Amid a solid earnings picture for the third quarter, many US-listed companies are beating estimates. Combining the results of firms in the Morningstar US Market Index that have reported with analyst expectations for those still yet to, earnings are on track to grow 5.2% from the second quarter—a sharp downtick from last quarter’s growth rate of 10.3%.

Nearly half of the US-listed stocks covered by Morningstar that reported earnings as of Nov. 14 beat FactSet consensus estimates by 5% or more. Even better for investors looking to put their money to work, analysts believe some of these stocks remain undervalued.

To highlight these opportunities, we ran a screen for undervalued stocks that crushed expectations for earnings and revenue for the quarter. More details on our screen and comments on the stocks from Morningstar analysts can be found later in this article.

5 undervalued earnings crushers

How do third-auarter earnings stack up?

As of the time of writing, 84% of the 888 US-listed stocks covered by Morningstar analysts have reported earnings. Of those, 46% beat the FactSet mean estimates for their earnings by 5% or more—a downtick from 50% last quarter. About 19% missed earnings estimates by 5% or more—an uptick compared with 15% last quarter.

Quarterly results

Fewer companies beat estimates by 10% or more—31% versus 33% in the second quarter. About 15% surpassed expectations by 5%-10%—a slight decrease from 17% in the second quarter.

How we did our stock screen

While Morningstar analysts pay close attention to earnings, they focus on long-term results and valuations. One quarter doesn’t usually lead to a change in a stock’s fair value estimate unless new material information affects the assumptions behind that valuation. For example, new data on a drug could raise the probability of its approval, or pricing gains on a key product line could affect an analyst’s long-term thinking. Still, looking at quarterly earnings with valuations in mind can help long-term investors identify opportunities.

We screened for stocks that beat earnings expectations by 20% or more but remain undervalued. To help keep the focus on companies with strong results that did not beat expectations through accounting gimmicks or one-time factors, we also screened for revenue beats of 5% or higher. We filtered those results for stocks with moats, a Morningstar Rating of 4 or 5 stars, and a fair value discount of at least 15%.

Of the 888 US-listed stocks covered by Morningstar analysts, only five companies met the criteria. We’ve highlighted what our analysts had to say about their earnings.

5 undervalued stocks

Pfizer

  • Earnings Per Share: Gain of $1.06 versus the consensus estimate of $0.61
  • Revenue: $17.7 billion versus the consensus estimate of $14.9 billion
  • Morningstar Rating: 5 stars
  • Discount: 38%

“Pfizer reported stronger third-quarter results than we had anticipated, largely due to significantly higher sales of covid-19 treatment Paxlovid that also drove management to increase top- and bottom-line guidance for the full year. However, after updating our model for Paxlovid’s solid demand in 2024 (but also a likely dip in 2025 as certain sales won’t repeat), we’re not making any changes to our $42 fair value estimate for Pfizer. While the firm’s strong 14% operational sales growth for its non-covid product line is encouraging, we think Pfizer faces significant competition to existing drugs that is putting pressure on the pipeline to succeed.

“We still assign Pfizer a wide moat rating, despite a series of pipeline disappointments and the uncertain value around recent acquisitions, which pressure our long-term ROIC forecast. We’re particularly concerned about growth prospects for new RSV vaccine Abrysvo (market breadth and need for repeat dosing could be more limited than we thought) and competition to the firm’s established Prevnar-based pneumococcal vaccine business (which faces new competition from Merck MRK as well as impending competition from Vaxcyte) and breast cancer drug Ibrance. We think the market is overly bearish about Pfizer’s ability to right the ship, and we see shares as undervalued at recent prices.”

—Karen Andersen, director of equity research

Centene

  • Earnings Per Share: Gain of $1.62 versus the consensus estimate of $1.35
  • Revenue: $42.0 billion versus the consensus estimate of $37.9 billion
  • Morningstar Rating: 5 stars
  • Discount: 36%

“Centene exceeded expectations in the third quarter on strength in its relatively high-margin individual plans. In a departure from another major Medicaid insurer, Elevance ELV, Centene maintained its guidance for the full year. We are keeping our $92 fair value estimate intact and continue to view Centene shares as undervalued, even as they rallied on relief after this news.

“As the top Medicaid and individual exchange insurer, Centene continued to feel opposite effects in those two markets in the quarter. Its Medicaid membership declined 14% year over year after states resumed redetermination activities to assess each member’s qualifications in April 2023. As states have been pushing Medicaid members off those plans, Centene’s safety net to catch people needing coverage—the individual exchanges—continued to grow at a fast pace, including 22% year-over-year membership growth in the quarter. The individual plan strength helped offset the Medicaid decline on Centene’s bottom line. So, although Centene’s medical membership declined 7% year over year, its premium and service revenue grew 6%, and its adjusted earnings per share of $1.61 exceeded management’s $1.31-$1.41 goal given in September, despite surging medical utilization in the Medicaid population.”

