When EPS Estimates Plummet: 2 'Buys,' 2 'Holds'

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 |  Includes: AEO, ALTR, FCX, MOS
by: Takeover Analyst

Below is a list of companies that have a fair amount of cash on hand but have experienced significant downward earnings revision. They cover a variety of industries: chemicals, mining, apparel retailing, and semiconductors. Of the four, Freeport (NYSE:FCX) is the most preferred with its "strong buy" rating. As investors become increasingly concerned about inflation following runaway spending, Freeport and other gold companies have macro trends working in their favor. End-market demand in technology is uncertain while unusually low consumer expenditures will curtail retail growth.

Mosaic (NYSE:MOS)

Mosaic is rated a "hold" and trades at a respective 10.9x and 11.1x past and forward earnings with a dividend yield of 0.4%. Cash per share stands at $8.53 - 15% of market value.

Consensus estimates for Mosaic's EPS forecast that it will grow by 10.2% to $4.85 in 2012 and then by 5.8% and 12.8% more in the following two years. Of the 16 revisions to estimates, 14 have gone down for a net change of -6.7%. Assuming a multiple of 10.5x and a conservative 2013 EPS of $5.07, the rough intrinsic value of the stock is $53.24, implying 6.6% downside.

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Freeport

Freeport is rated a "strong buy" and trades at a respective 9.7x and 8.4x past and forward earnings with a dividend yield of 2.2%. Cash per share stands at $5.09 - 11% of market value.

Consensus estimates for Freeport's EPS forecast that it will decline by 11.6% to $4.28 in 2012 and then grow by 28.3% and 3.5% in the following two years. Of the 17 revisions to estimates, 16 have gone down for a net change of -9.3%. Assuming a multiple of 11x and a conservative 2013 EPS of $5.37, the rough intrinsic value of the stock is $59.07, implying 28% upside.

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American Eagle (NYSE:AEO)

American Eagle is rated a "hold" and trades at a respective 15.1x and 13.5x past and forward earnings with a dividend yield of 3.1%. Cash per share stands at $2.48 - 17.3% of market value.

Consensus estimates for American Eagle's EPS forecast that it will decline by 15.7% to $0.86 in 2012 and then grow by 23.3% and 17.9% in the following two years. Of the 26 revisions to estimates, all have gone down for a net change of -8.1%. Modeling a CAGR of 7% for EPS over the next three years and then discounting backward by a WACC of 9% yields a fair value figure of $16.01, implying 11.8% upside.

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Altera (NASDAQ:ALTR)

Altera is rated a "buy" and trades at a respective 16.9x and 17.5x past and forward earnings with a dividend yield of 0.8%. Cash per share stands at $10.88 - 27.5% of market value.

Consensus estimates for Altera's EPS forecast that it will decline by 21.3% to $1.85 in 2012 and then grow by 22.2% and 20.4% in the following two years. Assuming a multiple of 19x and a conservative 2013 EPS of $2.19, the rough intrinsic value of the stock is $41.61, implying 5% upside.

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