10 Stocks With the Largest Fair Value Estimate Increases After Q2 Earnings

Amid a solid second-quarter earnings season, in which the US Market Index saw its highest quarterly earnings growth rate in over two years, Morningstar analysts have been bumping up their fair value estimates of various stocks.

The names with the largest fair value increases were telecom services company Lumen Technologies LUMN, with a 233% jump, and semiconductor manufacturer KLA KLAC, which was up 26%.

Across the 874 US-listed stocks covered by Morningstar, there was a 0.72% average increase in fair value estimates for the 2024 second-quarter earnings season, up slightly from last quarter’s 0.64%.

Among the stocks we scanned for changes, 6% saw increases of 10% or more. Over the past 10 years, 8% of the group had average quarterly fair value estimate increases of 10% or more.

The technology and healthcare sectors saw the highest rate of increases. Roughly 11.0% of tech companies had a fair value increase of at least 10.0%, and the average increase across the sector was 0.4%. Among healthcare companies, 10.0% had fair value increases of at least 10.0%, and the average increase was 0.2%. The sector with the largest average increase was communication services, at 2.8%.

Here are the stocks with the largest percentage increases in their fair value estimates:

• Lumen Technologies LUMN: $5.00 from $1.50
• KLA KLAC: $670 from $530
• EVgo EVGO: $2.50 from $2.00
• Tenet Healthcare THC: $128 from $104
• Lam Research LRCX: $830 from $680
• Evercore EVR: $215 from $177
• Southwest Airlines LUV: $23 from $19
• Spirit AeroSystems SPR: $37.25 from $31.00
• Tyler Technologies TYL: $600 from $500
• TechnipFMC FTI: $25 from $21

Here’s more of what Morningstar analysts had to say about each stock.

Lumen Technologies

• Fair Value Estimate: $5.00
• Fair Value Increase: 233%
• Morningstar Uncertainty Rating: Very High
• Economic Moat: None

Lumen had the largest fair value increase, going to $5.00 from $1.50. “Lumen’s second quarter was consistent with recent trends, with sales continuing to decline at a mid-single-digit rate organically and margins remaining depressed,” says Morningstar senior equity analyst Matthew Dolgin. “However, the firm’s recent announcement that it will receive $5 billion to build private networks to help advance hyperscalers’ artificial intelligence needs, including a recently announced deal with Microsoft MSFT, has reduced the liquidity risk that we believe has hampered the stock. We are reducing our Morningstar Uncertainty Rating to Very High from Extreme, and we’re slightly lowering the discount rate we use for Lumen’s valuation to reflect the lower risk.”

“The reduction in our discount rate, along with operating benefits we expect from the recent deals, results in our fair value estimate rising to $5.00 from $1.50,” Dolgin adds. “We expect the stock to remain very volatile as equity continues to make up a small portion of Lumen’s total enterprise value. The 200%-plus rise in our fair value estimate for the stock corresponds with only a 15% increase in enterprise value. We could see significantly more upside to the stock if Lumen extends its run of recent deals, but slight missteps could cause an equally dramatic decline, all while the enterprise value remains somewhat stable.”

Lumen is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Take a deeper dive into Dolgin’s outlook for Lumen.

KLA

• Fair Value Estimate: $670.00
• Fair Value Increase: 26%
• Morningstar Uncertainty Rating: High
• Economic Moat: Wide

KLA had the second-largest jump, going to $670 from $530, due to increased short-term growth assumptions. “We expect a chip market upcycle to drive strong short-term growth, with some additional upside from artificial intelligence chip development,” says Morningstar equity analyst William Kerwin. “We now expect double-digit growth for KLA in both fiscal 2025 and fiscal 2026, with growth tapering to a midcycle level of around 7% thereafter. Longer-term, we continue to expect cyclicality in KLA’s results in the semiconductor market. In our view, shares have traded predominantly on rosy short-term expectations and have ignored longer-term cyclicality. We continue to see KLA as a high-quality dominant force in process control chip equipment but see its valuation as challenging even after raising our assumptions.”

KLA is trading at a 22% premium to its new fair value estimate and has a Morningstar Rating of 2 stars.

Read Kerwin’s full take on KLA here.

