5 Buys From the Market's New Blue Chips on the Block

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Includes: AAPL, CVS, CVX, GIS, GOOG
by: Investment Underground

By Roger Choudhury, Lead Editor

We searched for large-cap companies with expected robust growth in non-GAAP EPS in this fiscal as well as the next fiscal year. Here is what we found:

Apple (NASDAQ:AAPL): For the six months ended March 26, the company’s revenues increased by 76% to $51.41 B, and non-GAAP EPS came in at $12.83 (+83.28%), compared to the same period in FY 2010. Last week, Apple smashed the Q2 2011 analyst consensus by bringing in $6.40 in non-GAAP EPS and $24.7 B in revenues. The next earnings release is on July 20. For FY 2011, the Street expects AAPL will earn $24.60 per share, an increase of 62.31%, with revenues of $103.0 B, which would be an increase of 57.93%. Looking forward, for FY 2012, analysts forecast that Apple will earn $28.48 in non-GAAP EPS (+15.77%) accompanied by revenues of $124.1 B (+20.48%).

With that said, and considering the growth drivers of the iPhone and the iPad, fundamentally, we believe that Apple has a fair potential of trading at least 100 points higher a year from now. In Q2 2011, the company sold 18.65 million iPhones, which was a 113% unit growth over Q2 2010. The iPad number was disappointing at 4.69 million units, but this was mainly due to Apple’s inability to meet consumer demand with its existing manufacturing operations.

However, continuing to reap rewards from its original business, the figure for Macs rose by 28% to 3.76 million units. On May 3, Apple will unveil a new line of iMac computers, updating to second-generation Core i processors. The company also has made significant inroads into international markets with 59% of Q2 2011 revenues coming from outside the U.S. Despite anemic consumer spending in the U.S., people continue to flock to Apple stores and buy their products. Just imagine Apple’s results when more consumers are able to dedicate their funds to purchase a new iPod, iPhone, iMac or iPad. This is still a good buy opportunity.

CVS Caremark (NYSE:CVS): In 2010, revenues dipped by 2.35% to $96.413 B, and GAAP EPS also fell by 2.35% to $2.49. However, for 2011, analysts estimate CVS will earn $2.76 in non-GAAP EPS, an increase of 10.55%, with revenues of $107.8 B, which would be an increase of 11.85%. For 2012, the Street forecasts non-GAAP EPS to grow by 13.40% to $3.13 with revenues of $112.6 B (+4.45%). CVS first must produce growth-friendly results for Q1 2011, which are reported on May 5. The consensus is $0.55 in non-GAAP EPS (+0.07% over Q1 2010) with revenues of $25.9 B (+8.83% over Q1 2010). CVS will probably meet or exceed results as Medco Health Solutions (NYSE:MHS) met the consensus non-GAAP EPS and revenue figures.

CVS also completed the acquisition of the Medicare Part D business of Universal American (NYSE:UAM) on April 29. According to the company, this should be accretive with $0.08 to adjusted EPS. This should also make CVS a top provider of service in Medicare Part D. For the long run, the company should benefit from increased drug utilization from an aging population, as well as more generic drug offerings that directly drive margin growth. CVS competes with Rite Aid (RAD) and Walgreens (WAG), but there is enough space for CVS to capture the drug needs of the baby boomer generation.

Reuters Research Average has a price target of $38.75. We believe that by the end of 2012, it should reach at least $42, implying a forward 2012 P/E of only 13.4. Currently, P/E stands at 14.5, and it was in the upper teens from 2003 to 2007. A forward 2012 P/E of 15 is fitting with revenue growth in the mid-single digits and EPS growth in the low teens. This implies a $47 price target by the end of 2012. CVS trades below our fair value estimate, and we recommend CVS as a strong long-term buy. The dividend yield is 1.3%.

Chevron (NYSE:CVX) is up by 26.5% over the past six months. In 2010, the company grew revenues by 19.40% to $204.92 billion, and GAAP EPS surged by 80.92% to $9.48. The EBT margin also improved to 15.64% from 10.79%. The most recent earnings release was on April 29, with CVX beating analyst estimates of $3.01 in non-GAAP EPS with $3.09, or an increase of 30.93% over Q1 2010. However, revenues came in at $58.4 B, below the consensus $66.6 B, but this was an increase of 21.23% from Q1 2010. In 2011, analysts estimate CVX will earn $12.15 in non-GAAP EPS (+28.19%) with revenues of $267.3 B (+30.42%). In 2012, the consensus non-GAAP estimate is $12.90 (+6.17%) with revenues of $292.3 B (+9.35%).

The company added 240 million barrels of net oil-equivalent reserves in 2010. This equates to 24% of net oil-equivalent production for the year. The company also has a strong worldwide portfolio with consistent exploration success. In fact, the success rate is 47% over a 9 year period, and an added bonus of having 32% lower finding costs than BP (NYSE:BP), ExxonMobil (NYSE:XOM), Shell (NYSE:RDS.A), and ConocoPhillips (NYSE:COP). It is focused on developing and finding oil and gas in West Africa, the Gulf of Thailand, and Northwest Australia.

