With a bullish start to 2012, some stocks are performing better than others. Chevron (CVX), Dominion (D) and Legg Mason (LM) are facing tough headwinds in the midst of a slowing recovering economy. Honeywell (HON) and Immunogen (IMGN) are showing strength by engaging in new projects. In the following article I will discuss these five stocks that are reacting to recently reported earnings, and how they are positioned heading into the coming quarters.
Chevron Corporation has moved down recently after the company reported earnings per share that were $0.28 less than analysts were expecting. Refining was one big problem. The company's U.S. refineries experienced a quarterly loss of $204 million, and international profits declined by 46.4%. Chevron also had a number of area-specific issues around the world. The company experienced everything from adverse weather in the Gulf of Mexico to hardware problems in both Thailand and the United Kingdom. Meanwhile, oil leaks and environmental damage plagued the company's reputation with both Brazil and Ecuador. Higher prices boosted the profits of the exploration and production divisions. However, shareholders will receive additional income from the stock's dividend yield of 3%, and it seems likely that Chevron will increase dividends later in the year. Increased demand for oil, which will continue the trend of higher prices, should also benefit this stock. Furthermore, Chevron has a number of exciting plays going on right now. As discussed here, the Gorgon Project in Australia figures to be highly lucrative as a source of natural gas. In fact, Chevron says there is over 40 trillion cubic feet of gas in the region, and the project should have an economic life of 40 years or more.
Dominion Resources, Inc.: After reporting disappointing fourth-quarter earnings, shares have fallen. Net income fell nearly $100 million from the same quarter last year, and revenue too decreased by a significant amount (>15%). Another statistic that Dominion reports, operating earnings, declined almost 9%, and it seems that an unusually warm winter may be the culprit. The company also had to take some one-time charges due to problems with its coal-powered stations. My advice for investors is to only buy this stock if you're going after the dividends. Granted, at a dividend yield of 4.1%, that alone is a pretty good reason to consider this stock. Despite the poor fourth quarter performance, Dominion is increasing dividends, and the company is making a variety of important investments to make sure those dividends can be kept up. Within the Virginia Power subsidiary, Dominion is updating its 500 kV loop, which is a crucial part of its electric transmission system. This will allow the company to meet new demand from customers such as data centers and improve overall reliability. The Dominion Energy subsidiary also has exciting projects on the way. I predict that natural gas production from the Marcellus and Utica Shale formations will be very lucrative, allowing for future dividend increases to take place.
Honeywell International Inc. reported better than expected adjusted earnings per share. The key word there is adjusted, though, because net income was actually negative due to one-time pension charges. Regardless, revenue did increase by 8% over the previous year's fourth quarter, and CEO Dave Cote was optimistic about the company's ability to improve margins. Mr. Cote wasn't so ready to predict strong near-term growth, but we think Honeywell is a valuable stock regardless. The stock's price to earnings, price/earnings to growth, and price to sales ratios are all reasonable compared to BorgWarner (BWA) and United Technologies (UTX). What really makes this stock special, though, is its dividends. The current yield is 2.60%, and I predict it won't be long before Honeywell increases dividends again. The Process Solutions division just won a huge contract to re-work the technology for Los Angeles' wastewater treatment system, and this has the potential to bring in serious earnings. Honeywell's Uniflex also figures to be lucrative. This technology helps refineries increase margins significantly, and I predict that it will become highly popular among oil companies around the world. Additionally, Honeywell is well positioned to take advantage of emerging markets, which currently account for 20% of the company's sales.
Legg Mason Inc. reported third quarter earnings that were down over 50% from last year. This asset management behemoth suffered due to clients making net cash outflows, and revenue in particular took a hit. That number was down 13% on a year-over-year basis, and fund fee income in particular was down 9%. Assets under management were down from this time last year, although that statistic was actually up 2% on a quarter-to-quarter basis due to market appreciation. Regardless, it's hard for me to justify recommending this stock. The dividend yield of 1.20% is nothing to write home about, and it seems unlikely that this stock will see significant capital appreciation anytime soon. Furthermore, Legg Mason has been reluctant to buy back shares. While the asset management industry as a whole isn't very attractive right now, Legg Mason isn't even cheap compared to its peers. Charles Schwab (SCHW) and BlackRock (BLK) both offer lower price/earnings to growth ratios. Those stocks also have better margins (Legg Mason's are 34.42% gross and 16.21% operating). Investors looking to make a play in financial services would be better off looking toward regional banks and well-run national banks.
Immunogen Inc. After delivering an impressive earnings report, this stock shot up. The company lost less than analysts were expecting, but more importantly, revenue was up over 80% compared to one year ago. That revenue number was nearly $2 million more than analysts were expecting. While ImmunoGen doesn't have its own products for the time being, the company has shown success with licensing its Targeted Antibody Payload technology. That essentially involves creating an antibody equipped with a cancer-killing agent, and this process is rather innovative. The antibody targets tumors, which is what makes it so effective. Immunogen has also been able to keep its operating expenses in check - those only went up $700,000 from Q4 2010. This stock could be interesting for an investor looking to make a speculative biotechnology play. Naturally, the company's future results will largely depend on how effective the Targeted Antibody Payload technology proves to be. For a price to sales ratio of 52.13, this stock seems reasonably priced considering how much room it has to grow. For investors looking for a safer bet, I would have to recommend Pfizer (PFE). That significantly more established company offers a 4.10% dividend yield, which can help retirees bring in some solid additional income.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.