When a company beats earnings estimates, investors often pile into it. But not all earnings beats are created equal. Twilio (NYSE:TWLO) announced large layoffs and told analysts to expect bad numbers, then beat them. Microsoft (NASDAQ:MSFT) showed big gains in the cloud, but it’s losing its biggest franchise in Windows. SunPower (NASDAQ:SPWR) beat estimates, but not by enough to change the narrative.
Sometimes a beat is management gamesmanship. You tell analysts things are going to be horrible so if they’re not so bad you’re a hero. That is what AMC Networks (NASDAQ:AMCX) did, delivering a loss that wasn’t as bad as expected. Or you can beat estimates while remaining overvalued, as Shopify (NYSE:SHOP) did. Finding gold in earnings releases means looking at a company’s business prospects, the stability of its model, and the general economy.
The companies in this gallery are in a wide variety of industries, but they know what they’re about, they don’t usually make big negative headlines, and they’re all a bet on growth for the U.S. economy. They were all underestimated last year and continue to be.
Earnings Beats: Applied Materials (AMAT)
Up first on our list of earnings beats is Applied Materials (NASDAQ:AMAT), a leader in building expensive machines that fabricate silicon chips. Its best-known rivals are Lam Research (NASDAQ:LRCX) and KLA Tencor (NASDAQ:KLAC).
A relative of mine worked at AMAT decades ago, and I briefly owned shares in the 1990s. This century shares are up 150% and it has become a regular source of dividends, currently at 26 cents per share each quarter, a yield of .93%. Since 2019 revenue is up 60%, and this may be a good time to buy given the tech recession, which has sent the shares down 13.4% over the last year. Others feel the same way. It’s up 18.5% since the start of 2023.
For the most recent quarter, the first of its 2023 fiscal year, Applied Materials earned $1.7 billion, $2.02 per share, on $6.7 billion in revenue. This beat analyst estimates and guidance was also positive. Shares barely budged because the good news was priced in and because profits remained soft. At the end of Jan., Applied still had $3.5 billion in cash to fund its capital spending, which came to $787 million last year. The dividend is also accounted for, costing $212 million last quarter. Despite being on the downside of the chip cycle there was $1.7 billion in operating cash flow.
One caveat. A ransomware attack at one of Applied’s key suppliers will result in a charge of about $250 million against second-quarter earnings. It’s an increasingly common risk that investors should be concerned about. Applied is a “get rich slowly” stock, perfect for a long-term investor seeking an industrial with staying power.
Earnings Beats: DraftKings (DKNG)
Next up on our list of earnings beats is Draftkings (NASDAQ:DKNG), which has used its media alliance to gain a strong position in a fast-growing market, sports gambling. Profits have yet to appear, although they’re on the horizon. This is not a long-term buy-and-hold. It’s the kind of speculation you can sell once the profit gusher is proven, once growth turns into value. Over the last two years, DraftKings stock is down 60%. But the growth is real and, with Walt Disney (NYSE:DIS) picking up some customer acquisition costs through ESPN, profits should follow.
DraftKings had revenue of $2.24 billion in 2022, up from $1.29 billion in 2021. Its short-term problem is that promotion costs jumped by the same proportion. So its loss from operations was $1.5 billion, just a little less than in 2021. With the Super Bowl coming in after fourth-quarter earnings and rivals worrying about their own marketing costs, analysts are optimistic.
DraftKings has a market cap of $9.2 billion. That’s just $2 billion less than its main U.S. competitor, Caesars Entertainment (NYSE:CZR), whose huge chain of physical casinos is worth $11.3 billion. MGM Resorts International (NYSE:MGM), which is also spending a lot on sports betting, is worth $16.5 billion. All are dwarfed by Flutter Entertainment (OTCMKTS:PDYDY), the giant European betting company that also owns DraftKings rival Fanduel and is worth $29.2 billion. (Flutter may list on a U.S. exchange this year.)
The good news for 2023 is that DraftKings is finally ready to turn off the marketing tap, cutting its deals with teams and leagues to focus on the ESPN relationship. Instead, the company is building betting parlors outside major sports venues in states that allow betting, like Wrigley Field in Chicago. As more states legalize the trade, DraftKings’ growth should continue. Profits should follow as marketing costs moderate. Once the profits start pouring in, consider selling. But it’s worth a bet right now.
