The following companies report earnings on Tuesday. Investors should follow the earnings news from these companies because they are not only interesting investment opportunities in their own rights, but each of these companies is unique compared to other companies in the industry and, as such, these stocks have the ability to affect industries and possibly the broad market.
Earnings related stock price moves are a result of more than just the actual results versus expectations. They are also the result of other factors including overall market sentiment and the stock's broad market sensitivity. The below listed stocks could all poised to pop if they announce strong earnings.
Apple Inc (AAPL)
The iPhone maker is one of the stock market's most important names. In addition to serving as the market's largest capitalization technology company, it is also an interesting retail sector play both domestically and abroad. As such, the company's earnings have major potential ripple effects throughout the stock market.
For a company that has been as dominant as Apple has been over the last several years, it is stunning that investors can purchase shares for a trailing P/E of 17.38, a forward P/E of 12.52 and a PEG ratio of 0.67. Once you exclude the significant excess liquidity on the company's balance sheet, the valuations become downright cheap. The enticing valuations and the strong fundamentals make Apple's stock primed for a rally.
In the quarter ending March 26, 2011, sales grew 82.7% year over year in large part because of growth in iPhone and iPad unit sales. These trends should remain strong and there are ample reasons for shareholders to be optimistic.
Bank of America Corp (BAC)
The global banking giant is one of the market's money center ("too big to fail") banks, but most probably agree that the company's huge mortgage exposure make it the least liked name out of the bunch. Still, investors would be wise to pay attention to the stock as an investment opportunity. The company has a forward P/E of 5.99 and a price/book ratio of 0.48. With $2.264 trillion in total assets, the bank could generate normalized earnings of $22.64 billion per year based on average return on assets of 1%. This implies that the company currently trades around 4.5x normalized earnings.
But there is much more to Bank of America than just the baseline bull thesis. In the medium term, BAC can be viewed as one of the most sensitive stocks to the continuing weakness in the housing market. In this sense, the bank's upcoming earnings could give investors some insight into a worst case scenario among the money center banks. Investors should pay close attention to global card services, consumer real estate services, global commercial banking and global banking & markets. Each of those segments had declining revenues during the last year. In addition, investors should watch carefully to see if expenses have risen at a faster rate than revenues. Higher than expected revenues hurt Citigroup (C). Any turnaround at BAC could yield some stock price upside as well as a reason to be bullish of other financials and mega banks.
Coca Cola Co (KO)
The global beverage maker has been dominant despite the financial crisis. Its popularity across its various brand portfolio has continued to increase along with its global reach. In 2010, revenues grew 13.3% year over year to $35.12 billion. The company is intriguing because trades at a reasonable valuation despite offering growth and a strong global brand. The stock sports a trailing P/E of 13.01 and a forward P/E of 15.78.
The company's earnings themselves could be a catalyst for a sharp move higher. This is especially the case against the backdrop of the current macro headlines. Investors are so thoroughly bewildered by the potential US debt default and Europe's curious debt drama that blue chip companies like KO could soon demand a premium market valuation as money managers look for new places to invest.
Chipotle Mexican Grill Inc (CMG)
The chain of Mexican fast-food restaurants has become one of the stock market's biggest story stocks. It is loved by momentum traders and generally loathed by fundamental investors that think the stock trades at rich valuations. Despite sitting on a 52 week high and trading with a trailing P/E of more than 50, the stock could still see upside if the growth trajectory persists or improves based on increased stores and margins. Of course, the opposite is also true. If the company fails to meet expectations, the rich valuation magnifies the potential downside from any miss.
Still, the fast growing company's 1,095 locations make it an increasingly important benchmark for other casual dining companies and as such, CMG's upcoming earnings could send signals for the rest of the industry, even more mature brands. An earnings disappointing could diminish near term investor enthusiasm for the entire industry group.
Peabody Energy Corp (BTU)
The Missouri based coal mining company's earnings are expected to grow sharply in the coming year. Trailing P/E is 19.84 and forward P/E is 10.28. As is the case with any company faced with these expectations, there is potential for significant upside and downside, but investor demand in the commodity space has generally been very positive and growing. With continued consolidation in the industry, Peabody looks like a strong stock as money flows towards coal and natural gas producers. Their huge relatively low cost coal reserves will continue to favor the company and expose it to upside leverage to coal prices.
Riverbed Technology (RVBD)
The IT company has generally traded in a tight price range for most of the year near its 52 week high but it could be poised for a strong move. The company's valuations are very rich and as such investors may be looking to either punish the company's inability to live up to expectations or reward it for growing into its promise. The company's trailing P/E is 137.4 and forward P/E is 33.53. Between 2008 and 2010, revenues grew 65.5% but they may have to grow faster to support valuations.
We think investors should be very cautious of this stock. While it clearly has upside potential, valuations give little margin of safety for purchases at these prices. Investors would be better off using the company has a benchmark for the industry.
Wells Fargo & Co (WFC)
Like Bank of America and other banks, WFC is priced for continued weakness. Trailing P/E is 11.19, forward P/E is 8.07 and price/book is 1.18. These valuations are below market average and are particularly noteworthy because the bank is considered the creme of the crop among the money center banks in large part because of their above average return on assets. These valuations are evidence of the negative sentiment and when the market paints stocks with broad strokes, there are usually good investment opportunities.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL, KO, BTU, WFC over the next 72 hours.
Additional disclosure: I own BAC shares
