By Larry Gellar
I have identified five interesting stocks that recently reported earnings. While food companies Yum Brands (YUM) and Sysco (SYY) did well, Humana (HUM) and Loews (L) faced headwinds. Meanwhile, HCA's (HCA) profits beat expectations by a very large margin. Now that the fog of earnings has dissipated, each one of these companies offers a good entry point for investors on a valuation basis.
Yum Brands, Inc. reported net income of $356 million and revenue of $4.1 billion for the fourth quarter. Both of those numbers exceeded analyst expectations, in part due to high growth in China. In fact, same-store sales at Yum's China restaurants were up 21% year-over-year. Yum CEO David Novak is also pretty excited about future growth in China, and he said, "Today we have fewer than two restaurants per million people in the top 10 emerging markets, compared to nearly 60 restaurants per million people in the U.S." Meanwhile, Yum's most successful business in the U.S. this past quarter was Pizza Hut, which experienced a 6% increase in same-store revenue year-over-year. With other brands like Taco Bell and KFC holding their own as well, I think Yum represents an attractive play right now due to its growth basis. Its markets would not be saturated even with 30 times current sales assuming a constant GDP per capita. The stock has a higher price to earnings ratio than McDonald's (MCD), but this premium is probably worth it when thinking about Yum!'s future growth. Because Yum has a variety of lucrative brands, there's a lot more opportunity for growth because the company can put multiple franchises in one area. When McDonald's tries to do this, the stores often cannibalize each other's profits. McDonald's does offer a better dividend yield, however, at 2.8%. However, on an management execution basis Yum remains a better bet.
Humana reported net income of $199 million and revenue of $9.06 billion for the fourth quarter. While earnings per share were in line with analyst expectations, revenue was a bit disappointing. Humana's estimates for 2012 were also lower than what Wall Street was hoping for ($1.20 in earnings versus expectations of $1.21). On the other hand, many investors are excited about Humana's foothold in the Medicare industry. The company expects to add 190,000 new members to those types of plans, as baby boomers continue to get older and become eligible. For a price to sales ratio of 0.38, this stock looks attractive right now. In fact, investors can take advantage of the pullback that hit the stock due to lower full-year estimates from the company. I don't think that corporate guidance should be considered particularly concerning because Humana's management is probably just trying to be conservative. The strength of this company lies in its ability to benefit from Medicare Advantage, and I predict that future growth in that arena will lead to stock price appreciation. Humana is also making important strides to keep costs down. For instance, the Retail and Employer Group is seeing a lower operating cost ratio (down by 20 basis points), and I expect this trend to continue.
Sysco Corp. reported revenue of $10.24 billion and net income of $250.1 million for the fiscal second quarter. Both of those numbers beat analyst expectations after the proper adjustments are made, although food cost inflation is becoming noticeable. That statistic was 6.3% was compared to 4.5% in the same period last year. Regardless, Sysco remains a solid option for dividend investors who can snatch a dividend yield of 3.5% by buying this stock. Additionally, there are a number of reasons why Sysco may be able to increase its dividends going forward. The company experienced notable case volume growth (2.8% without acquisitions, 3.6% with acquisitions) and made some headway into gaining more market share. These trends suggest that Sysco is slowly but surely cornering the wholesale food market, which would give it more financial flexibility in the future. Sysco is also working on an interesting Business Transformation Project. Now in its second run in Oklahoma, it appears that the new type of facility could improve Sysco's performance in a wide variety of categories. I predict that this will continue to allow Sysco to grow its business in a cost-effective manner. This in turn would increase margins and leave Sysco with more cash to return to shareholders through dividends.
Loews Corporation is a conglomerate that owns Loews Hotels, Highmount Exploration and Production, 90% of CNA Financial Corp. (CNA), 50.4% of Diamond Offshore Drilling Inc. (DO), and 66% of Boardwalk Pipeline Partners LP (BWP). The company reported earnings per share of 67 cents and revenue of $3.48 billion. Considering analysts were expecting earnings per share of 90 cents, investors were obviously rather disappointed. The poor earnings were due to reduced investment income and increased reserves for insurance, and I find it hard to recommend this stock. With a price to earnings ratio of over 11, Loews is a surprisingly expensive stock despite the fact that many of its businesses remain exposed to difficulties in the U.S. economy. I wouldn't be surprised if CNA Financial continues to struggle, and Diamond Offshore experienced an important dip in earnings. Maintenance and mobilization issues caused that and should be seen as a red flag. Also, Diamond's Ocean Onyx project may not be as lucrative as management expects it to be due to the high costs involved with the new hardware. I must admit though, Boardwalk Pipeline has some exciting things on the horizon. Specifically, I expect work in the Eagle Ford Shale to help Loews generate cash going forward. The Marcellus gas gathering project could be useful as well if gas prices make a rebound soon.
HCA Holdings, Inc. reported net income of $1.94 billion, which translated to adjusted earnings per share of 94 cents. That was 18 cents higher than analysts were expecting, as the hospital behemoth was able to admit more patients than ever before. While cardiovascular surgery declined yet again, managed-care admissions are finally starting to improve as citizens throughout the U.S. gain back jobs (and therefore insurance). In fact, HCA stands to benefit from a number of ongoing trends. Demand for in-patient services is growing, and commercial insurance enrollment is stabilizing. HCA's ability to deliver on emergency services is also exciting. With the latest earnings, HCA's price to earnings ratio moves down to 5.10. That's a fraction of Tenet Healthcare's price to earnings ratio (14.07), and HCA already had the better margins for the new earnings report (42.77% gross and 13.11% operating). HCA is also paying shareholders a special dividend of $2 per share later in the month. That represents nearly 7% of the current stock price but shouldn't put too much of a strain on HCA, which has $444 million of cash at the moment. Management also discussed some interesting statistics here. For example, HCA's same-facility revenues were up 2.2%, and that number should improve now that HealthONE is being consolidated into the financial statements.