After experiencing significant losses in the last quarter, the markets are ready to move in the upward direction. Although they started the week with some red color, they will probably turn green soon. We are in the last quarter, which is known as the harvest season of equities. I am expecting the October momentum to continue for a while. Besides, the earnings season is one of the best times to be in the market to recoup your losses. During this period companies’ earnings performance is revealed to public. It is mostly the case that undervalued companies report blow-out earnings, pushing their stock prices to higher levels. Therefore, investing in undervalued stocks with strong earnings potentials could be highly profitable.
Here is a brief analysis of cheap companies reporting earnings on Tuesday. I have analyzed these stocks from a fundamental perspective, adding my FED+ valuations and O-Metrix scores where applicable:
Company | Q3 EPS Estimate | Q3 Revenue Estimate | Fair Value Range | O-Metrix Score |
Apple (AAPL) | $7.28 | $29.45 billion | $573 - $647 | 6.24 |
Intel (INTC) | $0.61 | $13.9 billion | $35.58 - $44.80 | 7.40 |
Juniper (JNPR) | $0.28 | $1.10 billion | $24.03 - $37.10 | 4.91 |
Unitedhealth Group (UNH) | $1.11 | $25.45 billion | $74.31 - $99.91 | 6.92 |
CSX Corporation (CSX) | $0.44 | $2.97 billion | $26.61 - $37.76 | 5.45 |
(Company data from Finviz/Morningstar. Earnings data from Earnings.com and Yahoo Finance. You can download FED+ Fair Value Estimator, here.)
Apple will report its earnings on Tuesday, after the market close. Consensus EPS estimate for the 3rd quarter is $7.28, which is $2.64 higher than the previous year. In 2010, the same period EPS was $4.64. Mean revenue estimate is $29.45 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 4.08 | 5.40 | 5.37 | 5.83 |
EPS Actual | 4.64 | 6.43 | 6.40 | 7.79 |
Difference | 0.56 | 1.03 | 1.03 | 1.96 |
Surprise % | 13.70% | 19.10% | 19.20% | 33.60% |
Apple is trading with a trailing P/E ratio of 16.7, and a lower forward P/E ratio of 12.77. Based on an annualized EPS growth estimate of 18.40%, the stock has a fair value range of $573.09 - $647.90. O-Metrix score of 6.24 is above the market average. Apple has been an outperformer since 20005. The analysts had consistently underestimated Apple in the last 4 quarters. The last quarter EPS of $7.79 was 33.60% higher than the mean estimates. I think Apple will again beat the analysts’ estimates, which will move the markets to higher levels.
Intel will release its earnings on Tuesday. Consensus EPS estimate for the 3rd quarter is $0.61, which is $0.09 higher than the previous year. In 2010, the same period EPS was $0.52. Mean revenue estimate is $13.90 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.50 | 0.53 | 0.46 | 0.51 |
EPS Actual | 0.52 | 0.59 | 0.56 | 0.54 |
Difference | 0.02 | 0.06 | 0.10 | 0.03 |
Surprise % | 4.00% | 11.30% | 21.70% | 5.90% |
Intel is trading with a low trailing P/E ratio of 10.78, and a lower forward P/E ratio of 9.59. Based on an annualized EPS growth estimate of 11.50%, the stock has a fair value range of $35.58 - $44.80. O-Metrix score of 7.40 is well above the market. Intel has been trading within $20 - $24 range since January, but I think the stock is about to break its upper resistance. Similar to Apple, the last quarter earnings were higher than the mean analyst estimates. Intel will probably report as analysts expect, but the stock is pretty cheap. Intel is a safe dividend pick for the next 5 years.
Juniper Networks will release its earnings on Tuesday, after market close. Consensus EPS estimate for the 3rd quarter is $0.28, which is $0.04 lower than the previous year. In 2010, the same period EPS was $0.32. Mean revenue estimate is $1.1 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.32 | 0.37 | 0.32 | 0.34 |
EPS Actual | 0.32 | 0.39 | 0.32 | 0.31 |
Difference | 0.00 | 0.02 | 0.00 | -0.03 |
Surprise % | 0.00% | 5.40% | 0.00% | -8.80% |
Juniper is trading with a trailing P/E ratio of 20.55, and forward P/E ratio of 14.28. Based on an annualized EPS growth estimate of 17.10%, the stock has a fair value range of $24.03 - $37.10. O-Metrix score of 4.91 is in line with the market average. Analysts have pretty bullish expectations on Juniper. The last quarter EPS estimate of $0.34 was 3 cents higher than the actual EPS. While I do not expect Juniper to replace Cisco (CSCO) anytime soon, the stock looks cheap at the current levels.
Unitedhealth Group will release its earnings on Tuesday, before market open. Consensus EPS estimate for the 3rd quarter is $1.11, which is $0.03 lower than the previous year. In 2010, the same period EPS was $1.14. Mean revenue estimate is $25.45 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.84 | 0.84 | 0.89 | 0.94 |
EPS Actual | 1.14 | 1.05 | 1.22 | 1.16 |
Difference | 0.30 | 0.21 | 0.33 | 0.22 |
Surprise % | 35.70% | 25.00% | 37.10% | 23.40% |
Unitedhealth Group’s earnings history was full of pleasant surprises in the last 4 quarters. The difference between the actual and estimated EPS suggests that analysts were pretty conservative in their estimates. The stock is trading with a trailing P/E ratio of 10.59, and forward P/E ratio of 9.9. Based on an annualized EPS growth estimate of 12.80%, my fair value range is $74.31 - $99.31. O-Metrix score of 6.92 is well above the market average.
CSX Corporation will release its earnings on Tuesday, after market close. Consensus EPS estimate for the 3rd quarter is $0.44, which is $0.08 higher than the previous year. In 2010, the same period EPS was $0.36. Mean revenue estimate is $2.97 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.35 | 0.37 | 0.35 | 0.44 |
EPS Actual | 0.36 | 0.38 | 0.35 | 0.46 |
Difference | 0.01 | 0.01 | 0.00 | 0.02 |
Surprise % | 2.90% | 2.70% | 0.00% | 4.50% |
Given CSX’s relatively stable revenues and profits, analysts were able to make almost perfect estimations on company’s earnings. As a railroad service provider, CSX is highly profitable with a gross margin of 65.26%, and a net profit margin of 15.42%. However, the stock was subject to a sell-off, and is trading at 22% below its 52-week high. It has a low P/E ratio of 13.59. Forward P/E ratio is 10.78. Based on 11% EPS growth estimate, CSX has a fair value range of $26.61 - $37.76. O-Metrix score of 5.45 is also above the market.