Earnings Beats: Shockwave Medical (SWAV)
Shockwave Medical (NASDAQ:SWAV) proved its business model last year and investors are flooding into this earnings beats play, as well.
The idea behind the company is to fight coronary disease with Lithotripsy emitters, and sound waves, a technique pioneered in the treatment of kidney stones. Its emitters create a field effect around calcium deposits, breaking them up safely. This can be used to treat blockages in peripheral blood vessels or those near the heart. Shockwave’s fourth-quarter earnings were called a massive beat, with profits of $141 million, $3.71 per share, and revenue of $126.5 million. The profit was outsized because it offset past losses. Operating profits came to $42.4 million, still about one-third of revenue.
You can buy Shockwave for its sales growth, profitability, or the chance a bigger company may buy it. But its success is no longer a secret, and shares fell last quarter despite its success, meaning the stock is still vulnerable to changes in the larger market. Shockwave is currently selling for 15 times revenue, and 81 times earnings. That is still below its speculative high of last August. There may still be room for its value to grow.
Shockwave’s acquisition of Neovasc (NASDAQ:NVCN), which seeks to treat refractory angina with an hourglass-shaped expandable stent, got a thumbs-down from analysts for its high price. But the Neovasc system is only now entering the U.S. market, there are no other approved treatments, and its potential is huge.
Republic Services (RSG)
Listen to your junkman. Waste collection stocks have become a bright spot in today’s stock market. In 2022 Republic Services (NYSE:RSG) and its rivals, Waste Management (NYSE:WM) and Waste Connection (NYSE:WCN), all beat the stock market averages.
That should continue as Republic’s fourth-quarter earnings beat estimates, and the company issued positive guidance for 2023. For the three months ending in December Republic earned $347 million, $1.13 per share fully adjusted, on revenue of $3.5 billion. Revenue was up 20%, and the company expects that to continue, with adjusted free cash flow of $1.65-1.9 billion. The dividend is up 30% over the last five years. The $2/year payout yields about 1.5%. Earnings gave a short-term lift to the stock after it fell in Jan.
Waste companies are like utilities, Barron’s notes. They’re regulated monopolies, with guaranteed revenue streams. Waste companies are also “defensive” stocks, not “multi-baggers” that make you rich. Instead, they’re the ballast that keeps a balanced stock portfolio afloat in rough seas. Since they’re necessary services, they have protection against inflation. Analysts who tell investors to buy the stock expect it to gain just 10% this year, but that beats a loss.
Waste companies are also in the recycling business, which can be a risk when commodity prices fall. Republic sells cardboard, whose price has fallen with the fading of the online shopping boom. Its landfills can also sell natural gas created by decomposing trash. Since the gas is renewable it also provides credits that can help companies meet regulatory quotas.
Choice Hotels (CHH)
Choice Hotels (NYSE:CHH) runs over a dozen hotel chains favored by middle-class travelers. The best-known are Rodeway Inn, Quality Inn, Comfort Inn, and Choice. Shares rose after it beat earnings estimates this month with net income of $55.5 million, $1.04 per share fully diluted, and revenue of $362 million. Earnings were down 9% from a year earlier but revenue rose 27%. In the week after earnings, the stock fell. But it’s still up 12% for 2023.
Choice shares rose in 2021 but fell in 2022 along with the rest of the market. But over the last five years, the shares are up 50% and the dividend is up about 10%. Management is now focused on moving up-market. Last year it added the Country Inn chain from Radisson, serving what’s called the “premium economy” segment of the market. Choice is also adding a branded credit card with Wells Fargo (NYSE:WFC), replacing a rewards program run by Barclays (NYSE:BCS).
Choice is a bet on vacations by the American middle class, people who got through the pandemic, who own their own homes but are still looking for drivable destinations. Most locations are in the U.S., although its Comfort Inn and Quality Inn brands carry its flag around the world. Unlike the other companies in this gallery, analysts at Tipranks are skeptical about Choice, with 3 of the 8 following it recommending investors sell. There should be ample selling pressure on the name and waiting for it to bottom may pay off.
On the date of publication, Dana Blankenhorn held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. His 10th novel is The Time Tunnel, now available at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.