Three Companies with Positive, Long-Term Potential

Earnings season rolls on. Despite still less-than-compelling economic readings, earnings reports have largely been good. With exactly half of the S&P 500 companies already having reported, we’ve seen 75 percent of them meet or beat expectations. Granted, many of these upbeat results stem from cost-cutting rather than strong top-line results, but we’ll take whatever we can get.

The earnings reported by some TCI portfolio holdings this week weren’t off the charts, but they left a positive long-term picture for these companies intact. Let’s take FPL Group (FPL), a member of both our Growth and Income portfolios. Before the market opened yesterday, FPL reported earnings and forward-looking guidance that underwhelmed investors. Excluding one time items, the U.S.’s largest producer of wind and solar power reported earnings per share of $1.38, four cents below consensus estimates.

The reasons for the miss were two-fold. First, the company’s Florida utility business was punished by the recession, as the state has been one of the hardest hit. Florida’s unemployment rate has reached 11 percent – its highest since records began in 1976. The company has expanded its wind farms and solar projects to compensate for lost Florida business, but earnings during the quarter were hurt by poor wind resources in Texas. The combination of the two caused the company to slightly lower its full-year 2009 guidance to $4.10 to $4.20 a share, while also bringing in next year’s estimates. The company is awaiting a rate increase in Florida that could lead to a revenue boost of $1 billion in 2010, but it must wait for a postponed vote from the Florida Public Service Commission that will now take place next year.

While the immediate outlook given by FPL wasn’t upbeat, the company’s long-term prospects still looks bright. Energy prices continue to creep up, and will create increasingly strong incentives on building out renewable sources. FPL, in addition to its tremendous wind and solar assets, is also the country’s third largest nuclear provider – another unregulated business helping to provide the company with long-term double digit earnings growth. Investors will not only get this growth, but dividends to boot – with shares now yielding 3.8 percent. The combination of the two makes the company attractive to income and conservative growth investors alike.

After the close of regular trading Tuesday, Growth portfolio member Visa (V) disclosed its numbers that indicated a strong quarter. Investors are cheering the results, as its shares reached a new 52-week high in yesterday’s trading.

Visa reported earnings per share of 74 cents, outpacing analysts’ expectations by 2 cents and representing a better than 20 percent improvement over the year-ago period. The company, which boasts the world’s largest payments network, was helped by dollar volume, which slid only 1 percent, versus 3 percent in the June quarter. On the conference call, the company noted that U.S. spending on its network actually grew 1 percent in September, and was 3 percent higher in the first 3 weeks of October – both positives for the economy at large. The company also reported strong results in debit card division, a business in which the company has a dominant, roughly 75 percent, market share. As credit card companies shrink credit lines and increase fees, more consumers are shifting to debit to buy their necessities, benefiting Visa.

The company does not take on consumer default risk, while it collects fees for the use of its far-reaching network. As credit remains tight for consumers, Visa’s network will continue to be in demand – both here and abroad.

Looking forward, the company expects revenue growth in the low teens, while margin improvements will help earnings per share grow by over 20 percent. The company, like us, sees shares attractive at current levels. To benefit, Visa announced a stock buyback program of $1 billion – another positive sign for its shareholders.

Meanwhile, shares of ConocoPhillips (COP) were down yesterday after the company beat consensus earnings estimates this morning. The company saw profit drop 71 percent from a year ago, but with earnings per share of $0.98 ex-items, it managed to outpace estimates by 4 cents. The company suffered a from precipitous year-over-year drop in prices for crude and natural gas. At the same time, Conoco was able to increase production by 2.5 percent during the quarter. For 2010, the company plans on reducing capital spending by 12 percent in 2010 in an effort to cut debt and boost returns.

Looking forward, ConocoPhillips is strongly positioned with an eye towards its oil reserves and tremendous natural gas assets. Shares yield over 4 percent, which will make the wait for the return of profits easier. And profits will return in a big way as energy demand will rise with the global economic recovery.

Comments

[longoil:]

Stephen,

Don't you find that COP is overextended in debt, a potential problem especially if NG prices remain low next year ?
COP's EPS is negative 16.38 per share.
Wouldn't one of the other majors (like XOM, CVX, BP, RDS, STO or TOT) by better investments since they have better control of their debt.

Oct 29 06:59 AM

[mbkelly75:]

FPL looks like a great stock if you just look at their dividend record which is terrific, however, their Price/Sales = 1.22 and their PEG is also high at 1.19. They are trending down right now and formed a Death Cross on 10/26 @53.38. I would wait to buy until they finish moving down and form a Golden Cross. The drop in price will give you a chance to lock in a higher dividend percentage and then you can ride them up instead of down.

Oct 29 09:54 AM

[tc1:]

>PEG is also high at 1.19....

FPL's PEG is naturally going to be rather high because they're primarily a utility and utilities are generally not "growth" stocks.

Oct 29 10:02 AM

[jerrydd:]

FPL for long investing is a great one. It's low price now means decent growth as the economy recovers. The rising price of electricity, bodes well for their RE investments.

They are getting the public to pay up front for their new nuke plants so a $10B boost in value right there on the backs of the customers thanks to our repub legislature , Governor. Same with the largest US solar PV plant just opened by Obama a couple days ago. They have a couple more and a CSP unit going in at almost no cost to them. Luckily I'm not in their area. Not good for customers but great for investors.

Progress is getting free nukes too on our west coast.

Fla is way down now but only going to go up from here for many yrs so now is the time to carefully invest as many real estate, other bargains here. A great time to buy a retirement home.

Oct 29 10:59 AM