EVgo

• Fair Value Estimate: $2.50
• Fair Value Increase: 25%
• Morningstar Uncertainty Rating: Very High
• Economic Moat: None

Electric vehicle charging provider EVgo saw its fair value bumped to $2.50 from $2.00, due to increased confidence in expanding margins as charging revenue scales in coming years. “That said, we still view shares as overvalued,” says Morningstar equity analyst Brett Castelli. “We question the long-term differentiation in EV charging site ownership, hence our no-moat rating.”

“EVgo saw another quarter of record revenue, with a 32% year-over-year increase to $67 million,” Castelli adds. “Network throughput increased to 66 GWh, representing a 146% year-on-year increase. Higher throughput is the driving source of revenue growth, and it continues to improve with faster charging times and rising stall count. Beyond financial results, funding runway remains a key topic for the second half of 2024. The firm ended the second quarter of 2024 with $163 million in cash, down slightly from last quarter’s $176 million. This should provide a runway into 2025 before additional funding is required. We see potential from a combination of project financing and the US Department of Energy Loan Program.”

Evgo is trading at a 50% premium to its new fair value estimate and has a Morningstar Rating of 2 stars.

The rest of Castelli’s take on EVgo can be found here.

Tenet Healthcare

• Fair Value Estimate: $128.00
• Fair Value Increase: 23%
• Morningstar Uncertainty Rating: High
• Economic Moat: None

Medical care facility operator Tenet Healthcare saw its fair value rise to $128 from $104, following an increased near-term outlook based on robust medical utilization trends and expanded higher-acuity offerings. “This quarter, Tenet recorded a positive net operating revenue growth of 0.4%, even after divesting 11 hospitals over the past year,” says Morningstar senior equity analyst Julie Utterback.

“In the ambulatory surgery centers (ASCs) segment, net operating revenue jumped 21% to $1.141 billion, driven by both revenue per case growth and new facilities. Specifically, same-facility joint replacement cases increased by 23%, highlighting Tenet’s progress in expanding capacity. In the hospital segment, we saw a similar trend of increased acuity with inpatient admissions growing 5.2% year-over-year, surpassing adjusted admissions (inpatient plus outpatient) growth by 280 basis points. Also, the firm’s 14.9% operating margin was 300 basis points higher than a year ago, mainly due to improved contract labor costs and a favorable payer mix. We remain encouraged by the early positive results of Tenet’s portfolio transformation from hospitals to the more profitable ASCs, and investors may appreciate that management appears focused on making its ASCs the company’s main growth driver going forward.”

Tenet is trading at a 22% premium to its new fair value estimate and has a Morningstar Rating of 2 stars.

Read Utterback’s full take on Tenet Healthcare here.

Lam Research

• Fair Value Estimate: $830.00
• Fair Value Increase: 22%
• Morningstar Uncertainty Rating: High
• Economic Moat: Wide

Semiconductor manufacturer Lam saw its fair value increase to $830 from $680. “We believe Lam will benefit from strong semiconductor investment over the next three years,” says Kerwin. “After a significant downturn for memory equipment in calendar 2023, we expect a multiyear rebound for both NAND and DRAM spending, supported by high-bandwidth memory demand for artificial intelligence. We also expect strong medium-term growth for Lam’s nonmemory equipment, supported by rising chip complexity and expanding supply. Lam’s June quarter results and September quarter guidance were positive and aligned with our updated forecast. We see Lam as well-positioned in memory and logic chipmaking customers, allowing it to benefit from secular growth trends like AI.”

Lam is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Kerwin has more about Lam’s stock here.

Evercore

• Fair Value Estimate: $215.00
• Fair Value Increase: 21%
• Morningstar Uncertainty Rating: High
• Economic Moat: Narrow

Investment bank Evercore saw its fair value estimate raised to $215 from $177. “This corresponds to a forward price/adjusted earnings multiple of around 12 times and a forward enterprise value/EBITDA multiple of about 13 times,” says Morningstar director of equity research Michael Wong. “Of the net $38 increase in our fair value estimate, approximately $5 was from earnings since our previous valuation update, $18 is from increasing our forecast for senior managing director productivity by about 10%, $3 is from increasing our forecast for normalized operating margins by 0.5 percentage points, and the remaining $12 is from multiple adjustments, such as slightly higher senior managing director headcount growth, equities revenue growth, and investment management revenue growth.”

Evercore is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Take a deeper dive into Wong’s outlook for Evercore.

