Among President-elect Donald Trump's proposed policy changes, a significant cut in corporate tax rates is expected. As Trump looks to reduce the federal corporate tax rate from 21% to 15%, increased profitability could result from the lighter tax burden. Although this policy, should it go into effect, would be a positive development for companies across sectors, the proposed tax cuts will significantly benefit cyclical stocks.
With this in mind, Morgan Stanley has prepared a list of “quality” cyclical stocks that it expects to benefit amid a lighter regulatory environment and a rebound of “animal spirits.” Among the firm's picks, the three stocks highlighted here have all garnered consensus “Strong Buy” ratings from the broader analyst community, are dividend-paying stocks, and also offer decent upside potential from current levels, based on Wall Street's forecasts. Let's have a closer look.
#1. Mastercard Stock
Founded in 1966 and based out of New York, Mastercard (MA) is a global payment technology company that facilitates electronic payment transactions. It provides services for credit, debit, and prepaid cards in more than 210 countries and territories. Mastercard’s extensive network enables transactions across various platforms, including physical stores, and online, and mobile payment systems.
Valued at a sizeable market cap of $472.7 billion, MA stock is up 22% on a YTD basis. Notably, the stock also offers a dividend yield of 0.51%. Moreover, the company has been raising dividends consecutively over the past 13 years, and with a modest payout ratio of 18.9%, there's scope for further growth.
Due to its dominant position in the global payments market, Mastercard has seen its revenues and earnings clocking impressive CAGRs of 11.51% and 13.61% over the past decade, respectively. Moreover, analysts are predicting forward revenue and earnings growth rates of 12.32% and 17.01%, respectively, for Mastercard, well above the corresponding sector medians of 5.48% and 3.42%.
This strong showing continued in the most recent quarter, as well, with both revenue and earnings surpassing estimates. In Q3, Mastercard reported revenues of $7.4 billion, up 14% from the previous year, aided by growth in the payment network and value-added services and solutions. Additionally, EPS moved higher by 15% to $3.89, above the consensus estimate of $3.74. Overall, this marked the 16th consecutive quarter that MA beat Wall Street's earnings estimates.
Net cash from operating activities increased to $9.9 billion from $7.9 billion in the year-ago period for the nine months ended Sept. 30. Overall, the company closed the quarter with a healthy cash balance of $11.1 billion, which was considerably higher than its short-term debt levels of $750 million.
Mastercard is focusing on emerging markets as its next major growth driver, and is strategically directing investments toward stronger emerging markets with higher cash generation potential and expanding its Value-Added Services (VAS) portfolio. The VAS portfolio represents a significant opportunity for Mastercard, offering a diverse range of products that complement its core payment systems. These solutions cater to the increasing global shift toward e-commerce and digital payments, providing an edge in a competitive marketplace.
VAS is also a key driver of margin expansion and revenue diversification. By introducing new service verticals, enhancing customer engagement, and supporting global reach, Mastercard has positioned itself to capture growth in emerging markets and adapt to new financial trends such as open banking and digital identity. Premium offerings in areas like cybersecurity, data analytics, and marketing further reduce the company's reliance on traditional payment processing, creating a more balanced and resilient revenue model.
Analysts have an average rating of “Strong Buy” for the stock, with a mean target price of $560.28. This denotes an upside potential of about 7.7% from current levels. Out of 38 analysts covering the stock, 31 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 5 have a “Hold” rating.
#2. Zoetis Stock
We continue our list of preferred cyclical stocks with Zoetis (ZTS). The company develops, manufactures, and markets veterinary vaccines, medicines, diagnostic products, and other animal health-related services. Its portfolio addresses the needs of both livestock and companion animals. Zoetis operates across more than 100 countries, offering over 300 product lines for diseases, immunization, and productivity enhancement in animals. Its market cap currently stands at $79.7 billion.
ZTS stock is down 10% on a YTD basis. The stock offers a dividend yield of 0.98%, backed by a conservative payout ratio of 29.01%.
Zoetis has displayed a consistent track record of increasing its revenues and earnings over the years. In the last 10 years, the company compounded its revenues by 6.85% annually, while the earnings CAGR was 15.74% over the same period.
For its latest results for the third quarter, Zoetis beat estimates on both revenue and earnings. Revenues for the quarter came in at $2.4 billion, up 11% from the previous year, with EPS of $1.58 representing an increase of 16.2%.
ZTS reported net cash from operating activities of $2 billion for the nine months ended Sept. 30, up from $1.5 billion in the prior year. Overall, the company exited the quarter with a cash balance of $1.7 billion, with no short-term debt on its books.
Zoetis enjoys a robust competitive moat built on its diverse product portfolio, strong patent protection, and steadfast R&D investment. The company capitalizes on rising global pet ownership and increased spending on pet care, which shields its revenue streams from broader economic volatility. Remarkably, despite its exclusive focus on animals, Zoetis ranks among the world’s top 20 pharmaceutical companies by market capitalization, underscoring its dominance in the pet-care sector.
To maintain its market leadership, Zoetis holds an impressive portfolio of over 5,000 patents, with more than 60% currently active. The company offers over 300 product lines spanning eight animal species and has driven innovation by advancing more than 2,000 products and lifecycle improvements in the past decade.
Analysts have an overall rating of “Strong Buy” for ZTS stock, with a mean target price of $220.54, which indicates an upside potential of about 24% from current levels. Out of 15 analysts covering the stock, 14 have a “Strong Buy” rating and 1 has a “Moderate Buy” rating.
#3. SLB Stock
We conclude our list with SLB (SLB), formerly Schlumberger, the world's largest oilfield services company. It provides technology, project management, and information solutions to the global energy industry. The company operates across four key segments, namely, Reservoir Characterization, Drilling, Production and the Cameron Group. The company currently commands a market cap of $62.2 billion.
SLB has experienced a 15% YTD correction in its stock price. The company's dividend yield of 2.50%, at a payout ratio of 32.09%, offers substantial flexibility for future dividend growth.
SLB's results for the latest quarter were impressive, as both revenue and earnings outpaced Street estimates. Revenues for the quarter were at $9.2 billion, growing 10% on a YoY basis, driven by a 12% rise in revenues from its core International markets to $7.4 billion. In the same period, EPS rose by 14% to $0.89. This marked the 16th consecutive quarterly earnings beat from SLB.
For the nine months ended Sept. 30, cash flow from operations and free cash flow increased to $4.2 billion and $2.4 billion from $3.6 billion and $1.8 billion, respectively, in the previous year. Overall, the company exited the quarter with a cash balance of $4.5 billion, and short-term debt levels of about $1 billion.
SLB is well-positioned for long-term revenue growth and margin improvement, fueled by tailwinds from offshore projects, geographic expansion, and operational enhancements. Its international division is poised to maintain strong momentum, driven by robust demand and ongoing capacity expansion, alongside continued investments in new gas and oilfield projects, especially in the Middle East and Asia. Offshore developments, particularly deepwater projects, are expected to generate significant activity, further contributing to consolidated revenue growth in 2024.
The company also stands to benefit from high-value contracts and partnerships, particularly through its OneSubsea joint venture. SLB's focus on production and recovery solutions, which help customers offset natural declines and maximize asset value, should continue to drive revenue growth in the coming years.
Overall, analysts are expecting the company to report forward revenue and earnings growth rates of 10.76% and 15.03%, compared to the energy sector medians of 1.44% and -6.09%, respectively.
Analysts rate SLB stock a “Strong Buy,” with a mean target price of $58.90, which denotes an upside potential of about 33.2% from current levels.
