Skip to Content
Stock Strategist

Four Cheap Stocks with Solid Earnings

These 5-star stocks beat earnings estimates and still look like good values.

Mentioned: , , , ,

Earnings surprises have become much less surprising. For the last few quarters, most companies small and large have been reporting earnings that have beaten Wall Street analyst estimates. Two major forces drive this outperformance.

The first is that the pace of recovery, especially at the beginning of 2009, was much faster than anyone dared predict in the dark days of the recession. It was unthinkable that the economy would stabilize, and even grow, so quickly given the depths to which it had fallen. But as the first green shoots of activity began emerging, earnings perked up faster than expected. At first, earnings were driven by cost-cutting. Firms were able to cut labor and other variable costs very quickly, and the productivity of remaining workers shot up. Now as the recovery enters the next phase, inventory restocking and even some rises in end demand are helping drive companies forward.

The second force leading to so many surprises is that many of the estimates were simply too low. With the recovery being choppy and uneven at best, it is a challenge for analysts to come out and predict that a firm is going to have a great quarter. There is considerable downside of being branded a Pollyanna in this environment. Critics can say that you didn't understand the depths of the financial crisis and dismiss you as a market cheerleader. It is much safer to come out with a conservative prediction. Executives also have the incentive to guide investors and analysts lower and then surprise on the upside. It makes it look like they are doing a better-than-expected job in navigating the downturn.

Investors seem to have figured most of this out already, and are now generally expecting firms to beat estimates pretty handedly. That explains why a lot of firms that have reported quarters that blew past analyst expectations, have seen their shares stagnate or even fall. The upside of this is that there are firms that are still producing decent earnings that the market is shrugging off. To find some of these, we used the  Premium Stock Screener to find stocks that have beat earnings estimates in the last quarter and are rated 5 stars. Here are four stocks that passed. Run the screen for yourself  here.

 Comcast Corporation (CMSCA)
Moat: Wide | Uncertainty: Medium
From the  premium analyst report:
Comcast's decision to go after NBC Universal tarnishes our view of the firm somewhat. We still believe the firm has a strong competitive position in its core cable business, which will continue to account for the majority of the firm's cash flow. We also expect NBCU will perform well over the next several years.

The primary basis of our fair value estimate remains Comcast's traditional cable business. We believe the firm will lose television customers during the next few years as customers turn to rivals or other means of gaining access to video content. We also expect competition will limit price increases, squeezing the amount Comcast can mark up programming content costs. We also believe that Comcast's ability to offer topnotch Internet access services will allow it to recapture lost television profits. We expect that Internet access customer growth will slow during the next few years, but we think the firm will be able to raise prices modestly over time, something it hasn't done recently. We don't expect the phone business to grow much from here, and we expect Comcast to begin losing customers a couple of years out as this industry continues to decline.

 Becton Dickinson (BDX)
Moat: Narrow | Uncertainty: Low
From the  premium analyst report:
Becton, Dickinson's needle and surgical tool empire has provided investors with robust returns on capital for years. Now, largely because of the company's decades-long dedication to innovation and wise deployment of capital, its business is prospering and its investors remain amply rewarded even in this challenging economic environment.

Our favorable take on Becton's prospects also stems from our confidence in the firm's management. Becton has a history of allocating its capital wisely and providing shareholders with solid returns on investment. The company's reputation for searching out pockets of growth, along with its sizable manufacturing and distribution infrastructure, convinces us that Becton will be able to fend off competition and continue to defend and widen its economic moat.

 Abbott Labs (ABT)
Moat: Wide | Uncertainty: Low
From the  premium analyst report:
On the foundation of a wide lineup of patent-protected drugs, a leading diagnostics business, a strong nutritional division, and an emerging vascular group, Abbott Laboratories has dug a wide economic moat. We expect these operating lines will continue to generate strong returns and drive growth. Further, the company's adept skills at partnerships and acquisitions will probably add to internal growth.

 Exelon Corporation (EXC)
Moat: Wide | Uncertainty: Medium
From the  premium analyst report:
In an era of concerns about global warming and rising fossil fuel prices, Exelon maintains an enviable position as the largest nuclear plant operator in the United States. Its ability to produce low-cost, carbon-free electricity should produce substantial, sustainable, and growing shareholder value for many years, regardless of what path power prices take. This is why we consider it the only utility in our coverage universe with a wide economic moat.

To sustain its economic value, Exelon must ensure power markets remain deregulated, particularly in the Midwest and mid-Atlantic. Both markets have experienced rate caps and other unfavorable conditions for power plants recently, but the situation continues to improve.

Data as of 2/4/2010

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.