6 Cheap Companies Reporting Earnings This Week

Includes: BA, C, DAL, FCX, LLY, LRCX
by: NakedValue

As great as it is to find an undervalued stock, it is even better to look for undervalued stocks with upcoming catalysts. Over the last few years, rising inter-asset correlations have trained investors to follow the macro market factors. But stock specific factors are still the best catalysts. Earnings announcements are some of the best potential catalysts and as such, investors should go into an earnings release prepared to act on extreme news.

Last week, we listed Supervalu Inc (NYSE:SVU) in our article, "7 Cheap Companies Report Earnings Next Week". We wrote,

The company is worth a closer investigation. Based on the current distress, the company could be leveraged for upside on any better than expected news.

Following their better than expected earnings, the company jumped 17%.

With that in mind, here are 6 cheap stocks set to report earnings this week.

Forward P/E: 8.36
Price/Sales: 2.10
Price/Book: 0.79

Citigroup is an enticing stock. While its reputation suffered because of the financial crisis, it still remains one of the country's largest and most important banks. In addition, the bank has attracted a significant investor base of respected investors, including: Paulson & Co, Pershing Square, Appaloosa Management and "Glenview Capital".

Based on JPMorgan (NYSE:JPM) and Bank America's 9BAC) recent earnings, Citigroup's upcoming earnings will likely offer a similar picture. On the plus side, there should be strong growth in deposit balances, lower credit costs and higher asset management and investment banking fees. But there should also be weak results from trading, high legacy mortgage related expenses and litigation uncertainty.

While the bank clearly has its share of flaws and headwinds, it is hard for investors to ignore the low valuation on one of America's most important institutions.

As we explained in, "Bank Dividends Ready to Roar: How to Take Full Advantage," TARP bank warrants may be the best way for bullish investors, who want to leverage their views of higher dividend payments, to invest in Citigroup. While Citigroup has been clear that they will not be able to increase dividends along with others, like JP Morgan and Wells Fargo (NYSE:WFC), if an investor is bullish of Citigroup, they should also be optimistic about Citigroup's ability to pay dividends over the course of the warrants' lifetimes.

Forward P/E: 8.65
Price/Sales: 2.24
ROA (ttm): 11.45%

The international copper and gold mining giant has benefited from record prices. From 2009 to 2010, the company's revenues grew 26%, surpassing their strong year in 2008 when mined products last traded near these levels.

The company is not without risks. The main risk being to the commodity prices which have risen to record prices shortly after they plummeted during the financial crisis. Any return to intermediate levels would significantly harm profitability. As an illustration of the disproportionate sensitivity to spot pricing, Freeport's earnings nearly doubled between 2009 and 2010 because their realized copper sales price jumped 38% and the realized gold sales price jumped 28%.

In addition, FCX has mining operations throughout the world. Some of these locations in South America, Africa and Indonesia may be susceptible to political and social instability. Such instability would also affect profitability. In 2010, only a quarter of the corporation's copper production and nearly zero percent of gold production came from North America.

While Freeport is statistically cheap, investors should view this stock as a leveraged bet on the prices of copper, gold and molybdenum.

Forward P/E: 4.56
Price/Sales: 0.25
ROA (ttm): 3.83%

The major US based airline merged with Northwest Airlines in 2008 and now operates more than 4,000 flights a day.

Energy prices are a headwind for Delta and the rest of the transportation industry. In 2010, the company consumed 3.82 billion gallons of fuel at $2.33/gallon. This represented 30% of operating expense. This was actually an improvement from 2008 when fuel represented 38% of operating expenses.

The story here is pricing power. In April, Delta Airlines raised their round-trip ticket prices $10 on some domestic routes because of rising fuel costs. This was the NINTH price increase this year with six persisting because airlines raised rates industry wide. To us, this represents an attractive and uncharacteristic industry pricing power that may be the result of the industry's large scale consolidation.

We are intrigued by this stock. We have historically disliked airlines because of their commodity like pricing power but the current valuations and the post consolidation pricing power and industry capacity discipline makes large airlines like Delta an interesting opportunity even if energy prices remain elevated.

Forward P/E: 9.71
Price/Sales: 1.71
ROA (ttm): 14.48%

The US based drug maker has seven drugs with $1 billion or more of worldwide revenues. Only one of these seven face expiration of their patent exclusivity this year. Unfortunately for investors, this drug happens to be the company's top selling Zyprexa which accounts for 22% of total revenues. The second highest grossing drug, Cymbalta loses its exclusivity in 2013.

While the expiring drug exclusivities provide significant headwinds going forward, Eli Lilly is a premiere brand among drug makers and investors may look at current valuations and additional stock price weakness as an opportunity. With 65 potential new drugs in human testing and a larger group of projects in preclinical development, Eli Lilly has the potential surprise investors on the upside.

Forward P/E: 9.36
Price/Sales: 2.10
PEG Ratio: 0.88
ROA (ttm): 19.09%

The semiconductor processing equipment supplier has at various times been mentioned as an acquisition target but more recently it has struggled because of fears of slowing Asian demand as well component supply issues related to the natural disaster in Japan. Asian customers represent 75% of the company's sales with 15% of sales coming from Japan. In addition, there is significant customer concentration risk with 50% of 2010 sales from their top three customers (Samsung, Taiwan Semiconductor and Toshiba).

We listed Lam Research in our article, "8 Companies That Could be the Next Big Technology Buyout". Following Texas Instrument's acquisition of National Semiconductor at a nearly 80% premium, we think investors should take a closer look at the semiconductor space. While the Texas Instruments attraction was somewhat specific to National Semiconductor, the huge premium and the low market valuations still imply that there is significant upside potential to names like Lam Research. While investors wait for catalysts, they can rest easier knowing that they own a cheap stock and David Tepper's Appaloosa Management owns this stock.

Forward P/E: 13.85
Price/Sales: 0.83
ROA (ttm): 4.50%

The company designs, develops and manufactures aircrafts, satellites and defense equipment for both commercial and military purposes. Like other defense sector names, the company has been under over the last year as investors expect the defense sector to face headwinds as budget deficits force legislators to cut more than expected from an industry that has grown significantly over recent years as a result of spending related to the Iraq and Afghanistan conflicts.

While Boeing is sure to face some headwinds, the company is not a typical defense industry name. In fact, Boeing derives around 43% of their revenues from government spending. Many of the other competitors in this space like Lockheed Martin, Northrop Grumman and Raytheon earn more than 80% of their revenues from government spending. Boeing will likely be a story stock during the next year as politicians talk tough about cutting spending, but Boeing's stock price should find some support from its commercial business.

Unless Boeing's stock price declines significantly, we think investors are better off staying on the sidelines. One of the best opportunities might be if correlations between defense industry names increase and Boeing trades along with the other more highly exposed defense companies. If this is the case, Boeing may become a good relative value opportunity.

Disclosure: I own C shares. I may also initiate a long position in DAL, LRCX over the next 72 hours.