Companies that report blowout earnings often see their stock ride a moon-shot rally, leaving them at pricey valuations. But not always.

As third-quarter corporate earnings continue to roll in, we turned to the 846 US-listed equities covered by Morningstar analysts and looked for those deemed undervalued compared with their estimates of the company’s value.

From here we looked for firms that have posted the strongest earnings results compared with FactSet’s earnings per share consensus estimates. To keep the focus on companies that had truly strong results--not, for example, beating earnings through accounting gimmicks or one-time factors--we also looked for firms that topped revenue expectations by 5% or more.

The result? Seven undervalued stocks that crushed third-quarter earnings expectations.

We should note that while Morningstar stock analysts pay close attention to quarterly earnings results, the focus is on long-term results and valuations. (Morningstar also does not generally publish quarterly earnings forecasts.) A single quarter’s results usually don’t lead to a change in the long-term assumptions behind our assessment of a stock’s fair value, unless a company also comes out with new, material information that those long-term assumptions are based on. For example, new data on a drug that raises the probability of approval or pricing gains in a key product line could affect an analyst’s long-run thinking.

Here are seven undervalued stocks that far exceeded third-quarter earnings expectations and topped revenue forecasts. We’re also noting stocks where Morningstar analysts changed their fair value estimate for the stocks following the earnings results.

Undervalued stocks that crushed earnings

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Incyte (INCY)

The most undervalued stock of our screen is Incyte, which trades at a 42% discount to its fair value. Incyte beat the FactSet EPS consensus by 41%, while actual revenue was 9% above revenue estimates.

“Incyte‘s third-quarter results were in line with our expectations, and we remain bullish on the firm's ongoing launches of Jakafi in chronic graft versus host disease, topical Opzelura in atopic dermatitis, and blood cancer drug Minjuvi,” says analyst Karen Andersen. The firm holds a narrow Morningstar Economic Moat rating, suggesting the company should earn excess returns on capital over competitors for 10 years.

Lloyds Banking Group (LYG)

Lloyds beat earnings expectations by 48% and revenue by 7%. Third-quarter reports led analyst Nikier Kammer to raise his fair value estimate by 9%. In addition, the banking firm reversed additional loan-loss provisions.

“Lifting our fair value is our revised model based on third-quarter results, slightly updated guidance, as well as the improving interest rate outlook in the U.K. in the near term,” says Kammer.

Delta Airlines (DAL)

Delta provided the largest surprise in our screen. “The effects of the new variant were not as bad as consensus feared,” says analyst Burkett Huey. Earnings were 96% above consensus with revenue pulling 9% ahead of estimates.

“The two major stories were strengthening business travel demand due to office reopening and cost inflation, particularly for labor and fuel. We believe the firm has structurally improved its nonfuel cost base, and we expect softening oil prices in the long term,” Huey says.

Crane (CR)

Industrial manufacturer Crane's shares shot up 11.1% since the company released earnings. Despite this, Morningstar still sees the company at a 10% discount. Crane beat earnings by 39% and revenue by 9%.

“Crane is well-positioned to maintain its strong momentum. Compared with the same period last year, Crane’s backlog is up 13% and orders are up 31%, suggesting robust demand heading into the fourth quarter. The company is also doing a solid job managing supply chain disruptions and cost inflation, as price/cost was approximately neutral in the third quarter,” says analyst Krzysztof Smalec. Smalec also notes that many of Crane’s end markets have yet to fully recovery, setting up a potential tailwind for the company’s revenue moving forward.

Gilead Sciences and BMW both beat earnings by over 50%. Credit Suisse, which faced a $4.7 billion loss earlier this year, beat FactSet earnings by 30% in the third quarter. Below are Morningstar analysts’ takes on these companies’ third-quarter results.

Gilead Sciences (GILD)

Gilead beat FactSet earnings consensus by 51% and revenue consensus by 18%.

“Gilead increased its guidance for 2021, following surprisingly strong sales of COVID-19 therapy Veklury ($1.9 billion) that led to 13% top-line growth in the third quarter. The firm is still facing headwinds, such as pandemic-related lower HIV diagnosis rates, generic competition to older HIV drugs, and a declining hepatitis C market. Gilead has maintained share in HIV prevention despite generic pressure, but this has eroded pricing for new drug Descovy. That said, longer term, we expect improving HIV market dynamics, the launch of novel HIV therapy lenacapavir, and a growing oncology portfolio to help drive stronger growth for Gilead, supporting the firm's wide moat.”

Karen Andersen, healthcare sector strategist

Credit Suisse Group (CS)

Credit Suisse, which faced a $4.7 billion loss during the Archegos meltdown, beat earnings estimates by 30% and revenue by 9%. Credit Suisse currently trades at a 34% discount to fair value.

“Narrow-moat Credit Suisse reported pretax profits of CHF 1 billion for the third quarter of 2021, 26% higher than the CHF 803 million pretax profits it booked for the third quarter of 2020. Reported profits were comfortably ahead of the CHF 863 million pretax profits the consensus of analysts polled by Credit Suisse itself expected for the quarter. Credit Suisse also announced the closure of its problematic prime equities operation, which was the source of CHF 5 billion losses following the recent Archegos debacle.

"We will revisit our model to incorporate the new guidance; we maintain our CHF 14 per share fair value estimate for now. The Greensill matter is still unresolved and represents a downside risk to our valuation of around CHF 1/share--under a worst-case outcome.”

Johann Scholtz, equity analyst

Bayerische Motoren Werke (BMWYY)

BMW beat earnings by 54% and revenue by 6%. The stock is 33% below our fair value estimate at current prices.

“BMW was both hurt and helped by the microchip shortage during the third quarter. Total global automotive volume dipped 12% year over year on the supply disruption created by the chip crunch. Even so, consolidated revenue rose 5% on a 3% increase in industrial revenue and a 14% jump in financial services. BMW has been allocating semiconductors to higher contribution margin vehicles. The microchip shortage has constrained all automakers production at a point when demand is high, resulting in low inventory. Limited consumer availability has increased average transaction prices for new and preowned cars. That means that BMW vehicles coming off-lease are worth more, too.

"For BMW, the combination of all these developments leads to higher pricing, richer product mix, and higher residual value preowned vehicle sales, which benefits financial services.”

Richard Hilgert, senior equity analyst