In this article, we will discuss 10 stocks analysts are downgrading after weak earnings reports. To take a look at some more stocks that have been downgraded, go to Analysts Are Downgrading These 5 Stocks After Weak Earnings Reports.
According to FactSet, as of July 22, the S&P 500 is posting its lowest earnings growth on a year-over-year basis since the fourth quarter of 2020. A tough reference to the extremely strong earnings growth in Q2 2021 and ongoing economic challenges can be used to explain the lower earnings growth rate for Q2 2022 compared to the recent quarters. Investors are looking at the numbers with keen interest as the US economy is engulfed by inflation at a multi-decade high and multiple interest rate hikes. Furthermore, the US dollar gaining strength against the major currencies of the world is also playing a significant role in denting the earnings of numerous corporations.
Till July 8, it was widely believed on Wall Street that the majority of businesses were successfully generating sizable profits from healthy revenues. According to Refinitiv, the consensus estimate for S&P 500 businesses was projected at a 10.6% increase in revenue from Q1 2021 and a 5.7% rise in earnings in Q2. However, a closer look would reveal that most of these earnings are anticipated to come from the energy sector. The situation quickly becomes gloomy if results from energy businesses are excluded. The average estimations would be lowered to a rise of 6.6% in revenue from the same period last year. Meanwhile, the earnings would be forecasted to decline by 3% in the second quarter of 2022.
In the last year, the US dollar index has gained 15.1% against a basket of other prominent currencies of the world as the Federal Reserve has taken a hawkish stance to fight inflation by hiking benchmark interest rates thrice since the start of 2022. This makes the exports made by US entities less competitive in the foreign markets, adversely impacting the top line and bottom line of the multinational companies that convert their foreign revenue and earnings into the US dollar. According to Morgan Stanley estimates, for each 100 basis points (bps) YoY rise in the US Dollar Index, the earnings growth of the S&P 500 companies falls by 50 basis points. As energy prices have started to take a breather after a turbulent first half of the year, the US dollar gaining strength is not providing a break to companies. According to FactSet, around 40% of the revenues of the S&P 500 companies are generated from outside the US. The information technology (IT) sector and the materials sector have the highest exposure to exchange rate fluctuations as they generate 58% and 56% of their revenue, respectively, from outside the US.
During this earnings season, International Business Machines Corporation (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), and Netflix, Inc. (NASDAQ:NFLX) have all quoted the US dollar gaining strength as a headwind to their earnings. It must be noted that Johnson & Johnson (NYSE:JNJ) and Microsoft Corporation (NASDAQ:MSFT) had already lowered their second quarter guidance to incorporate the impact of the rising US dollar. Some of the notable stocks that have received a downgrade in ratings following weak earnings reports include Delta Air Lines, Inc. (NYSE:DAL), AT&T Inc. (NYSE:T), and Snap Inc. (NYSE:SNAP).
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Our Methodology
With this context in mind, we will be looking at 10 notable companies analysts are downgrading after weak earnings reports. We will dissect the reasons why these companies struggled during the three months and outline the impact of macroeconomic headwinds on their earnings reports. We have ranked these stocks according to the number of hedge funds having a stake in them as of Q1 2022.
10. Wipro Limited (NYSE:WIT)
Number of Hedge Fund Holders: 15
Wipro Limited (NYSE:WIT) is a Bengaluru, India-based IT, consulting, and business processes services corporation.
Wipro Limited (NYSE:WIT) saw its Q1 FY23 revenue grow by 9.8% to $2.7 billion, which fell short of the consensus estimate of $2.71 billion. Meanwhile, the GAAP EPS of six cents missed the analysts’ forecast of eight cents. Wipro Limited (NYSE:WIT) saw its order bookings grow by 32% YoY. Following the results, Surendra Goyal at Citi downgraded Wipro Limited (NYSE:WIT) stock from a Buy to a Sell rating on July 20. The price target was also lowered by 24%. Although the analyst had anticipated soft margins, the contraction was steeper than anticipated amongst all the large-cap Indian IT Services firms that reported their quarterly results till now.
At the end of Q1 2022, 15 hedge funds held a stake in Wipro Limited (NYSE:WIT).
9. Colony Bankcorp, Inc. (NASDAQ:CBAN)
Number of Hedge Fund Holders: 16
Colony Bankcorp, Inc. (NASDAQ:CBAN) is a Fitzgerald, Georgia-based bank holding company.
For Q2 2022, Colony Bankcorp, Inc. (NASDAQ:CBAN) reported revenue and operating EPS of $29.22 million and 30 cents, respectively, which missed the consensus estimate of $29.57 million and 41 cents. Following this development, Kevin Fitzsimmons at DA Davidson downgraded Colony Bankcorp, Inc. (NASDAQ:CBAN) stock from a Buy to a Neutral rating and lowered the target price from $18 to $16.75 on July 22. The analyst highlighted the steep operating EPS miss as the company faced less favorable variances in core expenses, loan loss provision, and net interest income. Fitzsimmons added that he would change his opinion if Colony Bankcorp, Inc. (NASDAQ:CBAN) returns to generating positive operating leverage.
