When I analyze an investment, I like to pick companies that can grow in the future without requiring equity financing. If a company is only able to grow by issuing equity or increasing its debt levels, the larger number of shares oustanding or the higher leverage will cancel out any benefit that equityholders might realize from a company's growth. It is essential to find companies with high profit margins because they are better able to generate returns internally. In addition, companies that are able to maintain adequate cost controls over its fixed assets and working capital are able to manage its cash needs. I also like companies that growth both earnings and sales every quarter. Here is a list of stocks I think are ready to start an uptrend.
These companies are experiencing solid growth in both sales and earnings, beating recent analyst expectations. They also have high return on equity multiples and high pre tax profit margins. I like to invest in leading companies and I think this list represents these kind of companies.
Union Pacific (UNP)
I think Union Pacific shares could rally if shares break the key $118 resistance level with increased volume. In the last earnings report, Union Pacific reported Q1 earnings of $1.79 per share, $0.15 better than the Capital IQ Consensus Estimate of $1.64 while revenues rose a strong 13.9% year/year to $5.11 billion vs the $4.97 billion consensus.
"With a strong first quarter behind us, we're focused on the prospects that lie ahead. Although softer coal demand remains a challenge, the benefits of our diverse franchise should support continued opportunities in other markets, driving record financial results for the year. We're moving forward with our capital investment strategy, investing today to strengthen the network and build capacity that will drive continued improvement in customer service and increased shareholder returns in the future."
I like Union Pacific because management expects record fiscal year 2012 earnings on positive volume amid the slow recovery. Management explained in the last earnings call that coal demand remains weak but they expect it to recover in the near future. I think the market like the fact that UNP's management reaffirmed a 65-67% operating ratio by fiscal year 2015 even considering the coal headwind (assuming natural gas stays this low) as the company will continue to reallocate resources and drive efficiencies.
I think that rail investors should not be focused too narrowly on coal and consider a favourable agricultural products story in 2H for UNP. First, traffic comparisons should ease as the company get past the comparison with 1H11, which saw strong demand for export grain due to unfavorable growing conditions in foreign markets. Second, the USDA is projecting a record corn harvest this year, something that could keep a lid on pricing and stimulate demand from China. Hedge Fund guru John Burbank bought shares of UNP last quarter.
Alexion Pharmaceuticals (ALXN)
I think Alexion could rally if shares break the key $100 resistance level. Recently Barclays raised their target in ALXN to $104 from $84 following earnings. Barclays estimates peak revenues to be $974 million, assuming 70% penetration in severe pediatric HPP cases. On the call, management stated that the company is accelerating clinical development of asfotase on the strength of clinical data. Barclays expects the company to file marketing applications for pediatric HPP patients in late 2013 or early 2014 which should grow earnings.
Alexion reported strong earnings and revenues and upwardly revised FY12 guidance, while management expressed solid earnings execution going forward in 2012. While shares are up 25% YTD and investors question whether a "steady" aHUS launch will result in meaningful upside to Soliris estimates (one of ALXN's most potential drugs), I believe current physician education/marketing efforts will result in increased market penetration over time.
Another strong pharmaceutical company that I also recommend is SXC Health Solutions (SXCI) based on the strong earnings growth that the company is currently generating.
George Soros started a position in ALXN last quarter.
Skyworks Solutions (SWKS)
Skyworks is another company that generates strong results. Skyworks reported Q2 earnings of $0.42 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus Estimate of $0.40 while revenues rose 12.1% year/year to $364.7 million vs the $361.18 million consensus.
I think that SWKS growth is driven by the huge secular demand for smartphones that continues to drive momentum. Skyworks has partnerships with all leading smartphone vendors and is highly exposed to the growth in smartphones demand. The market for smartphones is growing four times the growth rate of the traditional cellular handset. The increasing complexity associated with the proliferation of smartphones and an array of other mobile Internet devices is fueling the total available market growth, providing a unique opportunity for Skyworks to expand. Management expects smartphone adoption to skyrocket in the developing countries, such as China and India. In the second quarter of 2012, Skyworks secured new design wins on Samsung's Galaxy S3 platform with an entire suite of Skyworks products.
Hedge Fund manager Lee Ainslie initiated a position in SWKS last quarter.
I think that Equinix's strong first quarter results demonstrate continued growth momentum for the business. Equinix reported strong top line results, including record bookings across regions. Metrics on the whole business trended positively. From a profitability perspective, I believe Equinix continued to demonstrate solid operating leverage.
Equinix reported Q1 earnings of $0.71 per share, $0.20 better than the Capital IQ Consensus Estimate of $0.51 while revenues rose 24.6% year/year to $452.2 million vs the $445.11 million consensus. I like the bullish upside guidance from EQIX's management. Management forecasted Q2 revenues of $466-468 million vs. $463.23 million Capital IQ Consensus Estimate. Management also issued upside guidance for FY12, expecting revenues to be greater than $1.89 billion vs. $1.89 billion Capital IQ Consensus Estimate.
I think that shares could experience a material uptrend considering that EQIX reported a strong quarter with revenues and EBITDA growing at 25%/29% above consensus analyst estimates. Management was upbeat on demand and pricing, giving an increased guidance. I think that EQIX is well positioned to benefit from the ongoing shift to cloud services.
EQIX growth should be fueled by a demand environment for managed/cloud hosting and data center services that continues to be positive in 2012 driven by a combination of both cyclical and secular factors. Other stock I like in the cloud computing segment is SalesForce (CRM)
Hedge fund manager Steve Mandel added to his position in EQIX last quarter.
Buffalo Wild Wings (BWLD)
I like Buffalo Wild Wings because the company is experiencing solid growth in its business.
Recently Deutsche Bank upgraded BWLD to Buy from Hold. Deutsche thinks the recent decline in the shares offers an attractive entry point (7.6x 2013 estimated EV/EBITDA) on one of the better growth stories in the industry. The combination of moderating wing prices, healthy sales trends, pricing power, and a discounted valuation suggest that BWLD shares can outperform from current levels.
Buffalo Wild Wings reported strong growth. The company reported Q1 earnings of $0.98 per share, $0.02 better than the Capital IQ Consensus Estimate of $0.96 while revenues rose a strong 37.8% year/year to $251.1 million vs the $251.82 million consensus. The company reaffirmed guidance for fiscal year 2012, forecasting EPS +20% to ~$3.28 vs. $3.29 Capital IQ Consensus Estimate. Management expressed confidence in the future:
"For the first four weeks of the second quarter, same-store sales are 6.7% at co-owned restaurants and 6.6% at our franchised locations. We're increasing our advertising over last year with national radio to cover all of our markets and we're airing a new TV spot. With solid first quarter results, ongoing same-store sales strength, the benefit of a 53rd week, and expense leveraging, we believe we will achieve our net earnings growth goal of 20% for 2012".