- Morgan Stanley says corporate earnings growth, which has been a crucial driver of the stock market’s record-breaking run, will start slowing around midyear.
- The firm has identified seven stocks around which it has high positive conviction this earnings season.
The firm sees earnings expansion peaking midyear as it becomes clearer just how much of an impact Republicans’ tax law will have on companies. At that point, the positive impact will be fully accounted for in corporate forecasts. And once that happens, the bar will be set extremely high for subsequent quarters, making it hard to achieve year-over-year growth.
But it’s not all bad news. Since the strongest companies are likely to continue on a growth trajectory, they will be easier to identify once the rest of the market starts to fade. With that in mind, the trick becomes knowing which stocks fit the bill.
That’s where Morgan Stanley comes in. The firm’s chief US equity strategist, Mike Wilson, has teamed up with a wide range of industry analysts to identify seven companies around which they have high positive conviction this earnings season.
Without further ado, here are those stocks, with an explanation of why Morgan Stanley industry analysts like them so much:
Price target: $US300
Morgan Stanley commentary: “ALGN remains a beat and raise story for us. We expect a strong 4Q, as our AlphaWise tracker suggests 3-7% upside to 4Q Invisalign case volume guidance. Our 4Q revenue estimate for 41% growth is also 4% consensus and EPS +75% Y/Y, 8% above consensus.”
Sector: Consumer staples
Price target: $US83
Morgan Stanley commentary: “We have high conviction in a Q4 topline re-acceleration. CL tracked channel sales growth has improved to +2.1% in Q4 vs. -3.0% in Q1-Q3 in the US, and similarly inflected to +7.2% in Q4 TD vs. -1.0% in Q1-Q3 in Europe. Further, we remain constructive on an EM growth pickup.”
Price target: $US63
Morgan Stanley commentary: “We expect ETFC to report NIM of 288 bps in 4Q, above prior guidance of a low-to-mid 280 bps range. We also expect a 4Q adjusted operating margin (ex-credit costs) of 42.1% (+540 bps vs. a year ago and +200 bps vs. guidance). ETFC should also be major beneficiary of tax reform, and will likely return the majority of any benefits to shareholders, in our view.”
Price target: $US382
Morgan Stanley commentary: “Management has been open about an opportunistic approach around pre-funding their pensions. We estimate if LMT pre-funded its 2019-21 obligation, it would lift 2019 EPS and FCF by ~5% and ~20%, respectively. Given the market typically values Defence stocks on P/E and FCF yield, shares should respond favourably.”
Public Service Enterprise Group
Price target: $US54
Morgan Stanley commentary: “With tax guidance likely on the 4Q call, we expect estimates to move higher. PEG is well positioned to capture higher earnings from weather-related power and gas volatility in the recent cold snap. Legislation offering NJ nuclear subsidies may be reintroduced in 1H18.”
Sector: Real estate
Price target: $US190
Morgan Stanley commentary: “SBAC has traded down YTD amid higher interest rates and concerns on a potential slower ramp in leasing activity vs high expectations. We expect solid, but likely conservative, initial 2018 guidance coupled with positive management commentary to help push shares higher.”
Sector: Consumer discretionary
Price target: $US192
Morgan Stanley commentary: “We expect solid 4Q results; our total property EBITDA estimate is 4% ahead of consensus. In Macau, our 4Q property-level EBITDA estimate is 6% ahead of consensus, driven by increased market share (whereas consensus expects a decline in share).”
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