Strong second-quarter earnings reports and cooling inflation have powered the S&P 500 to its highest level in 16 months. Courtesy of a five-month winning streak reminiscent of 2021’s bull run, the popular stock market gauge is back to within 5% of its record high.
Not all S&P 500 companies have come along for the ride, though — which could translate into an opportunity for long-term investors.
Halfway through the Q2 earnings season, 4 out of 5 S&P 500 names have reported above-consensus earnings per share (EPS). It speaks well of market strength that the surprises have come from all 11 economic sectors (amazingly, not a single information technology company has posted lower-than-expected EPS).
As for ‘the other 20%’ that fell short of Wall Street’s forecasts, macroeconomic weakness, soft demand and cost inflation are common themes. For investors that like to sift through the underperformers for good values, good factors to identify are 1) market overreaction and 2) healthy long-term outlooks.
These two S&P 500 names meet both criteria.
Why Did IPG Stock Drop After Earnings?
The Interpublic Group of Companies, Inc. (NYSE: IPG) actually surpassed EPS expectations but fell short on revenue, sending its stock on a two-day 14% slide. The advertising and marketing conglomerate was impacted by macro uncertainty that caused clients to spend cautiously during the period, especially tech and telecom companies. Still, revenue of $2.33 billion was just shy of the $2.39 billion consensus. And thanks to effective cost-cutting initiatives, EPS grew 17% year-over-year and handily beat the Street.
In the back half of the year, IPG is expected to return to top-line growth thanks to some large new business wins. The company has secured deals from pharmaceutical giants Bristol-Myers Squibb and Pfizer. Its Martin Agency subsidiary is developing new (undoubtedly humorous) campaigns for Geico, which is owned by Warren Buffett’s Berkshire Hathaway.
Longer-term, IPG should benefit from 1) its leading position in the global ad market and 2) rising demand for digital media services tied to e-commerce growth. The acquisition of brand accelerator Acxiom should continue to expand its capabilities in data analytics and artificial intelligence (AI), two of tech’s biggest growth areas.
As these catalysts play out, investors have the opportunity to collect a quarterly dividend that has increased in each of the last 11 years. With the recent dip, IPG has a 3.7% forward dividend yield. And with share repurchases totaling $128 million year-to-date, an active buyback program further strengthens this value proposition.
Will Equifax Stock Recover From an Earnings Selloff?
Like IPG, credit report provider Equifax Inc. (NYSE: EFX) reported above-consensus second-quarter EPS and slightly lower-than-expected revenue. What is the market’s response? A $20 share price selloff extended to a 15% downturn on Friday. The key thing to note here is that Equifax ran up to $240 ahead of the release so that traders may have anticipated much better numbers. All things considered, however, the results were solid.
Since Equifax depends on the credit check activity of lenders and governments, rising interest rates are usually a headwind because they discourage consumer and business borrowing. Lately, rising U.S. mortgage rates have been a major challenge.
Last week, the average 30-year fixed mortgage rate reached 6.81% and seems destined for a return to 7%. Accordingly, Equifax is projecting a 37% decline in mortgage originations this year.
Despite this roadblock, Q2 total revenue was flat year-over-year, aided by a 7% uptick in B2B non-mortgage revenue. At the midpoint, management expects 3.5% top-line growth for 2023, which is significantly better than what industry peers are forecasting.
EPS are expected to be lower than in 2022, but a restructuring, cloud transformation and workforce reduction should aid profit margins heading into 2024.
Last month, Equifax secured shareholder approval for its merger with Boa Vista Servicos, Brazil’s second-largest credit bureau. This is a positive step in improving a stagnant international business — but one that saw 23% growth in Latin America last quarter. Since international clients account for just 22% of total revenue, gaining exposure to faster-growing emerging markets will be an important theme to watch.
With EFX’s summer gains erased (and then some), the stock is trading at 23x next year’s earnings estimate. This is well below its five-year average P/E ratio of 30x, a reversion that implies 30% upside. And with technically oversold conditions nearing, this Q2 earnings loser looks like a long-term winner.
