Tuesday was a disastrous day for equities, which gave up all of their gains from Monday. Conglomerates performed the worst (-3.4%), followed by financials (-2.7%), and healthcare stocks (-2.1%). Amazon (AMZN) reported disappointing earnings report. While its sales expansion was impressive, the company reported a confusing guidance for the last quarter. Operating income is expected to be with a range of $200 million loss and $250 million gain.
It is mostly the case that undervalued companies report blow-out earnings, pushing their stock prices to higher levels. Investing in undervalued stocks with strong earnings potentials could be highly profitable. On the other hand, a minor deviation from expectations can cause a sharp sell-off for high-fliers. It is worth to state that Amazon was trading 14% lower after hours due to an earnings miss. Therefore, one needs to be careful when it comes to playing the earnings season.
Here is a brief analysis of 6 companies reporting earnings on Thursday. I have analyzed these stocks from a fundamental perspective, adding my FED+ valuations and O-Metrix scores where applicable:
Company | EPS Est. | Revenue Est. | Fair-Value | O-Metrix |
Altria (MO) | $0.56 | $4.44 billion | $25-$28 | 4.73 |
Dow Chemical (DOW) | $0.63 | $14.63 billion | $34-$51 | 4.96 |
Exxon Mobil (XOM) | $2.13 | $113.56 billion | $101-$132 | 4.21 |
International Paper (IP) | $0.80 | $6.78 billion | $36-$53 | 5.24 |
L-3 Communications (LLL) | $2.15 | $3.85 billion | $115-$180 | 6.18 |
Occidental Petroleum (OXY) | $1.47 | $5.70 billion | $127-$170 | 7.13 |
(Company data from Finviz/Morningstar. Earnings data from Earnings.com and Yahoo Finance. You can download my FED+ Fair Value Estimator here)
Altria will report its earnings on Thursday at 7:00 am. Consensus EPS estimate for the 3rd quarter is $0.56. In 2010, the same period EPS was $0.54. Mean revenue estimate is $4.44 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.52 | 0.44 | 0.44 | 0.53 |
EPS Actual | 0.54 | 0.44 | 0.44 | 0.53 |
Difference | 0.02 | 0.00 | 0.00 | 0.00 |
Surprise % | 3.80% | 0.00% | 0.00% | 0.00% |
Altria is trading with a trailing P/E ratio of 16.36, and a lower forward P/E ratio of 12.33. Based on an annualized EPS growth estimate of 7.5%, the stock has a fair value range of $25 - $28. Altria is a nifty dividend payer with a yield of 6.07%. Its O-Metrix score of 4.73 is in line with the market average.
Analysts are very good at estimating Altria’s earnings. I do not expect a surprise from the earnings transcript. Nevertheless, the stock is trading within its fair value range, which translates into an annualized return of 11% for the next 5 years. Stifel Nicolaus has a target price of $29.
Dow Chemical will report its earnings on Thursday, before market open. Consensus EPS estimate for the 3rd quarter is $0.63. In 2010, the same period EPS was $0.54. Mean revenue estimate is $14.63 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.41 | 0.35 | 0.67 | 0.81 |
EPS Actual | 0.54 | 0.47 | 0.82 | 0.85 |
Difference | 0.13 | 0.12 | 0.15 | 0.04 |
Surprise % | 31.70% | 34.30% | 22.40% | 4.90% |
Dow Chemical is trading with a trailing P/E ratio of 12.15, and a lower forward P/E ratio of 8.57. Based on an annualized EPS growth estimate of 6.5%, the stock has a fair value range of $34 - $51. The company offers a yield of 3.78%. Its O-Metrix score of 4.96 is in line with the market average.
The company was able to beat the analyst estimates with large margins in the last four quarters. The 2010 Q3 EPS was 31.70% higher than the consensus estimate. However, the stock has been going south for a while. The year-to-date return is -20.76%. A good earnings report can take the stock back to its fair-value range. UBS has buy rating with a target price of $38.
