Because it is earnings season, companies' stocks briefly trade on a higher than normal volume. This in turn induces volatility. If reports are better than expected, many investors are trying to buy. If earnings are below analyst expectations, many try to get out as fast as possible. While quarterly earnings are important, it is wise to look beyond just the bottom line. The following companies are ones that I believe are positioned well for the long-term, whether their most recent reports exceed or fall below analyst projections.
Capital One Financial (COF): Capital announced a 14.8% increase in its 2011 full year net income, rising to $3.1 billion from the prior year's earnings of $2.7 billion. Although the full year net income rose, Capital's fourth quarter earnings were below analyst expectations. Capital's fourth quarter earnings were $407 million compared to $813 million in the third quarter and $697 million in the fourth quarter of 2010.
Although this report was disappointing and resulted in a 6% decline in share price on Friday, the reasons behind the earnings decline were optimistic. One of the main reasons behind the decrease in net income was due to a subsequent increase in noninterest expense. The noninterest expense increase was due to a seasonal increase in marketing expenses and an increase in operating expenses which included about $90 million in litigation expenses and $40 million in asset write downs while the company rationalized some previously overstated property. Because one is cyclical and the other is extraordinary, the increased expenses should be of no major concern.
Another reason behind the fourth quarter expense increase was the pending purchase of ING Direct from ING Groep (ING) which will ultimately entail a $9 billion price tag and is expected to be completed this quarter. In addition to the more optimistic take on these expenses, Capital has been performing quite well over the past year. In fact, aside from this most recent report, quarterly earnings have been increasing. In the second quarter, net income rose by 49.8% and in the first quarter, it rose by 59.7%. While net income has been increasing, revenue has been falling. It fell 2.3% in the second quarter from the prior year and 8.3% in the first quarter.
Wells Fargo & Company (WFC): Wells Fargo announced record quarterly earnings this quarter of $4.1 billion. These record results were compiled from an increase in loans, deposits, net interest margin, net interest income, and noninterest income. 2011 full year earnings amounted to $15.9 billion. Commercial loan assets had the highest increase. The value of loans outstanding at the end of 2010 was close to $150 billion while they are currently standing at about $170 billion.
On top of that, Wells Fargo saw growth in areas that are generally dominated by competitors like Goldman Sachs (GS) and Morgan Stanley (MS), such as investment banking and capital markets. While others are announcing layoffs, Wells Fargo is hiring traders and dealmakers to further expand its relative market share.
Wells Fargo is increasingly subjecting itself to the mortgage industry. News on fourth quarter earnings shows that, from the third quarter, mortgage banking income increased close to 30% to $2.36 billion. Additionally, mortgage origination revenues grew by 59% while that of JPMorgan Chase & Co. (JPM) declined by 12% over the same period. Recently, along with four other majors, Wells Fargo agreed to pay a portion of the up to $25 billion on a settlement arising from deceptive foreclosure practices that ultimately forced many Americans out of their homes. This settlement was designed to make it easier for those at risk of foreclosure to restructure their loans.
The $25 billion will be portioned out to those who were negatively affected by this malpractice. This will result in a decrease in potential profitability from mortgage loan interest. However, it could have been a lot worse for these banks. Many Americans believe that the small portion of the settlement they receive does not come close to a fair compensation. In return for the up to $25 billion, these banks will no longer have the threat of potential lawsuits arising from these questionable foreclosures.
Boston Scientific (BSX): Boston plans on launching 24 new products this year to boost profits. Company plans include growing its drug-eluted stent (DES) business in China and India. Also, during the first quarter of 2011, it completed several acquisitions to support its growth initiatives in several areas. In addition to acquisitions, Boston recently divested its Neurovascular business by selling it to Stryker Corporation (SYK) for a purchase price of $1.5 billion in cash. Upon closing, they received $1.45 billion and will receive $50 million based on transfer or separation of certain manufacturing facilities which will likely be completed over the next 24 months. Ultimately, Boston plans on increasing profits through cost cutting and product launches.
Boson recently received good news about the Johnson and Johnson (JNJ) suit. Johnson and Johnson alleged that Boston Scientific infringed on patents. U.S. District Court filed in favor of Boston, claiming that the suit was "invalid." However, there is one major lawsuit involving a recent acquisition that should be of some concern. Boston recently purchased Guidant Corp. for $27.5 billion in 2006. Two assessments indicate that Boston could owe the IRS more than $1.1 billion in back taxes accrued by Guidant Corp. prior to the acquisition. Boston is currently challenging this ruling and will pay nothing until the courts rule on the cases.
Chevron Corporation (CVX): Chevron has been doing well recently, earnings wise. Earnings have been on the upside and analysts predict that come their fourth quarter earnings report, the proliferating pattern will continue. In the third quarter of 2011, profits almost twice as large as profits from the same quarter of the previous year. Third quarter profits rose from $3.77 billion to $7.83 billion. This estimate exceeded analyst expectations. During the same period, revenue rose from $49.72 billion to $64.43 billion. Notably, the profit margin increased from 7.6% to 12.2% during this period as well. Analysts are expecting revenue to rise even further to $71.08 billion this quarter. In fact, the revenue and the net income have subsequently risen for the past three quarters. Analysts expect this pattern to continue.
Ultimately, assuming the economy rebounds and oil prices rally, Chevron will likely continue to grow its quarterly revenue. The company is managed well. It is embarking in aggressive cost reduction initiatives. If Chevron avoids unprofitable markets and increases its margins, its profitability will also rise over the next several quarters. Chevrons future largely depends on management effectiveness, the price of its commodities and the global economy. The stock price is positively correlated with these factors. Those with a perceptive macroeconomic view will be successful with this stock.
E.I. du Pont de Nemours (DD): DuPont recorded net income of $373 million, similar to the same quarter one year prior of $376 million. Despite this slight drop, sales were up 14% during these same periods. This was largely due to a rise in prices. By segment, performance materials rose by 1%, agricultural rose 8%, and performance chemical sales rose 12% because of the increase in prices that effectively offset raw material costs. This increase in prices caused in part the 10% drop in volume. Despite this likely correlation, management stated that this was a cyclicality and that it was the fact that buyers tend to decrease inventories rather than stock up at the end of the year. However, if we are seeing an increase in revenue and a decreased bottom line, rising costs or lacking efficiency are likely culprits.
DuPont has also seen large gains from its investment in titanium oxide which is used in paint manufacturing. Additionally, DuPont bought out the company Danisco which boosted its agricultural and nutritional segments that show diversification. It also plans on investing $500 million to expand its titanium dioxide capacity. Although there are questions of efficiency and current profitability, DuPont proves to be a diversified company with management that is planning for the future.