncertainty and a fall in restaurant visits in Q4 due to the surge in the Omicron variant. Coca Cola’s peers’ results do not bode well. Last week, McDonalds reported earnings that missed estimates, as higher food costs weighed on profits. The burger chain said that it would raise menu costs and boost digital sales to combat the effects of inflation, however, its share price has eased back in recent sessions, suggesting that the market remains wary about the pricing power of the fast-food and drinks market, and McDonald’s share price has fallen 3.57% over the past month. In contrast, Coca Cola’s share price is up more than 2.8% YTD. To extend gains, Coca Cola may need to give an upbeat outlook for demand and more detail about the new alcohol-based beverages it plans to launch this year. In recent quarters, Coca Cola has seen modest gains in its share price after it reports quarterly earnings.