For Value Investors: Previewing This Week's Earnings

by: Vince Martin

Another earnings season kicks off this week, with reports due from Apple (NASDAQ:AAPL), IBM (NYSE:IBM), Goldman Sachs (NYSE:GS), and General Electric (NYSE:GE), among many others. All told, 13 members of the 30-stock Dow Jones Industrial Average, and 96 members of the S&P 500, will report this week, according to MSN Money.

Below I've highlighted five stocks with strong fundamentals that will also report this week. These stocks should be of interest to value investors, and solid earnings reports this week could strengthen their case to be added to one's portfolio -- or to be removed from the watchlist.

1. Intel Corporation (NASDAQ:INTC)

I've been bullish on Intel -- and the semiconductor industry at large -- for a few months now; the stock offers a small amount of net cash, a P/E ratio below 11, and a safe, solid 3.6% dividend yield.

Tuesday's earnings (reported after the market close) could be key for the stock; after a 12% bull run over the past two weeks, INTC closed on Friday at $23.50, just 23 cents shy of its 52-week high reached back in May. The stock even shrugged off disappointing news, as PC shipments for the third quarter came in below expectations.

The Wall Street consensus is for earnings of 61 cents on revenue of $13.9 billion, a 25% increase from the year-ago quarter. Intel has beaten estimates for four consecutive quarters, so traders anticipating yet another beat can look to the options market. October calls, expiring on Friday, are asked at 33 cents for the 24 strike and 10 cents for the 25 strike, requiring a 3.5% and 6.8% gain for breakeven, respectively.

For investors with a longer-term horizon, if INTC can report a strong quarter, despite sector headwinds, the stock should break through the 52-week high and perhaps reclaim some status as a growth stock. As of now, its low valuation seems to have priced in a low growth rate. If Intel can convince the market otherwise, INTC shareholders should be rewarded.

2. Alaska Air Group (NYSE:ALK)

ALK reports before the bell on Thursday; analysts are expecting earnings of $3.29 per share, on revenue of $1.19 billion. ALK may have the ability to provide an suprise on the top line, as its fares this summer offered a "free" (free to the company, anyhow) discount. When a Congressional impasse caused the expiration of FAA taxes, Alaska Airlines was one of the few airlines to pass those savings directly to customers, rather than hiking fares in response.

ALK is one of the strongest picks in the airline industry, and has had a fantastic two-week run, gaining over 20%. Lower fuel costs and slowly increasing market sentiment have propelled the stock -- and the sector -- higher since early October.

Despite a strong track record of profitability, ALK trades at a P/E of just over 8 at Friday's close of $63.69, a level at which the stock seems undervalued. Its balance sheet is exceptionally strong, particularly compared to its competitors. Net debt is minimal, leaving only aircraft leases and pension contributions as major liabilities, both of which are easily covered with existing free cash flow. A strong earnings report Thursday could launch the stock back toward its 52-week (and all-time) high of $70.61, which has provided strong resistance twice this year.

3. Southwest Airlines (NYSE:LUV)

Fellow airline Southwest also reports before the bell on Thursday, with analysts expecting 13 cents per share on $4.23 billion in revenue.

I covered the bull case for Southwest in detail last month, only to see the stock slip further, touching a multi-year low of $7.15 (below its tangible book value), before its recent rebound with the rest of the industry. Even with a 20% bounce off that low, LUV looks undervalued at Friday's close of $8.61. At those levels, the market is valuing the company at just $1 billion above its tangible book value. This is a seemingly large discount, given Southwest's 38 consecutive years of profitability and its status as one of the 5 most admired companies in the world. And while its forward P/E of 19 is not impressive, its cash flow numbers -- Southwest has generated 30% of its market capitalization in free cash in the last 6 quarters -- better show the company's value.

Analysts and investors will be looking for continued strength (passenger numbers as of late have been solid) on the top line, and continued synergies from the acquisition of AirTran. With the volatility in the industry lately, the data from Alaska Air and Southwest's earnings may move not only their own stocks, but those of competitors such as Delta (NYSE:DAL), United Continental (NYSE:UAL), and AMR Corporation (AMR).

4. Datalink (NASDAQ:DTLK)

IT reseller Datalink has been one of the market's strongest performers in 2011, up nearly 100% year-to-date at Friday's close of $9.03. The stock has nearly overcome a steep drop in late September that appeared to be due to stock sales related to a secondary offering in March.

Investors should keep a close eye on Datalink's earnings, reported Wednesday after the bell, as the company has gapped up after each of its last three quarterly reports, blowing away estimates each time. For the third quarter, analysts are estimating earnings of 17 cents per share (non-GAAP) on nearly $88 million in revenue. Both figures are around the midpoint of Datalink's guidance for $85-90 million in sales and non-GAAP earnings of 15 to 19 cents per share.

Datalink certainly looks like a strong buy at current levels; backing at the company's $1.86/share in net cash, its P/E is just over 10 on a trailing basis. Meanwhile, year-over-year revenue growth has been 31% for the first half of 2011, despite comparing against a record 2010. The company's focus on data center solutions puts it at the center of the so-called "cloud computing" movement, as enterprises move from hard drive to virtual storage, creating significant growth opportunities going forward.

Another strong earnings report for DTLK could propel the stock back toward the $11 level it reached in August; anything less may disappoint investors accustomed to the company surpassing not only analyst expectations but its own guidance. Any weakness in the stock post-earnings may provide another buying opportunity for a classic GARP ("growth at a reasonable price") stock.

5. MKS Instruments (NASDAQ:MKSI)

The semiconductor supplier reports after the close on Wednesday, with analysts expecting non-GAAP earnings of 48 cents per share on sales of $190.6 million. The company guided sales of $180-210 million, with non-GAAP earnings between 40 and 60 cents per share, in conjunction with its second quarter earnings report.

With analyst consensus below the midpoint of MKSI's guidance, it's worth noting that MKSI pre-announced before second quarter earnings, warning that revenue would be toward the lower end of expectations. No such warning has been issued this quarter, perhaps indicating that the company expects to report toward the midpoint or high end of guidance. Earnings at those levels would strongly exceed analyst guidance and likely move the stock higher.

An earnings beat would be welcome news for MKSI shareholders, who have faced a difficult few months. The stock has paid the price for struggling sales, as the sequential drop from a record first quarter led the stock from an April high near $33/share down to $20, before a recent rebound to Friday's close of $24.78. With $9 per share in cash, and trailing earnings of $2.73 per share, MKSI looks strong undervalued on a fundamental basis. However, revenue and margin concerns amid a slowdown in the semiconductor industry may make the stock a value trap instead of a value play.

Third quarter earnings should give investors some clarity either way; any strength amidst industry headwinds should provide some confidence in the stock's future prospects. However, continued weakness on the top line may make MKSI a classic value trap, as its current enterprise value-to-earnings ratio below 6 will appear more justified amid sequential revenue and earnings declines.

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