It wasn’t that bad finally.
With the second-quarter earnings season approaching the books, concerns about a series of negative earnings surprises have proved unfounded. According to Factset’s latest insight, about three out of four S&P 500 companies have reported positive EPS surprises, close to the historical norm.
On the other hand, it was more difficult to get to the wide variety of winning beats. The average size of the beats has lagged considerably behind the past.
This means that companies that surprised us with big profit surprises stood out more. Based on the market’s reactions, we may one day look back on the second quarter earnings as a major turning point for these three stocks.
What have we learned from Trade Desk’s Q2 report?
Market leader in digital advertising Trade Desk, Inc. (NASDAQ: TTD) matched Wall Street’s earnings per share of $0.20, but came in past the highest estimate reports $377 million in Q2 revenue. The 35% year-over-year revenue growth helped allay concerns about a major lull in global ad spending due to economic uncertainty – and sent Trade Desk stocks flying.
The stock rose 36% in heavy volume last week, moving away from the $50 where it had lingered since the last earnings announcement. The last time Trade Desk received this much trade attention in November 2021, it climbed to a record split-adjusted high above $110.
Now trading in the mid $70s, there’s still a lot to make up for, but some analysts think it’s on the right track. Eight of the nine sales firms repeated buy ratings after the surprise Q2 update, including Wells Fargo, which set a $100 price target.
The performance and good outlook from management showed that the demand for programmatic advertising is resilient. With a consistent 95% customer retention rate, some of the world’s largest consumer brands continue to rely on the Trade Desk platform for their omni-channel marketing campaigns. Supermarket chain operator Albertson’s has recently been one of the last to grab a seat at the Trade Desk.
Last month, Abbott labs (NYSE: ABT) posted Q2 EPS of $1.43, marking 22% year-over-year growth and crushing the consensus estimate by more than 25%. The surprise was led by a strong performance in the company’s diagnostics business, which delivered 36% revenue growth on the back of strong demand for rapid Covid-19 testing. It took in another $1 billion in Covid test sales compared to the same period last year.
While the diagnostic segment stole the show, Abbott Labs generated 6% organic sales growth even without Covid testing — a reflection of continued strength in pharmaceuticals and medical devices. Balanced growth coupled with management’s revised EPS guidelines propelled the stock firmly off its 52-week low and has since moved to the $110 level.
In the future, Abbott’s rapid diagnosis has much more to offer. The company raised its revenue guidance for full-year Covid testing from $4.5 billion to $6.1 billion as caseloads in Asia and other parts of the world continue to grow. Meanwhile, the infant formula relaunch is expected to significantly boost earnings in the second half.
With analysts raising their EPS estimates in the wake of the Q2 report and Abbott has a history exceeding those estimates, the stock appears to be the tailwind on the way to the last months of the year. It’s still 21% lower than it has been so far, but with gains lower than the industry’s 23x, it has room to run.
Has Citigroup Stock Reached a Turning Point?
Citigroup Inc. (NYSE: C) rose in triple average volume after the Q2 report and has since risen. Although revenues were lower than a year earlier, they were 30% above what Street had expected.
The release of the statement was the result of improved net interest income, supported by the Fed’s aggressive campaign to raise interest rates. The big four bank was able to charge more for its mortgages and other loan products, offsetting the weakness in investment banking.
With more Fed rate hikes likely on the horizon, Citi’s earnings outlook is at least looking forward to the coming quarters. From there, the fruits of highly anticipated investments in the personal banking and capital markets divisions could continue the momentum.
If the market has a pronounced recession along the way, Citi is in a better position than most bankers to weather the storm. In response to the Fed’s June 2022 stress test, the company announced it will increase its stress capital buffer to a more conservative 4%.
Unfortunately for shareholders, the cautious financial stance comes at the cost of a stagnating dividend and a suspended buyback program. Still, the stock’s forward return of 3.75% remains well above the financial sector average of 3.2%. This, along with the expectation of more aggressive Fed action, should make Citi stock worth banking on.