Worldwide net oil-equivalent production was 2.76 million barrels per day in Q1 2011, down from 2.78 million barrels per day in Q1 2010. In the U.S., net oil-equivalent production of 694,000 barrels per day in the first quarter 2011 was down 40,000 barrels per day, or about 5%, from Q1 2010. Internationally, net oil-equivalent production of 2.07 million barrels per day in Q1 2011 was up 17,000 barrels per day from a year ago. The increase included 73,000 barrels per day from higher production in Brazil, Nigeria, Thailand and Canada.

For the dividend buffs, CVX has a current yield of 2.8%. CVX trades below our fair value estimate, and given positive economic and company growth prospects, we recommend this for people looking for long-term growth. For you short-termers, we think CVX should get to $130 with a forward 2011 P/E of 10.7. We believe that CVX deserves a higher multiple than the current P/E of 10.1, using data from the trailing 12 months. Revenue growth of 30%+ merits a higher multiple, and that would also represent the largest revenue growth, since 2005 showed +27.62%. Burgeoning demand from emerging markets and improving demand from industrialized economies are the main thrust to revenue growth.

On a side note, we believe that the talk on eliminating subsidies for oil companies is merely political. It is only $4 B, after all. Chevron’s effective tax rate was 40% in 2010, 43% in 2009, and 44% in 2008.

General Mills (NYSE:GIS): For the nine months ended February 27, the company’s revenues increased by 1% to $11.24 B with a non-GAAP EPS of $1.96 (+3.15%), compared to 9M10. For the trailing 12 months, the EBT margin is 15.58%. For 2011, analysts estimate GIS will make $2.48 in non-GAAP EPS (+10.56%) with revenues of $14.9 B (+0.91%). The next earnings release is June 27. For the coming quarter, analysts project that GIS will earn $0.52 in non-GAAP EPS, an increase of 68.66% over Q4 2010, with revenues of $3.7 B, an increase of 2.53%. For 2012, the Street expects non-GAAP EPS to be $2.68 (+8.06%) with revenues of $15.5 B (+4.02%). The company also has a debt to equity ratio of 0.83.

FY 2011 has almost run its course and has produced rather tepid revenue figures with only 1.6% growth in Q3 2011 over Q3 2010. However, FY 2012 holds some promise with improving consumer demand in the U.S. and the international markets, especially in Asia-Pacific and Latin America, according to S&P. Despite rising commodity costs and inflation, the company should benefit from higher prices on its products.

We place a $41 price target, implying a forward 2011 P/E of 16.5. This is reasonable, given more optimism after meeting or beating analyst estimates, and the current P/E is 16.4, using data from the trailing 12 months. By the end of 2012, we expect GIS to be at $45.50, which utilizes a forward 2012 P/E of 17.0, which is similar to FY 2007’s results of 9.66% GAAP EPS growth and 6.89% revenue growth compared to estimated FY 2012’s 8.06% growth in non-GAAP EPS and 4.02% revenue growth. With a current yield of 2.9%, this is a buy for income investors and risk-averse investors.

Google (NASDAQ:GOOG) is the #1 brand in the world. It reported Q1 2011 results on April 15, when it reported that non-GAAP EPS came in at $8.08 (+19.52% over Q1 2010), meeting the consensus estimate. Revenues were $6.535 B (-3.54%), which was 3.32% over the consensus. In 2010, revenues jumped by 23.9% to $29.32 billion, net income went up by 30.4% to $8.5 billion, and GAAP EPS grew by 28.9% to $26.31. The EBT margin was fat with 36.82%. For 2011, analysts estimate GOOG will earn $33.68 in non-GAAP EPS (+28.01%) with revenues of $27.6 B (-5.71%). Projecting forward into 2012, the Street anticipates non-GAAP EPS to be $39.47 (+17.19%) with revenues of $33.0 B (+19.56%). 96% of the company’s revenues came from advertising in 2010, and 97% in 2008 and 2009.

An improving global economy, penetrating new markets, and expanding into other markets are all factors that provide robust and sustained growth in the online advertising revenues for Google. The company is also seeking to cast a wide net in the mobile Internet arena, which provides another driver of growth as the number of Internet-ready phones come into use. A catalyst pointed out by Credit Suisse is that non-GAAP EBIT margins as a percent of net revenues can stabilize at pre-recession levels of around 50% in 2012 and beyond. This provides an added source of EPS growth.

Using data from the trailing 12 months, P/E is currently 17.4. Given declining revenues in 2011, we believe that a forward P/E of 15.9 is fair. Consider, though, that the 2010 P/E was 22.6 with 28.9% growth in GAAP EPS and 23.9% growth in revenues. So, growth in the upper teens in both non-GAAP EPS and revenues should be rewarded with a P/E north of 17.5. Yet, the forward 2012 P/E is only 13.64. This is why we believe that Google should be a $700 stock by the end of 2012, implying a P/E of 17.7. GOOG is a buy at current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.