Seeking Alpha
Profile| Send Message| ()  

Following is a brief analysis and trading strategy on five companies which reported their earnings last week:

Accenture (ACN) is a leading global consulting, technology and outsourcing company. The company’s consulting group offers a full spectrum of services, including management consulting, software development and implementation, and systems integration. The Outsourcing group offers IT and BPO solutions. Geographically, Net Revenue contribution is distributed as: Americas – 44%, EMEA – 45%, Asia-Pacific-12%. Accenture reported its earnings on June 23.

Recommendation: Buy

From a sector perspective, demand remains strong. A number of key trends like globalization, regulatory changes, demand for greater operational efficiency and new technologies, like mobile, analytics and cloud computing, are driving and providing support to ACN’s business.

Enterprise spending is beginning to pick up, representing an enormous backlog of work that needs to be done – which would translate into a definite upside for Accenture. The company has the most diversified business in the IT space in terms of revenues regional, vertical and services mix. Also note that it wins much of its business through sole sourced contracts, indicating the strength of its C level relationships.

On the labor front, Accenture is looking at hiring 66000 more employees in FY12, increasing its headcount by approx. 12%. Accenture also acquired Symbian Professional Services unit responsible for Symbian OS customer engineering and customer support from Nokia (NOK). The ensuing contract with Nokia is estimated to generate $200mn annually for Accenture. Consensus estimates EPS of $3.27 for current year (Aug 2011) and an EPS of $3.68 for next year (Aug 2012).

Adobe Systems (ADBE) is a leading web and mobile content company. The company has been highly successful in delivering proprietary, client resident software to both professional and consumer content creators. Adobe’s diverse product offering provide solutions for multiple media types, including print, web and dynamic, and across multiple operating systems and devices.

Recommendation: Neutral

Adobe continues to build on its strong product innovation fundamentals. It launched the CS5.5 in May, extending the strong revenue run-rate of the CS5 suite. The release also includes a subscription edition, which is expected to grow its revenue base by tapping the low end consumers. Other products like the beta release of Social Analytics product in March is drawing a positive response from consumers, given the interest in measuring the Social Media impact.

Adobe is also scheduled to release the beta of Adobe Edge in July, an animation tool, expected to become an important product for the future.From a business segment perspective, Enterprise and Omniture business continue to outperform, with enterprise business being driven by broader platform deals, higher ASPs and unit shipments.

On the negative end, ADBE carries a risk of low recurring revenue, which is 20% vs. 60% for peers. Its flagship products, Creative Suite and Acrobat, contributing to 80% of its overall revenues, have no post sale maintenance and generate low consulting work for the company. Revenue from its Flash product is forecasted to taper off as the product itself is expected to be overtaken completely by HTML 5.5 in a couple of years.

Bed, Bath & Beyond Inc. (BBBY), is a speciality retailer that sells a wide assortment of merchandise with focus on domestic and home furnishings. Domestics include bedding, bath products, kitchen linens and other textiles. The home furnishings category includes basic house wares, hardware for kitchen and tabletop, small electrics, and consumables. It operates 984 Bed Bath & Beyond stores, 66 Christmas Tree stores, 47 buybuy BABY stores and 45 Harmon stores. Bed Bath and Beyond reported its earnings on June 22.

Recommendation: Buy

From a cash perspective, BBBY ended 1Q2011 debt free and approx. $1.8 bn. in cash and short term investments. The management continues to execute on share buybacks as a means to return capital to shareholders. The company has maintained its high gross margins and increased it to 40.6% in 1Q2011.

It has also been able to overcome an increase in inventory acquisition costs and a mix shift to lower margin products by reducing markdowns. The company’s strong merchandising focus, appealing product line up and attractive price points will drive the comp growth. At the risk end, cotton prices are expected to increase in 2H11 which would affect raw material. Consensus estimate EPS at $3.56 for ‘Feb12 and $4.08 for ‘Feb13.

ConAgra Foods Inc. (CAG), headquartered in Omaha, Nebraska, is a leading US packaged food manufacturer, with annual sales of over $12 billion. The company operates in two segments; Consumer Foods and Commercial Foods. Geographically, ConAgra generates approx. 90% of its sales in the US. ConAgra reported its earnings on June 23.

Recommendation: Neutral

Commodity inflation hit ConAgra in FY11, with the company being unable to increase its prices proportionately or timely. Gross margins were directly hit as a result of this, decreasing both for 1Q2011 as well as for the year. Also, due to its commodity oriented portfolio, it will have a tougher time vs. its peers to pass the prices to the consumer.

Growth in Consumer Foods, its core business, remains a challenge. However, Commercial Foods grew strongly in 1Q2011, giving a boost to the company’s earnings, and increasing its operating margin to 10.4%. The company continues to pursue its hostile takeover bid for Ralcorp, which, if executed, is expected to bring synergies and increase EPS of ConAgra. As of now, it is a wait and watch strategy for the stock, till compelling reasons for an upside are observed.

Carnival Corporation (CCL), based in Miami, Florida, is the world’s largest cruise line trading as a DLC structure in both the US and UK. The combined group operates a fleet of 100 ships among 11 cruise brands. It has a leading position in North America, UK, Germany, Italy, France, Spain, Brazil, Argentina and Australia. In 2009, the company generated $13.2 bn. in revenue and $2.2 bn. in operating income. Carnival Corporation reported its earnings on June 21.

Recommendation: Buy

Carnival is well positioned as a global leader in a consolidated industry with high barriers to entry and strong growth prospects. CCL has geographic diversity, a strong balance sheet, and strong cash flows. Carnival follows an effective marketing policy of demographically segmenting the market with its multiple brands.

With a 45% market share position in Europe, CCL’s policies give it a further scope for international expansion. From an Industry perspective, the shipping industry is expected to have significant pricing power as supply will fall considerably in 2012 and 2013. More developed global industry outsourcing would give a further impetus to the industry.

Carnival did face the headwinds of soaring fuel costs and redeployment of ships due to geopolitical disturbances in the Middle East and Africa, and due to the earthquake in Japan, which dented the otherwise strong 2Q2011. However, Carnival adjusted for rising fuel costs by cutting operating costs where possible. Going forward, it is also expected to consider hedging for fuel costs, which it has not done till now. According to consensus estimates, price target for the stock is $45.77.

Source: How to Trade 5 Key Companies Post-Earnings: Part 1