While the stock market stands at crossroads with the Fed’s next move and with uncertainty still hanging in the air, it could be ideal to invest in fundamentally sound stocks such as DENSO Corporation (DNZOY), Dynatrace, Inc. (DT), and Daito Trust Construction Co.,Ltd. (DIFTY) that have shown resilience through this past earnings season and look poised for further growth.
In recent weeks, several Fed officials have signaled that the Fed's focus remains primarily on quelling inflation, which is still running at elevated levels. Last week the Commerce Department reported that the core Personal Consumption Expenditures (PCE) price index rose 0.4% in April and 4.7% from a year ago. Despite the higher inflation rate, consumer spending jumped 0.8% for the month, while personal income increased 0.4%.
With a strong labor market and a broadly healthy economic backdrop, the report has reinforced the probability that interest rates could stay higher for longer. As a result, the market is pricing another quarter-percentage-point interest rate hike at the June meeting, bringing the federal funds rate to 5.25% - 5.5%.
On the other hand, amid recent uncertainty in the regional banking sector and the credit crunch worries, some investors remain hopeful that a pause in rate hikes might still be on the cards. However, the Fed’s next move in interest rates largely depends on the U.S. nonfarm jobs report and CPI inflation data for May, slated to release in the coming weeks, both of which are expected to show some cooling.
Against this backdrop, adding quality stocks DNZOY, DT, and DIFTY with a focus on earnings consistency and high profitability could be beneficial. Let’s look into the fundamentals of the featured stocks.
DENSO Corporation (DNZOY)
Headquartered in Kariya, Japan, DNZOY is engaged in the manufacturing and sale of automotive components and systems, industrial products, and home appliances. It operates through the following business divisions: Automotive; Consumer Products; Industrial Products; and New Business Fields.
On May 10, DNZOY announced a joint collaboration with United Semiconductor Japan Co., Ltd., a subsidiary of global semiconductor foundry United Microelectronics Corporation (UMC), to produce Insulated Gate Bipolar Transistors (IGBT), which have entered mass production at the 300mm fab of USJC.
The production of a new generation of IGBT developed by the company offers a 20% reduction in power losses compared with earlier generation devices and is expected to reach 10,000 wafers per month by 2025. In addition, the combined efforts of both companies should help further accelerate electrification through the production of competitive semiconductors.
For the fiscal year that ended March 31, 2023, DNZOY’s revenue increased 16.1% year-over-year to ¥6.40 trillion ($45.50 billion). Its operating profit grew 24.9% from the year-ago value to ¥426.09 billion ($3.03 billion).
During the same period, its profit for the year and EPS came in at ¥347.86 ($2.47 billion) and ¥416.01, representing 20.5% and 21.4% year-over-year increases, respectively. In addition, its cash from operations improved by 52.3% from the prior-year value to¥602.72 billion ($4.28 billion).
Street expects DNZOY’s revenue to increase 11.2% year-over-year to $11.80 billion in the fiscal first quarter (ending June 30, 2023). Moreover, it topped the revenue estimates in three of the trailing four quarters.
DNZOY’s EBITDA and EBIT have increased at CAGRs of 27.9% and 87.1%, respectively, over the past three years, while its EPS has grown at a 67.9% CAGR.
The stock’s trailing-12-month EBITDA margin of 12.35% is 13.6% higher than the 10.88% industry average, while its trailing-12-month ROTA of 4.25% compares with the 3.65% industry average.
The stock has gained 28.4% year-to-date to close the last trading session at $31.53.
DNZOY’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Stability, and Quality. Among the 58 stocks in the A-rated Auto Parts industry, it is ranked #4. Click here to see the additional ratings for DNZOY (Value, Momentum, and Sentiment).
Dynatrace, Inc. (DT)
DT offers a unified observability and security platform with analytics and automation for dynamic, hybrid, multi-cloud environments. Its product offerings include application and microservices monitoring, runtime application security, infrastructure monitoring, log management and analytics, digital experience monitoring, digital business analytics, and cloud automation.
On May 23, the company announced new integration capabilities for Event-Driven Ansible from Red Hat. As a result, Red Hat Ansible Automation Platform customers can integrate AI-powered insights and action from DT with Event-Driven Ansible to automate a broader range of DevSecOps use cases.
This combined solution of industry-leading AI and automation capabilities should help customers in driving greater operational efficiencies while boosting their digital services’ performance, reliability, and security.
DT’s total revenue increased 24.5% year-over-year to $314.48 million in the fourth quarter that ended March 31, 2023. Its adjusted operating income grew 35.2% from the year-ago value to $77.94 million, while its free cash flow increased 39% year-over-year to $114.51 million.
The company’s non-GAAP net income amounted to $92.46 million and $0.31 per share, representing 91.5% and 82.4% year-over-year increases, respectively.
The consensus EPS estimate of $0.22 for the first quarter (ending June 2023) represents a 22.7% improvement year-over-year. The consensus revenue estimate of $327.07 million for the current quarter represents a 22.4% increase from the same period last year. The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past three years, DT’s revenue and total assets have grown at 28.5% and 10.5% CAGRs, respectively. Moreover, its levered free cash flow has improved at 24.9% CAGR over the same period.
DT’s trailing-12-month ROCE and ROTA of 7.42% and 3.90% are significantly higher than the 0.63% and 0.08% industry averages, respectively. Also, its trailing-12-month levered FCF margin of 28.23% is 299.5% higher than the industry average of 7.07%.
Shares of DT have gained 35.4% over the past six months to close the last trading session at $49.70.
DT’s solid prospects are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
It has a B grade for Growth, Sentiment, and Quality. The stock is ranked #28 of 133 stocks in the Software – Application industry. To see additional POWR Ratings of DT for Value, Momentum, and Stability, click here.
Daito Trust Construction Co.,Ltd. (DIFTY)
Based in Tokyo, Japan, DIFTY is primarily engaged in real estate-related business that involves designing and constructing apartments, condominiums, and rental office buildings, factories, and warehouses. It operates through three segments: Construction; Real Estate; and Finance.
During the fiscal year that ended March 31, 2023, DIFTY’s net sales increased 4.7% year-over-year to ¥1.66 trillion ($11.78 billion). The company’s operating income rose marginally from the year-ago value to ¥100 billion ($710.80 million).
Its net income came in at ¥70.36 million ($500.13 million), up 1.1% year-over-year. Also, its current assets amounted to ¥619.98 billion ($4.41 billion) compared to the prior-year value of ¥588.487 billion ($4.18 billion).
Analysts expect DIFTY’s revenue to increase marginally year-over-year to $2.98 billion in the ongoing quarter ending June 30, 2023. Also, it surpassed the revenue estimates in each of the trailing four quarters. Its revenue has grown at a marginal CAGR over the past five years, while its total assets rose at a 6.5% CAGR over the past three years.
The stock’s trailing-12-month asset turnover ratio of 1.60x is significantly higher than the 0.13x industry average. Likewise, its trailing-12-month cash per share of $29.27 compares to the industry average of $0.53.
Over the past year, the stock has gained 11.7% to close the last trading session at $24.39.
DIFTY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system. It also has an A grade for Stability and a B for Growth and Value. Out of 47 stocks in the REITs - Diversified industry, it is ranked #2.
In addition to the POWR Ratings given above, click here to see DIFTY’s ratings for Momentum, Sentiment, and Quality.
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DNZOY shares were trading at $31.53 per share on Monday afternoon, up $0.32 (+1.03%). Year-to-date, DNZOY has gained 28.38%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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