Every earnings season has its share of beats and misses, and exaggerated market reactions to these quarterly reports often present opportunities for investors. We have identified three companies below for which we feel earnings letdowns have made for attractive buys.
$57.43; 52Wk Range: $33.72-62.00
After reporting earnings of 40 cents a share, beating the Street's 39 cents/share estimate, Starbucks shares fell over 5%. The hang-up was Europe, where sales fell 1%, signaling that the high-end coffee retailer is not immune to the economic troubles of the region. Otherwise, global sales were strong, particularly in the China/Asia Pacific region where sales were up an impressive 18%.
Given the conditions in Europe and high commodity costs, Starbucks guided EPS down slightly for FY 2012, but the bottom line is that Starbucks remains an attractive global growth story. Its stock was due for a correction after gaining more than 30% YTD, but Thursday's results were actually quite solid in many regards.
Investors have Chinese expansion to look forward to, as well as further entry into the K-cup business that should continue to eat away at competitor Green Mountain Coffee's (GMCR) market share. Any pullback in share price post-earnings presents an opportunity for investors who had been waiting on the sidelines for an attractive entry point to accumulate.
Bank of America (BAC)
$8.24; 52Wk Range: $4.92-12.71
Chart from Yahoo Finance.
Bank of America also beat estimates by a wide margin - 31 cents versus an estimate of 11 cents - but everything wasn't perfect for BofA in the first quarter of 2012. One-time items and DVA (debt valuation adjustment) seemingly helped sugarcoat the report. Nonetheless, the business is improving, and we think the stock has substantial upside. We expressed our view in more detail in "Why Bank of America's Earnings Are Good Enough."
BofA has fallen mightily from its 2007 highs, and after a recovery to $10 in 2012, we feel the recent pullback that was given fuel by an earnings report that failed to over-achieve presents a buying opportunity for investors, particularly those looking to position themselves for an eventual recovery in financials.
Considering that Bank of America is up nearly 50% YTD, a halt to the momentum was justifiable, but we see further gains from current post-pullback levels. So, too, have other banks seen similar post-earnings corrections, including Citigroup (C), Wells Fargo (WFC) and JPMorgan (JPM), but we view these as temporary declines.
$134.44; 52Wk Range: $100.95-165.96
Chart from Yahoo Finance.
We recently detailed our bullish view on Baidu post-earnings in the article "Baidu: Buy The Pullback." Baidu beat EPS estimates, but under-delivered slightly on revenue and forward guidance, and the market punished it with a severe pullback. While we acknowledge the high-flying days may be over for Baidu, that doesn't mean the stock should be avoided.
Slowing growth is the natural progression of a maturing company, and we see in Baidu an industry leader well positioned to profit from sustained internet growth in China. The Chinese internet user base continues to grow in size and financial strength, and Baidu has invested significantly in research and development, bringing a multi-faceted and innovative approach to the space, in order to ensure it continues to capitalize on that growth.
In particular, Baidu has strengthened its mobile search business and now reports that 20% of all search traffic is mobile. This investment in R&D should also help ensure that Baidu can fend off competition from prospective competitors in China, including from the likes of Youku.com (YOKU) and Tudou (TUDO) in online video and ultimately Google (GOOG) in search.
The post-earnings correction has taken the share price to multiples we haven't seen in some time, so this may be the time to pull the trigger on Baidu. Despite an extraordinary run-up in price over the last several years, we see limited downside from the current levels, given Baidu's dominant position in Chinese search and rock-solid financials.
Disclosure: I am long BAC.