How To Play The Earnings For These 2 Companies

Jul.24.13 | About: Harvest Natural (HNR)

Earnings reports often act as potent triggers for stocks, and thus it makes sense to keep an eye on stocks which have a history of outperforming street expectations or involve a turnaround. Harvest Natural Resources Inc (NYSE:HNR) and Zep Inc (NYSE:ZEP) are such stocks where quarterly results are awaited and stocks could make big moves.

Harvest Natural Resources is a petroleum exploration and production company with interests in Venezuela. Unlike most other companies of its size, Harvest Natural's primary source of income is its 40 percent stake in the Venezuelan joint venture Petrodelta SA. In the latest quarter, it reported a profit of $36 million, up from a loss of $1 million in the first quarter of 2012. This was made possible by bumper contribution from Petrodelta. Meanwhile, loss from its operations which primarily include exploration activities in Indonesia, Gabon, and China, reduced from $13.4 million last year to $5.6 million in the first quarter of 2013. This way, Harvest Natural's cash flow from continuing operations is negative, but it more than makes up with a continuing production boost in Venezuela.

Investors stand to benefit from increasing production in Venezuela while any oil discovery in Indonesia or Gabon would be bonus. The stock currently sells at 61 percent discount to its book value and has risen 18 percent over the last month. Investors, however, stand to get better entry points before the company announces its second quarter results in August.

Unlike Harvest Natural, where results will be announced next month, Zep Inc is slated to file its third quarter earnings next week. The company supplies cleaning and maintenance chemicals to commercial, industrial, institutional, and consumer customers. For the six months so far in the current financial year, the company has maintained traction in sales and earnings growth. While sales grew 5.3 percent to $321.4 million, profits registered 4.3 percent jump to $6.27 million. This is expected to continue in the coming quarters as seen from upbeat analyst expectations. However, slowing revenue growth in recent quarters, amid a high debt capital structure, can impede the stock's prospects. Although a debt equity ratio of 1.33 is not extremely high, increasing interest expenses are eating into the company's profits. During the February quarter, Zep paid $2.28 million in interest, marking a disproportionate 66 percent jump from previous year.

Given their individual strengths and weaknesses, it may be prudent for investors to look more favorably at Harvest Natural Resources while Zep management offers some insight how they plan to handle the debt pile.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.