The long-term outlook from the Federal Reserve is beginning to improve. Interest rates remain high for now, but the central bank is still giving signs that it intends to cut back. While GDP growth has slowed from its post-pandemic highs, it has simply reverted toward historical norms. In short, after several years of economic cross-currents, we may finally be getting out of the rapids.
Watching the situation from Evercore ISI, analyst Julian Emanuel is willing to put some numbers on the positive sentiment: “The backdrop of slowing inflation, a Fed intent on cutting rates and steady growth have supported Goldilocks. We raise our year-end 2024 S&P 500 Price Target to 6,000 from 4,750… 7,000 is possible by end-2025. High multiples are supported by companies’ proven record of managing costs and maintaining/growing margins.”
Emanuel’s 6,000 target represents a year-end S&P 500 gain of ~9% from current levels. His colleagues among the Evercore stock analysts are running with that possibility, and picking two stocks to play that bounce. Let’s give them a closer look.
Ovintiv (OVV)
First up on our list is an energy firm, Ovintiv. The company is an exploration and production (E&P) outfit taking a multi-basin approach, and operating in multiple regions rather than focusing on just one. The company’s asset portfolio includes valuable positions in several of North America’s high-quality production basins. The company has stakes in the Permian Basin of Texas, the Anadarko Basin of Oklahoma, the Uinta Basin in Utah, and the Montney formation that straddles the Alberta-British Columbia border. Based on these holdings, Ovintiv has worked to develop high returns through hydrocarbon liquids extraction, with the goals of generating free cash flows and returning cash to shareholders.
As a company, Ovintiv was founded in 2020 via the restructuring of its Canadian precursor, Encana, but its roots in the energy industry stretch back more than a century. Ovintiv has been an innovator in horizontal drilling techniques and in unconventional extraction, allowing it to access oil and gas reserves in difficult-to-reach sands and shales.
The company’s strategy brought it solid production numbers in the first quarter of this year, with totals on every product meeting or beating the high end of guidance. Ovintiv averaged total production volumes of 547 Mboe/d in the quarter, a figure that included 211 Mbbls/d of oil and condensate, another 88 Mbbls/d of other natural gas liquids, and 1,648 MMcf/d of natural gas.
That said, on the financial side Ovintiv realized $2.35 billion at the top line, missing the forecast by $308 million. The company’s earnings, reported as an EPS of $1.24 by GAAP measures, was 14 cents below the forecast. The EPS figure was based on net earnings of $338 million. After capital expenditures, Ovintiv reported a free cash flow of $444 million in the quarter.
For Evercore analyst Stephen Richardson, Ovintiv presents a buying proposition, based on the company’s comparison to its peers and its strong production numbers. The analyst writes, “While relative performance to the sector over the past 6 months tells the story, the stock remains well positioned relative to SMID-cap peers in our view. Post the Permian acquisitions of 2023, management has delivered on what was a process of asset integration and seasoning a fierce decline curve. Initial OVV drilled and completed wells have outperformed (well understood by the market at this point). In a narrowing group of relevant names, looking for market opportunities to capture investor mindshare, we see OVV as continuing to outperform peers.”
Richardson goes on to rate these shares as Outperform (i.e. Buy) and sets a price target of $60 to indicate potential for 27% upside in the next 12 months. (To watch Richardson’s track record, click here)
Overall, OVV shares get a Moderate Buy consensus rating, based on 18 recent reviews that include 13 Buys and 5 Holds. The stock is selling for $47.21 and its $61.10 average target price implies a one-year gain of 29.5%. (See OVV stock forecast)
Confluent (CFLT)
The next stock we’ll look at is Confluent, a company dedicated to providing ‘data in motion,’ a vital tool for the digital business world. Confluent is a cloud-native company, built by the creators of Apache Kafka to work with that popular data processing platform. Confluent delivers a rich data experience, including comprehensive Kafka tutorials, and a fully managed data streaming service compatible with any cloud system, at any scale.
The Confluent Platform is available as a software download, enabling data storage, management, and access, with continuous streaming. The tool is managed by the user and integrates historical and current data streams into a single, centralized source.
Cloud computing has become nearly ubiquitous, and business cloud users form a strong customer base, which Confluent has leveraged to deliver solid financial results. The company’s revenues have been trending up for several years, and earnings turned positive in the second half of 2023.
In the most recent quarter, 1Q24, Confluent generated $217.2 million in total revenue, representing a 24.6% year-over-year gain and beating the forecast by $5.36 million. The company’s bottom line, the non-GAAP EPS, was a nickel per share, 3 cents better than had been expected.
Several important metrics drove the revenue and earnings beats. Subscriptions in Q1 were up 29% y/y, to $207 million, and the Confluent Cloud revenue of $107 million was up 45% year-over-year. And, Confluent reported having 1,260 customers with at least $100,000 in annual recurring revenue – a total that was up 17% from the prior year period, and bodes well going forward.
All of this caught the attention of Evercore analyst Chirag Ved, who says of Confluent, “We believe CFLT is the runaway market leader in the nascent $60bn+ (and growing) data streaming market, and we remain in the early innings of companies leveraging real-time data across their organizations as part of their data modernization and GenAI strategies. We believe the shift towards Confluent Cloud and the number of underappreciated growth levers (e.g., Flink, DSPs) will drive revenue reacceleration to 25%+ in FY25 alongside margin expansion, making CFLT a ‘Rule of 40+’ company by FY26.”
The analyst quantified his stance with an Outperform (i.e. Buy) rating, and he set a $35 price target that suggests the shares are primed for a 28% one-year appreciation. (To watch Ved’s track record, click here)
Confluent has 22 recent analyst reviews on file, with a 16 to 6 split between Buy and Hold giving it a Moderate Buy consensus rating. The shares are trading for $27.34, and their $35.14 average target price indicates that there is a 28.5% upside in store for the stock. (See CFLT stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
