Earnings on Deck - Three Companies That Look the Best

With a major week of earnings right around the corner, we thought it would be useful to our readers to provide an analysis of the companies set to report in the first half of next week. This analysis contains a breakdown of each company's default recommendation according to AFG's Buy/Sell criteria, a look at their valuation attractiveness, and a look at the direction their Economic Margin's are expected to head in the upcoming year. The three companies that look the most attractive based on these criteria are Pfizer (PFE), Advanced Micro Devices (AMD) and Boston Scientific (BSX).

A company's Economic Margin (EM) is a measurement of their true earnings above or below their cost of capital. EM also corrects distortions caused by accounting policies to give a more accurate assessment of a company's real value. It is important to understand the direction a company's EMs are heading because, by knowing this, one can get a complete assessment of how profitable a company can be in the future. The EM Framework addresses profitability, competition, growth and cost of capital. When factoring in each of these variables, investors can fully assess a company's value.

Below is the list of companies reporting earnings in the first half of the upcoming week along with a closer look at Boston Scientific:

click to enlarge

According to the chart below, BSX's intrinsic value is above its current stock price, which leads us to believe that Boston Scientific is undervalued right now.

According to the Wealth Creation chart below, BSX has shown a positive Economic Margin and is forecasted to improve that margin in the upcoming year.

Source: Www.EconomicMargin.com

AFG's Buy/Sell criteria factor in Economic Margin, Management Quality, and AFG's Valuation Metric. In order to determine Management Quality, AFG scores management on their growth decisions in accordance with the company’s ability to either create or destroy wealth. AFG's Valuation Metric measures a company's Percent to Target (the deviation between a stock's current trading price and its AFG current default target price). To derive the intrinsic value of a firm, AFG uses its proprietary Valuation Model.

AFG's default valuation is a good place to start because it is a simple metric that gives a more accurate outlook on a company's value while correcting distortions.

AFG’s Intrinsic Value Chart identifies how far a stock’s intrinsic value (target price assuming immediate decay) deviates from its trading range, which helps you recognize potentially mispriced stocks and pursue long and short opportunities.

• The blue bars represent the high and low trading range for a stock for 1 year.
• The red dotted line represents AFG’s historical Intrinsic Value through time.
• When the red line (Intrinsic Value) is above the blue bars (trading range), the company looks to be undervalued.
• When the red line (Intrinsic Value) is below the blue bars (trading range), the company looks to be overvalued.

AFG’s Intrinsic Value Chart also contains a company’s Value Score (ranked valuation attractiveness), Economic Margin Change (expected increase/decrease in economic profitability), and Accuracy score (how well AFG’s default valuation has tracked the company).

Wealth Creation Report displays a company’s Economic Margins (what a company earns above or below its cost of capital) through time as well as a projection of their expected future levels. The second graph shows how a company has grown their assets over time and also contains a projection of how they will grow their assets next year. AFG’s view on wealth creation starts by looking for profitable companies that are also growing their assets to make the most of that profitability.

Comments

[JamesApple:]

If even AAPL is a poor choice here I can't imagine the prospects of Rim.

Jul 16 11:40 PM

[PalinTologist:]

oh man. doesn't look good for aapl. this is bad news. wait a minute. as well respected as (your proctologist here) is, i'm gonna take a flyer on aapl. i mean, just for what-the-heck.

Jul 17 12:45 AM

[FreeRange:]

anal-ists! - they publish these ridiculous charts with no backup, and no clear picture of the total market landscape for a particular company. If they are so smart, tell us before it happened, why did the market crash? where were they in their predictions? how much money have they made if they are so smart and their methodology is so great? In regards to Apple, these clowns are dead wrong. They really should be able to look beyond their silly numbers...

Jul 17 01:23 AM

[TradingHelp...:]

Freerange, I empathise with some of your views but I do believe that it is useful to look at issues like instrinsic and economic value. It may not tell us where the stock will be next week or even in 3 months - market wide risk appetite is more key over short term horizons - but if you as an investor are keen to pay fair value at most for a stock then this excellent articel and others like it will help you.

If you just want to chase the market trend then of course there are other methods that would suit you better.


On Jul 17 01:23 AM FreeRange wrote:

> anal-ists! - they publish these ridiculous charts with no backup,
> and no clear picture of the total market landscape for a particular
> company. If they are so smart, tell us before it happened, why did
> the market crash? where were they in their predictions? how much
> money have they made if they are so smart and their methodology is
> so great? In regards to Apple, these clowns are dead wrong. They
> really should be able to look beyond their silly numbers...

Jul 17 03:47 AM

[Timeline St...:]

How about a disclosure on what stocks they own? I thought that was a requirement?

And, by the way, it's my opinion that they are silly about AAPL (my disclosure, long AAPL). AAPL will be one of the few real top- and bottom-line growth stories in this earnings season.

Jul 17 04:36 AM

[Timeline St...:]

Just like I said. AAPL closed at $147.52 on the day when this article was published. It's at about $164 today. That's a 10% gain in 3 weeks.

PFE and BSX are up much less than AAPL in this same period. AMD is down.

Back to the drawing board with your stock picking tools.

Jul 30 02:19 PM

[Value Expec...:]

Thank you for your feedback.

The Applied Finance Group is a global independent equity research firm with over 200 institutional firms as clients, which manage over $350 billion in equity assets. AFG is not an RIA so has no investments in any recommendation. We help clients with a long term investment discipline and not necessarily focused on day trading.

Here is a link in case anyone is interested in our long term performance portfolio around the world:
www.valueexpectations....

Lastly here is an article on Apple when we thought it was much more attractively priced at $91 not $147:
www.valueexpectations....

If you would like to learn how we could better help your investment process, visit: EconomicMargin.com


On Jul 30 02:19 PM Timeline Strategy Consulting wrote:

> Just like I said. AAPL closed at $147.52 on the day when this article
> was published. It's at about $164 today. That's a 10% gain in 3 weeks.
>
>
> PFE and BSX are up much less than AAPL in this same period. AMD is
> down.
>
> Back to the drawing board with your stock picking tools.

Jul 30 05:15 PM

[Value Expec...:]

Precisely


On Jul 17 03:47 AM TradingHelpDesk wrote:

> Freerange, I empathise with some of your views but I do believe that
> it is useful to look at issues like instrinsic and economic value.
> It may not tell us where the stock will be next week or even in 3
> months - market wide risk appetite is more key over short term horizons
> - but if you as an investor are keen to pay fair value at most for
> a stock then this excellent articel and others like it will help
> you.
>
> If you just want to chase the market trend then of course there are
> other methods that would suit you better.

Jul 30 05:20 PM