A fresh bout of anxiety amid another expected interest rate hike has weighed heavily on investor sentiments. This is expected to keep stock market volatility anchored for a while. Given this backdrop, one could explore some quality stocks, Eaton Corporation plc (ETN), F5, Inc. (FFIV), and Extreme Networks, Inc. (EXTR), which have gained prominence among Wall Street analysts.
But before we delve deeper into the fundamentals of the stocks mentioned above, let us discuss what’s happening in the economy.
Market volatilities are resurfacing due to the stronger-than-expected PCE price index data, which dwindled the likelihood of the rate hike pause. Even though Fed officials recently signaled to forgo an interest rate increase in June. However, they have indicated to resume hikes later this year.
In addition, the recently released job openings data, indicating a resilient labor market in the United States, suggested pressure on wages and inflation. Employers posted 10.1 million job openings last month, up from 9.7 million in March.
Economists at Citi’s team said, “A combination of stronger growth and stronger inflation in Q1 make it even more likely that the Fed will see further rate hikes as needed to cool activity enough to bring inflation back to 2%.”
Moreover, even though the suspension of the debt ceiling has averted an excruciating economic slump, some experts anticipate it to impact the U.S. GDP. For instance, EY-Parthenon’s chief economist, Gregory Daco, estimated that the proposed deal would have a 0.3% drag on real GDP in 2024 and lead to 250,000 job losses.
Given the overall market scenario, stocks ETN, FFIV, and EXTR, with solid fundamentals and bullish Wall Street expectations, could be considered now.
Eaton Corporation plc (ETN)
Based in Dublin, Ireland, ETN operates as a power management company worldwide. Its segments include electrical products; electrical systems and services; hydraulics; aerospace; vehicle and eMobility.
ETN paid its quarterly dividend of $0.86 per share to its shareholders on May 26, 2023. ETN pays a $3.44 per share dividend annually, which translates to a 1.89% yield on the current share price.
Its four-year average dividend yield is 2.49%. The company’s dividend payouts have grown at a CAGR of 5.1% and 5.8% over the past three and five years, respectively.
ETN’s trailing-12-month levered FCF margin of 9.44% is 81.2% higher than the industry average of 5.21%. Likewise, its trailing 12-month cash from operations of $2.83 billion is significantly higher than the industry average of $208.68 million.
ETN’s net sales increased 13.2% year-over-year to $5.48 billion for the first quarter that ended March 31, 2023. The company’s adjusted earnings and adjusted earnings per ordinary share increased 16% year-over-year to $753 million and $1.88, respectively.
Its free cash flow for the quarter stood at $209 million, compared to a negative $73 million in the prior-year quarter. Moreover, its total current assets stood at $9.14 billion as of March 31, 2023, compared to $8.75 billion as of December 31, 2022.
For the full year 2023, the company increased its organic growth guidance between 9% and 11% and expects adjusted earnings per share to be between $8.30 and $8.50.
For its fiscal second quarter ending June 2023, analysts expect ETN’s revenue and EPS to be $5.74 billion and $2.10, which represents 10.2% and 12.2% year-over-year increases, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters.
The stock has gained 26.9% over the past year to close its last trading session at $175.90. It has gained 7.6% over the past six months. Wall Street analysts expect the stock to reach $193.17 in the upcoming 12 months, indicating a potential upside of 9.8%. The price targets range from a low of $159 to a high of $221.
ETN’s POWR Ratings reflect its promising outlook. It has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has a B grade for Growth, Sentiment, and Quality. ETN is ranked #13 of 78 stocks in the A-rated Industrial - Machinery industry.
Click here to see ETN’s ratings for Value, Momentum, and Stability.
F5, Inc. (FFIV)
FFIV provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. It also provides professional services, including consulting, training, installation, maintenance, and other technical support services.
The company had $1.23 billion remaining under its currently authorized common stock repurchase program and announced its plans to repurchase at least $250 million worth of shares during the third quarter of the fiscal year 2023.
FFIV’s trailing-12-month net income margin of 11.74% is 396.6% higher than the industry average of 2.36%. Its trailing-12-month ROCE and ROTA of 12.74% and 6.25% are significantly higher than the industry averages of 0.50% and 0.08%, respectively.
FFIV’s total revenues increased 10.9% year-over-year to $703.18 million for the fiscal second quarter that ended March 31, 2023. Its gross profit increased 7.8% from the year-ago value to $547.52 million. Furthermore, the company’s non-GAAP net income and EPS increased 17.4% and 18.8% year-over-year to $153.63 million and $2.53, respectively.
Analysts expect FFIV’s revenue and EPS to increase 0.8% and 22.4% year-over-year to $705.59 million and $3.21, respectively, in the fiscal fourth quarter ending September 2023. It surpassed EPS estimates in all four trailing quarters.
The stock has gained 9.8% over the past month to close its last trading session at $147.58. Wall Street analysts expect the stock to reach $153.60 in the upcoming 12 months, indicating a potential upside of 4.1%. The price targets range from a low of $140 to a high of $179.
It’s no surprise that FFIV has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has an A grade for Quality and a B for Growth and Value. It is ranked #2 in the 50-stock Software – Business industry.
Beyond what is stated above, we’ve also rated FFIV for Momentum, Stability, and Sentiment. Get all FFIV ratings here.
Extreme Networks, Inc. (EXTR)
EXTR is a software-driven networking solutions provider. It offers wireless network infrastructure equipment and develops software for network management, policy, analytics, security, and access controls.
On May 9, the company introduced ExtremeCloud Edge, the industry’s first networking cloud continuum, delivering more choice and flexibility to customers while running networking applications, including management, analytics, and AI. ExtremeCloud Edge eliminates cloud sovereignty concerns and dramatically boosts the one-network experience.
This new launch reflects EXTR’s continued innovation in enterprise networking and should have a robust market demand.
The stock’s trailing-12-month ROCE and ROTA of 57.35% and 5.43% are significantly higher than the 0.50% and 0.08% industry averages, respectively. Likewise, its levered FCF margin of 14.05% is 95.9% higher than the industry average of 7.17%.
In the third quarter that ended March 31, 2023, EXTR’s total net revenue increased 16.5% year-over-year to $332.51 million. Its non-GAAP operating income grew 45.9% from the year-ago value to $52.04 million.
The company’s non-GAAP net income amounted to $38.85 million and $0.29 per share, representing an increase of 41.7% and 38.1% from the prior-year quarter, respectively.
The consensus revenue and EPS estimates of $343.37 million and $0.31 for the fourth quarter ending June 2023 represent 23.4% and 106.7% improvements year-over-year, respectively. The company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
EXTR’s shares gained 4.6% intraday to close the last trading session at $20.60. Over the past year, the stock has gained 107.7%. Wall Street analysts expect the stock to reach $23.50 in the upcoming 12 months, indicating a potential upside of 14.1%. The price targets range from a low of $23 to a high of $24.
EXTR’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Quality. Among the 50 stocks in the Technology – Communication/Networking industry, it is ranked #4.
In addition to the POWR Ratings highlighted above, one can see EXTR ratings for Value, Momentum, Stability, and Sentiment here.
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ETN shares were trading at $178.32 per share on Thursday morning, up $2.42 (+1.38%). Year-to-date, ETN has gained 14.76%, versus a 10.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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