Now that Wall Street is about to close the books on another earnings season, it’s time to find out which names posted better earnings than others, according to UBS. Investors analyzing fourth-quarter results looked for clues about how companies are navigating a period of higher inflation and rising interest rates. So far in the S&P 500, roughly 86% of companies have reported quarterly earnings, according to FactSet data. And of those companies, about 69% posted a positive surprise. However, UBS strategist Keith Parker worries that the quality of earnings is an “overshoot”, saying the gap between earnings and companies’ operating cash flow points to a roughly 15% decline in earnings per share for risk stocks. “Revenues have typically moved closely with operating cash flow (OCF), but revenues have grown much more than OCF in the last year off [financials/energy] as firms ran up less on the cost side and working capital increased. Reconnecting to OCF, arguably a more reliable measure of profitability, would point to a ~15% decline in EPS for the S&P ex Fins/Ener,” Parker wrote in a note this month. “With the median accrual (earnings-OCF difference) at an all-time high , which indicates broad EPS risk, the difference between high and low accrual spreads is also close to wide bands, making accruals a critical factor in identifying a stock’s relative earnings risk or resilience,” Parker added. With that in mind, the strategist has identified stocks that are out of profit. These stocks are in the S&P 1500, have a market cap of more than $3 billion, excluding financials, real estate and utilities. In addition, they have lower accruals or better operating cash flow than earnings and have a larger forward price-to-earnings decline, according to the note. They also have stronger 3-month earnings revisions. Here are the names. Google parent Alphabet posted better earnings. Recent layoffs and other cost-cutting measures boosted inve stock confidence in stocks. UBS analyst Lloyd Walmsley said disciplined spending “should lead to margin stability”, although he warned that increased competition “could lead to reinvestment”. Darden Restaurants made the list. The parent company behind Olive Garden and LongHorn Steakhouse has shown “above-average resilience” in previous recessions and should “continue to handle macro pressures well,” according to UBS analyst John Hodulik. Meanwhile, Humana has demonstrated strong revenue quality thanks to its leading position in the Medicare Advantage market, according to UBS analyst Kevin Caliendo. He wrote: “High earnings quality is expected to push FCF north of $5 billion in 2023, with FCF earnings delta driven by rations moving higher, reflecting strengthening reserves.” Other stocks listed include Las Vegas Sands and Chipotle Mexican Grill.
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