—Julie Utterback, senior equity analyst

Kilroy Realty

  • Earnings Per Share: Gain of $0.44 versus the consensus estimate of $0.36
  • Revenue: $290 million versus the consensus estimate of $276 million
  • Morningstar Rating: 4 stars
  • Discount: 33%

“No-moat-rated Kilroy Realty’s third-quarter numbers had some encouraging signs of fundamentals being close to bottoming out as the firm reported funds from operations, or FFO, of $1.17 per share, which was around 4.5% higher on a year-over-year basis. The demand for office real estate in West Coast cities like Los Angeles and San Francisco has remained tepid due to city-specific factors and a slower recovery in physical office utilization rates for tech companies compared with other sectors. While Kilroy’s high-quality portfolio holds up significantly better than the overall market, the pressure on its portfolio remains intense. We think that the headline performance for Kilroy will remain under significant stress in the medium term, but the current valuation of the company implies an extremely pessimistic outlook for the long run that we think is unlikely. We are maintaining our $59 per share fair value estimate for Kilroy Realty as we incorporate third-quarter results.

“Same-store operating revenue grew by 1.9% and operating expenses increased by 3.0%, resulting in same-store net operating income growth of 1.5% in the third quarter. On a cash basis, same-store NOI increased by 2.7% on a year-over-year basis. The same-store portfolio occupancy rate grew by 60 basis points on a sequential basis and declined by 190 basis points on a year-over-year basis as it was reported at 84.3% in the third quarter. The company signed approximately 227,000 square feet of new and renewing leases in the third quarter with GAAP and cash rents increasing 26.0% and 7.1%, respectively, compared with the prior levels in the stabilized portfolio.”

—Suryansh Sharma, equity analyst

General Motors

  • Earnings Per Share: Gain of $2.96 versus the consensus estimate of $2.38
  • Revenue: $48.8 billion versus the consensus estimate of $44.7 billion
  • Morningstar Rating: 4 stars
  • Discount: 25%

“We maintain our GM fair value estimate of $77 after the firm reported strong third-quarter results and raised 2024 guidance. We continue to see GM’s stock as undervalued as the firm has a strong North American product lineup. It is buying back lots of its stock while keeping costs in line despite investing in electric and autonomous vehicles. Seeing the market finally reward GM’s earnings by sending the stock up nearly 10% on Oct. 22 was good. Adjusted diluted earnings per share of $2.96 beat the $2.43 LSEG consensus and increased 29.8% year over year. Adjusted automotive free cash flow rose 18.8% to $5.8 billion on 15.5% adjusted EBIT growth, less capital expenditure, and favorable working capital. Full-year adjusted automotive free cash flow guidance at the midpoint is up $2.5 billion from July to $13 billion. The free cash guidance increase is from pricing not falling as GM expected (it was a $1 billion tailwind for third-quarter profit), and some cost increases have been non-cash charges for 2024, such as a $700 million unfavorable warranty variance in the quarter to reserve for future repairs at higher parts and labor costs due to recent inflation.

“The third quarter’s $4.1 billion total company-adjusted EBIT will not repeat in the fourth quarter as management indicated various headwinds that could mean a sequential EBIT decline of as much as $1.5 billion. Refreshed full-size SUVs launching now means erratic production of these highly profitable models. GM pulled forward about $400 million of production into third quarter so dealers will have something to sell in that segment until fresher product arrives later in fourth quarter and 2025. The fourth quarter will also see about eight lost production days for holidays, hurricanes stopped some October production, EV mix will increase as GM needs to wholesale about 80,000 EVs to meet its 200,000 2024 unit target, and incentives will likely rise to be competitive for the holiday shopping season.”

—David Whiston, equity strategist

Hess

  • Earnings Per Share: Gain of $2.14 versus the consensus estimate of $1.79
  • Revenue: $3.2 billion versus the consensus estimate of $3.0 billion
  • Morningstar Rating: 4 stars
  • Discount: 19%

“After reassessing narrow-moat-rated Chevron CVX’s proposed acquisition of narrow-moat-rated Hess, we marginally reduce our fair value estimate to $178 from $180 previously. While we peg Chevron as having a roughly 60% chance of ultimately purchasing Hess, we now model a 90% probability that either Chevron or Exxon Mobil XOM will buy Hess at the agreed-upon purchase price (we previously modeled a 100% probability that Chevron would close Hess before our revised fresh take).

“Still, Hess remains materially undervalued, which we attribute to a combination of Chevron’s undervalued stock as well as market-related anxiety to the deal closing given arbitration between Chevron and Exxon. We’ve also marginally reduced our stand-alone fair value estimate for Hess by $1 to $152. The key takeaway here is that even in the unlikely event the deal doesn’t close, investors still enjoy both substantial downside protection and potential upside.

“Our lower stand-alone valuation impact is due to lower oil production than we had originally forecast. Exxon temporarily shut down two of its three production vessels to connect a new gas-to-shore-pipeline, which temporarily had an adverse sequential impact on Guyana oil production during the fourth quarter (oil production fell from 192,000 barrels a day in the second quarter to 170,000 barrels a day in the most recent third quarter). Nonetheless, we expect production should bounce back in the fourth quarter, and we continue to view Hess’ Guyana asset as an engine for rapid, low-cost production over the next few years.”

—Joshua Aguilar, director of equity research

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.