Encouraged by the recent data on wage growth, slowing inflation, and stable economic growth, the Federal Reserve approved a quarter-percentage-point interest rate hike yesterday. Stocks have had a solid start to the year, with the S&P 500 posting its biggest monthly gain since October and the Nasdaq surging in its best January since 2001.
However, Fed Chair Jerome Powell said that the Fed would continue to hike rates for the foreseeable future and reiterated that the central bank would not consider rate cuts until the committee is "confident" that inflation is moving toward its 2% target. Further, FOMC's December minutes confirmed that not one participant thought cutting interest rates this year would be appropriate.
The Fed's continued actions to slow its interest rate hikes is a promising sign for those concerned about a recession this year. Christy Akulian, a senior strategist in BlackRock’s iShares Investment Strategy team, stated, “We think the ultimate way to get inflation back up to the end goal will almost necessarily require a recession, even if it’s a short and shallow one.”
Given this uncertain backdrop, investors could invest in quality stocks Cisco Systems, Inc. (CSCO), McDonald's Corporation (MCD), and US Foods Holding Corp. (USFD), given their robust fundamentals.
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.
On January 31, 2023, CSCO exhibited its new range of collaboration devices for Microsoft Teams and unveiled the new Cisco Table Microphone Pro, a digital and multi-directional table microphone for hybrid workspaces, along with audio interoperability advancements.
Such innovations are expected to advance hybrid workers’ experience by delivering more inclusivity and choice for meetings, while improving the manageability, configuration, and security required by IT.
In the same month, the company paid a quarterly dividend of $0.38 per common share. Its annual dividend of $1.52 yields 3.13% at the current price level. Its dividend payouts have increased at a 2.8% CAGR over the past three years and a 5.6% CAGR over the past five years. CSCO has a record of 11 years of consecutive dividend growth.
On November 29, 2022, CSCO launched new AppDynamics Cloud capabilities that allow organizations to achieve observability over cloud-native applications correlated to business context across the entire IT estate. The new capabilities would initially support cloud-native applications and digital services running on AWS as both companies continue to empower organizations on their journey to full-stack observability.
CSCO’s total revenue increased 5.7% year-over-year to $13.63 billion for the fiscal first quarter (ended October 29, 2022). The company’s operating income grew 3% year-over-year to $3.54 billion, while its non-GAAP net income came in at $3.55 billion, representing a 2.1% year-over-year increase. Also, its non-GAAP EPS came in at $0.86, up 4.9% year-over-year.
The consensus EPS estimate of $0.86 for the second quarter that ended on January 31, 2023, represents a 1.9% improvement year-over-year. The consensus revenue estimate of $13.42 billion for the last quarter indicates a 5.5% increase from the prior-year period. The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
It has gained 7.3% over the past six months to close the last trading session at $48.57.
CSCO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Quality and a B for Stability. Within the Technology - Communication/Networking industry, it is ranked #4 out of 49 stocks. Click here to see the other ratings of CSCO for Growth, Value, Momentum, and Sentiment.
McDonald's Corporation (MCD)
MCD operates and franchises McDonald's restaurants owned and operated by independent local business owners. Famous for its hamburgers and cheeseburgers, the company also offers chicken sandwiches and nuggets, wraps, fries, salads, desserts, soft serve cones, soft drinks, coffee, and other beverages.
On October 13, 2022, MCD announced an increase of 10% over the company’s previous quarterly dividend, reflecting confidence in the Accelerating the Arches growth strategy and a continued focus on driving long-term profitable growth for all stakeholders.
MCD’s four-year average dividend yield is 2.26%, and its forward annual dividend of $6.08 translates to a 2.28% yield on prevailing prices. Its dividends have grown at 6.2% and 8.1% CAGRs over the past three and five years, respectively. The company has increased its dividend for 21 consecutive years.
For the fourth quarter that ended December 31, 2022, MCD’s revenues amounted to $5.93 billion. The company’s operating income grew 7.7% from the year-ago value to $2.58 billion. Its non-GAAP net income rose 13.3% year-over-year to $1.90 billion, while non-GAAP EPS came in at $2.59, indicating a 16.1% year-over-year increase.
For the fiscal year 2023 (ending December 2023), MCD’s EPS is expected to increase 5.1% year-over-year to $10.61. Its revenue is expected to increase 5.3% year-over-year to $24.40 billion in the current year. MCD surpassed Street EPS estimates in each of the trailing four quarters.
Over the past nine months, the stock has gained 6.9% to close the last trading session at $266.27.
MCD’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. It has an A grade for Quality and a B for Stability and Sentiment.
Out of 45 stocks in the B-rated Restaurants industry, it is ranked #10. Click here to see additional ratings of MCD (Growth, Value, and Momentum).
US Foods Holding Corp. (USFD)
USFD markets and distributes fresh, frozen, and dry food and non-food products to restaurants, national restaurant chains, hospitals, hotels and motels, country clubs, government, educational, and military organizations, and retail locations in the United States.
On November 10, 2022, the company announced a share repurchase program under which it is authorized to repurchase up to $500 million of its outstanding common stock. This reflects the company’s strong cash flows and might boost shareholder returns.
On October 10, USFD announced the national rollout of MOXē (Making Operator Xperiences Easy), an all-in-one e-commerce application in the food service distribution industry. This new application focuses on providing enhanced speed, confidence, and control, making the operator experience easier.
For the third quarter that ended October 1, 2022, USFD’s net sales increased 13% year-over-year to $8.92 billion. Its adjusted gross profit rose 15.2% from the prior-year quarter to $1.47 billion.
The company’s adjusted EBITDA grew 20.6% year-over-year to $351 million, while its adjusted net income increased 26.9% year-over-year to $151 million. Also, its non-GAAP EPS increased 25% from its prior-year quarter to $0.60.
Analysts expect USFD’s EPS and revenue for the fiscal fourth quarter (ended December 31, 2022) to increase 40.4% and 11.5% year-over-year to $0.53 and $8.52 billion, respectively. The stock surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Shares of USFD have gained 30.3% over the past three months to close the last trading session at $38.58.
It is no surprise that USFD has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system. It has a B grade for Growth, Value, and Sentiment. Out of 82 stocks in the B-rated Food Makers industry, it is ranked #3.
Beyond what we’ve stated above, we’ve also rated USFD for Momentum, Stability, and Quality. Get all USFD ratings here.
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CSCO shares were trading at $49.03 per share on Thursday morning, up $0.46 (+0.95%). Year-to-date, CSCO has gained 3.74%, versus a 8.88% 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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