Exxon Mobil will report its earnings on Thursday, before market open. Consensus EPS estimate for the 3rd quarter is $2.13. In 2010, the same period EPS was $1.44. Mean revenue estimate is $113.56 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 1.39 | 1.63 | 2.07 | 2.33 |
EPS Actual | 1.44 | 1.85 | 2.14 | 2.18 |
Difference | 0.05 | 0.22 | 0.07 | -0.15 |
Surprise % | 3.60% | 13.50% | 3.40% | -6.40% |
Exxon Mobil is trading with a trailing P/E ratio of 10.44, and a lower forward P/E ratio of 9.43. Based on an annualized EPS growth estimate of 6%, the stock has a fair value range of $101 - $132. Its O-Metrix score of 4.21 is slightly below the market average.
XOM was able to report better than expected earnings in 3 of the last 4 quarters. As the world’s largest company by market cap, Exxon’s earnings report will be widely followed around the world. With a low beta of 0.53, Exxon offers a yield of 2.37%. UBS has a target price of $90.
International Paper Company will report its earnings on Thursday, before market open. Consensus EPS estimate for the 3rd quarter is $0.80. In 2010, the same period EPS was $0.91. Mean revenue estimate is $6.78 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 0.79 | 0.65 | 0.59 | 0.67 |
EPS Actual | 0.91 | 0.68 | 0.74 | 0.80 |
Difference | 0.12 | 0.03 | 0.15 | 0.13 |
Surprise % | 15.20% | 4.60% | 25.40% | 19.40% |
International Paper is trading with a trailing P/E ratio of 9.25, and a lower forward P/E ratio of 8.88. Based on an annualized EPS growth estimate of 5.5%, the stock has a fair value range of $36 - $53. It offers a yield of 4%. Its O-Metrix score of 5.24 is above the market average.
The company was able to beat analyst estimates in the last four quarters. Apparently, analysts have pretty conservative expectations. The stock is trading 19% below its 52-week high. Given International Paper’s exposure to rest of the world, this earnings report is also likely to beat the consensus estimates. Longbow has a buy rating with target price of $36.
L-3 Communications will report its earnings on Thursday, before market open. Consensus EPS estimate for the 3rd quarter is $2.15. In 2010, the same period EPS was $2.07. Mean revenue estimate is $3.85 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 2.02 | 2.31 | 1.78 | 2.11 |
EPS Actual | 2.07 | 2.37 | 1.85 | 2.26 |
Difference | 0.05 | 0.06 | 0.07 | 0.15 |
Surprise % | 2.50% | 2.60% | 3.90% | 7.10% |
L-3 is trading with a trailing P/E ratio of 8.04, and a lower forward P/E ratio of 7.69. Based on an annualized EPS growth estimate of 7.1%, the stock has a fair value range of $115 - $180. L-3 offers a yield of 2.62%. Its O-Metrix score of 6.18 is well-above the market average.
Most high-tech industrials are trading at a pretty high discount to their fair values, and L-3 is no exception. The company was able to outperform analyst estimations in the last 4 quarters. On the contrary, the stock lost almost 22% since August. It has almost 67% upside potential to reach the lower boundary of its fair-value range.
Occidental Petroleum will report also its earnings on Thursday before market open. Consensus EPS estimate for the 3rd quarter is $1.95. In 2010, the same period EPS was $1.47. Mean revenue estimate is $5.70 billion for the current quarter. Here is the recent earnings history:
Earnings History | Sep 10 | Dec 10 | Mar 11 | Jun 11 |
EPS Est | 1.35 | 1.54 | 1.80 | 2.16 |
EPS Actual | 1.47 | 1.58 | 1.96 | 2.23 |
Difference | 0.12 | 0.04 | 0.16 | 0.07 |
Surprise % | 8.90% | 2.60% | 8.90% | 3.20% |
Occidental is trading with a trailing P/E ratio of 12.29, and a lower forward P/E ratio of 10.4. Based on an annualized EPS growth estimate of 14%, the stock has a fair value range of $127 - $170. The company offers a yield of 2.16%. Its O-Metrix score of 7.13 is well-above the market average.
The stock is trading 27% below its 52-week high. The company is highly profitable with a gross margin of 70%, and a net margin of 25%. While there are inherent risks in investing in energy companies, Occidental is one of the best among its peers. An earnings surprise might take the stock back to its 52-week highs. Analysts mean target price of $112 imply significant upside potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
