Retail sales experienced a notable increase of 3.2% in July compared to the previous year, surpassing June’s growth rate of 1.2%. This surge indicates a positive trend in consumer spending, defying the Federal Reserve’s efforts to curb demand for goods and services. Economists believe this trend will continue as the Federal Reserve nears the end of its endeavor to combat inflation by raising interest rates.
With these encouraging developments, analysts are revising their earnings forecasts for companies that produce non-essential consumer goods. Examples of such businesses include General Motors (GM), Ford Motor (F), and Booking Holdings (BKNG). These companies tend to thrive when the economy experiences rapid growth.
According to FactSet, the aggregate 2023 earnings per share forecast for companies listed in the Invesco S&P 500 Equal Weight Consumer Discretionary exchange-traded fund (RSPD) has risen by an impressive 10% in the past six months. It’s important to note that this calculation equalizes the impact of each stock and excludes the dominant influence of Amazon.com (AMZN).
Moreover, many consumer-discretionary companies have consistently outperformed expectations in terms of both sales and profit margins. The rising costs of labor and materials have remained comparatively stable, assisting these companies in surpassing profit margin estimates.
To identify truly prosperous companies within this sector, we conducted a thorough screening process to assess their earnings revisions. Specifically, we focused on those that demonstrated higher earnings forecasts and traded at a maximum of 20 times the expected earnings per share for the following year. To provide context, the current figure for the S&P 500 is 19 times.
Aside from Ford, GM, and Booking, our screening process highlighted other promising names to consider. Caesars Entertainment (CZR), MGM Resorts International (MGM), and Royal Caribbean Group (RCL) showed the potential to benefit from the overall strength of the consumer discretionary sector.
Ford’s Strong Q2 Results Drive 30% Increase in EPS Forecast for 2023
Recent data from analysts reveals that the consensus forecast for Ford’s 2023 earnings per share (EPS) has surged by approximately 30% in the last six months, largely attributed to the company’s robust performance in the second quarter. Ford’s sales for this period reached an impressive $44.9 billion, surpassing analysts’ expectations of $43.2 billion. The higher sales volume and elevated prices were key factors contributing to this positive outcome. Additionally, Ford’s operating margins outperformed initial predictions, resulting in a per-share profit of 72 cents, significantly higher than the expected 54 cents projected by Wall Street.
Despite these exceptional results, Ford’s stock is presently undervalued. After reaching its peak for 2023 in July, the stock took a dip and is currently trading at just over six times earnings. This valuation represents a considerable decrease when compared to early 2022, before the Federal Reserve began raising rates, when Ford’s stock traded at nearly double the current multiple.
GM Sees Expanded EPS Estimates with Impressive Q2 Sales
General Motors (GM) has also experienced a positive upward trajectory recently, with estimates of its EPS rising by approximately 26%. In the second quarter, GM recorded sales of $44.7 billion, outperforming the projected $42.1 billion. Although the operating margins fell slightly short of expectations due to higher-than-anticipated costs, GM still managed to achieve an EPS of $1.91, exceeding the predicted $1.86.
Similar to Ford, GM’s stock has undergone a decline from its yearly peak. Currently, the stock is valued at less than five times earnings, a significant reduction compared to early 2022 when it traded at around nine times earnings.
Booking Poised for Growth as EPS Forecasts Increase by 10.5%
Booking.com, the renowned hotel-reservation website valued at $112 billion, has witnessed a rise of 10.5% in EPS forecasts. This growth can be attributed to the consistent year-over-year sales expansion over the past decade, fueled by the growing popularity of online travel planning over traditional human travel agents.
Industry analysts anticipate an annual sales growth rate of approximately 10% for Booking.com starting from 2024 and lasting for three years. This impressive trajectory would propel sales to reach $27.7 billion by 2026, according to FactSet. Furthermore, Booking.com has consistently outperformed forecasts over the past 20 quarters, with the consensus view on Wall Street suggesting potential margin expansion that may unlock nearly 13% annual EPS growth. If this comes to fruition, EPS is estimated to reach $204.52 by 2026. During a recent conference call discussing the company’s latest results, Booking.com’s management hinted at exploring new sources of revenue, including the possibility of implementing fees for payments made on their platform.
Despite Booking.com’s stock experiencing a remarkable gain of over 50% this year, it still trades at approximately 19.4 times EPS estimates. Remarkably, this valuation is less than twice the projected 13% profit growth that Booking.com is expected to achieve. In comparison, the S&P 500 is currently valued at roughly twice the anticipated EPS growth.
In conclusion, these stocks present promising investment opportunities for discerning investors seeking growth prospects within the automotive and travel industries.