Chasing a soaring stock just because it had a good earnings report is never a good idea. But sometimes, an earnings report can reaffirm an existing investment thesis, signal a turnaround in a business, or provide an indication of where a business is headed and why a company should be worth more.
Target (NYSE: TGT), nVent Electric (NYSE: NVT), and PTC(NASDAQ: PTC) all popped after earnings for good reasons. Three Motley Fool contributors were asked to offer their views on why each stock is worth buying now. Here's what they had to say.
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Target has returned to growth
Daniel Foelber (Target): Last week investors saw some confusing price action in the retail industry. Target stock soared over 17% on Nov. 15 after reporting its earnings, while Walmart(NYSE: WMT) stock fell 8% on Nov. 16 after reporting its earnings. The confusion arises because the management of both companies reported seeing similar challenges in weak consumer spending in discretionary goods and ongoing inflationary pressures. Some of the odd trading could be because Walmart stock had just hit an all-time high right before releasing its report while Target was down big on the year and hovering around a three-year low.
If there's one thing Wall Street hates, it's uncertainty. Target's epic rally was a sign that there's more certainty its turnaround is underway. We can see it in Target's improved operating margin, which came in at a solid 5.2% for the quarter.
Target's free cash flow has also turned positive. And it's entering the holiday season with a lean inventory. The retailer's capital expenditures are expected to be close to $5 billion this year but just $3 billion to $4 billion next year, showing that it's taking a conservative approach to avoid overextending.
Another encouraging note is that Target's trailing-12-month revenue, operating income, and net income are now all above pre-pandemic levels, indicating it has found its footing and is laying the foundation for new, sustained growth.
TGT Revenue (TTM) data by YCharts.
Target has the makings of an excellent value stock worth owning for years to come. And it's not expensive, either, with a forward price-to-earnings ratio (P/E) of just 15.7. Throw in a 3.4% dividend yield, and there's lots to like about Target stock right now.
nVent Electric's acquisitions are helping to power significant growth
Scott Levine (nVent Electric): The world is becoming more electric, and nVent Electric continues to benefit. A leader in the design and manufacturing of products for electrical solutions, nVent recently reported strong third-quarter 2023 financial results, powering investors' enthusiasm. Since the company reported Q3 2023 earnings on Oct. 27, shares have soared more than 16%. And it's likely that the market's excitement won't short-circuit anytime soon.
Blowing past analysts' expectations of $0.73, nVent reported adjusted earnings per share (EPS) of $0.84 for Q3 2023. It's not merely nVent's recent performance, however, that jolted the stock higher; management's upwardly revised 2023 forecast represents another catalyst. Whereas the company originally provided 2023 adjusted EPS guidance of $2.85 to $2.91, it was recently raised to $3.01 to $3.03.
Management credits improvements in the supply chain and better inventory management as two factors contributing to a more auspicious view of 2023. The company also recognizes the recent acquisitions of ECM Industries and TEXA Industries as potential positive influences.
The company's financials are benefiting from management's well-executed acquisition strategy -- and more acquisitions may be on the horizon. On the recent earnings call, management stated that it sees "tremendous opportunities to continue to grow and expand with our acquisition framework."
With nVent reporting strong free cash flow in Q3 2023 of $136 million (an 8% year-over-year increase), nVent is clearly operating well on multiple fronts. It seems that the market hasn't caught up to this fact yet; when it does, shares should climb higher.
PTC's cash flow is about to expand
Lee Samaha(PTC): The industrial software company's recent fourth-quarter results were well received by the market, and the stock is up nearly 30% this year. With growth in the industrial sector slowing and CEO Jim Heppelmann referring to a "challenging economy" on the earnings call, investors were concerned that PTC might disappoint with its earnings report.
However, PTC's key metrics showed impressive improvement. Management said it believes the best way to gauge PTC's growth is through its annual run rate (ARR). It represents the annualized "value of our portfolio of active subscription software, cloud, SaaS [software as a service], and support contracts as of the end of the reporting period." ARR leads PTC's free cash flow (FCF), so strong ARR growth means FCF growth to come.
Organic constant-currency ARR grew at a 13% rate in the fourth quarter and at the same figure for the full year. Management's guidance calls for 11%-14% growth in 2024 and then mid-teens growth in 2025 and 2026. This kind of growth is estimated to lead to $1 billion in FCF in 2026, compared to the current market cap of $18.5 billion.
PTC will get there, provided the industrial sector keeps adopting digital technology in its product design, production, and lifecycle management from their inception, production, usage, servicing, and disposal. It's a powerful megatrend, and PTC is a great way to invest in it.
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Daniel Foelber has positions in Target and has the following options: long November 2024 $130 calls on Target and short November 2024 $135 calls on Target. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool recommends PTC. The Motley Fool has a disclosure policy.