Fourthstone LLC was the leading hedge fund investor in Colony Bankcorp, Inc. (NASDAQ:CBAN) as of Q1 2022.
8. Nokia Oyj (NYSE:NOK)
Number of Hedge Fund Holders: 22
Nokia Oyj (NYSE:NOK) is a Finnish telecom equipment giant.
The company posted its Q2 2022 results on July 21. Nokia Oyj (NYSE:NOK) highlighted that there will be an ease in the global semiconductor shortage during the second half of 2022 and the first half of 2023. The world is facing a semiconductor chip shortage since the peak of the COVID-19 pandemic in 2020 and it has impacted various sectors. The IT and telecoms sectors have been the most impacted by the shortage.
Nokia Oyj (NYSE:NOK) saw its net sales increase by 11% YoY to $5.99 billion. The company maintained its full-year revenue guidance of $24.02 billion to $25.25 billion. However, due to supply chain disruptions, Nokia Oyj (NYSE:NOK) saw its margins contract. On July 22, Nokia Oyj (NYSE:NOK) was downgraded from a Buy to a Hold rating by Sebastien Sztabowicz at Kepler Cheuvreux with a price target of $5.52.
Overall, 22 elite funds held a stake in Nokia Oyj (NYSE:NOK) as of Q1 2022.
7. Seagate Technology Holdings plc (NASDAQ:STX)
Number of Hedge Fund Holders: 32
Seagate Technology Holdings plc (NASDAQ:STX) is a Cupertino, California-based manufacturer of hard disks and other mass data storage solutions.
The company reported its Q4 FY22 results on July 21 that missed consensus estimates and also provided a weaker-than-expected outlook for FY23 along with a reduction in production. Seagate Technology Holdings plc (NASDAQ:STX) generated revenue of $2.63 billion for the three months ending on July 1. This fell short of analysts’ forecast of $2.79 billion. The adjusted EPS was posted at $1.59, which was significantly lower than the consensus estimate of $1.89.
For Q1 FY23, Seagate Technology Holdings plc (NASDAQ:STX) anticipates revenue to be between $2.35 billion to $2.65 billion. The midpoint of $2.5 billion missed the analysts’ estimate of $3 billion by $500 million. As opposed to analysts’ forecast EPS of $2.21, Seagate Technology Holdings plc (NASDAQ:STX) expects its Q1 FY23 EPS to be between $1.20 and $1.60.
Following the results, on July 22, Christian Schwab at Craig-Hallum downgraded Seagate Technology Holdings plc (NASDAQ:STX) stock from a Buy to a Hold rating and reduced the target price from $112 to $79, citing the weak Q4 FY22 results and weak Q1 FY23 guidance. The analyst thinks that Seagate Technology Holdings plc (NASDAQ:STX) is facing headwinds from the COVID-19-related lockdowns in China.
Antipodes Partners lowered its stake in Seagate Technology Holdings plc (NASDAQ:STX) by 11% during Q1 2022.
6. Discover Financial Services (NYSE:DFS)
Number of Hedge Fund Holders: 33
Discover Financial Services (NYSE:DFS) is a Chicago, Illinois-based financial services firm that owns Discover Bank and provides payments services.
Discover Financial Services (NYSE:DFS) has commenced an internal investigation that would look into the compliance of the student-loan servicing business. CEO Roger Hochschild revealed that despite all the uncertainty, the expense guidance for 2022 still stands, and he anticipates the total cost to rise by a single-digit percentage.
Discover Financial Services (NYSE:DFS) saw its Diluted EPS decline from $5.5 in Q2 2021 to $3.96 in the second quarter of 2022, reflecting a YoY decline of 29%. The company’s operating expenses also recorded a YoY increase of 9%, or $94 million.
Following the company’s Q2 results, Arren Cyganovich at Citi lowered the price target on Discover Financial Services (NYSE:DFS) from $140 to $115 and downgraded the stock from a Buy to a Neutral rating on July 22. The analyst also cited the investigation as one of the reasons for the downgrade. Cyganovich was disappointed by the limited information shared by the company, which raises a significant level of short-term risk if the regulators are involved.
Discover Financial Services (NYSE:DFS) was held by 33 hedge funds at the end of Q1 2022.
In addition to Discover Financial Services (NYSE:DFS), stocks such as Delta Air Lines, Inc. (NYSE:DAL), AT&T Inc. (NYSE:T), and Snap Inc. (NYSE:SNAP) also failed to impress analysts with their earnings reports for Q2 2022.
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Disclose. None. Analysts Are Downgrading These 10 Stocks After Weak Earnings Reports is originally published on Insider Monkey.