Southwest Airlines

• Fair Value Estimate: $23.00
• Fair Value Increase: 21%
• Morningstar Uncertainty Rating: High
• Economic Moat: None

Southwest Airlines saw its fair value estimate bumped up to $23 from $19. “On July 25, Southwest released second-quarter 2024 results that mostly resembled our forecasts, which we had recently updated to reflect how delivery delays from Boeing BA are crimping its growth plans while stiff price competition is damaging the airline’s profitability,” says Morningstar equity analyst Nicolas Owens. “We saw evidence of cost-cutting in the quarter as salaries, maintenance, and capital expenditures came in shy of our second-quarter estimates.”

Owens continues: “We raised our fair value estimate to begin to account for Southwest’s announced plan to assign seats and add more legroom in up to one-third of its cabins sometime in 2025. We continue to believe that Southwest faces pricing pressure both from below among ultra-low-price carriers and above by the Big Three and will continue to do so even with a new seating plan. We acknowledge that sharper segmentation could add to ancillary revenue, and we will update our forecasts when we have more particulars from the airline on the ratios of its new seat configurations and commercial terms. Until then, we are making a conservative estimate that incremental revenue from premium bookings will not be material and will be offset by some operating costs and ongoing price competition.”

Southwest is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Investors can find more of Owens’ take on Southwest here.

Spirit AeroSystems

• Fair Value Estimate: $37.25
• Fair Value Increase: 20%
• Morningstar Uncertainty Rating: Very High
• Economic Moat: None

Aerostructure manufacturer Spirit saw its fair value increase to $37.25 from $31.00, following a deal to be acquired by Boeing. $37.25 is the price agreed with Boeing for the firm to be sold. “Spirit shareholders will receive between 0.25 and 0.18 shares of Boeing per share of Spirit, depending on the market price of Boeing stock in the days leading up to the deal closing, expected sometime in mid-2025,” says Owens. “The deal represents a 20% premium to our erstwhile fair value estimate of $31, which is logical in that Boeing can achieve better economic returns on Spirit’s assets than Spirit could independently.”

Owens continues: “Spirit’s second-quarter results suffered from slowed 737 fuselage production, as Boeing has asserted quality checks of these plane bodies happen before they leave Spirit’s Wichita, Kansas, plant instead of after arriving in Washington at Boeing’s assembly facility. The difference is vital to returning Boeing’s 737 production to a standard process, and it also means Spirit cannot book revenue on as many fuselages until they are delivered. We are confident that by mid-2025, Spirit will cease to exist as an independent company and shareholders should take the Boeing offer of $37.25 per share in Boeing stock, which we view as moderately undervalued.”

Spirit is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Read Owens’ full take on Spirit here.

Tyler Technologies

• Fair Value Estimate: $600.00
• Fair Value Increase: 20%
• Morningstar Uncertainty Rating: Medium
• Economic Moat: Wide

Software company Tyler saw its fair value bumped to $600 from $500. “The company continues to hit milestones, such as closing the first of its two proprietary data centers in the quarter, and delivering on its cloud evolution, where positive trends, such as public safety moving to the cloud and conversions of on-premises customers to the cloud, are accelerating,” says Morningstar senior equity analyst Dan Romanoff. “We continue to see federal stimulus funds as supporting the healthy environment. We also see consistent growth and margin expansion over time driven by the maturation of the cloud transition, from which we think Tyler, as the leader in local government software, should benefit. We also see continued success in upselling and cross-selling between legacy Tyler and NIC as an avenue for upside in the coming quarters.”

Tyler is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Romanoff has more about Tyler’s stock here.

TechnipFMC

• Fair Value Estimate: $25.00
• Fair Value Increase: 19%
• Morningstar Uncertainty Rating: Very High
• Economic Moat: None

Offshore oilfield service provider Technip saw its fair value raised to $25 from $21. “While we hold the same fundamental outlook as we had previously and make no changes to our underlying assumptions, we’ve now updated our model following a time value of money calculation error,” says Morningstar director of equity research Joshua Aguilar. “In the near term, we continue to expect roughly $8.9 billion of full-year revenue, combined with consolidated adjusted EBITDA of $1.3 billion, which remains in line with guidance. More importantly, over the long term, we model a high-single-digit top-line compound annual growth rate combined with EBITDA margins in the mid-teens through the economic cycle. Our revised valuation now implies a 2025 enterprise value/EBITDA ratio of over 7 times.”

Technip is trading near its new fair value estimate and has a Morningstar Rating of 3 stars.

Read Aguilar’s full take on TechnipFMC here.