Cramer's Mad Money - When an Earnings Beat Fails to Impress (10/15/09)

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Includes: ABT, FLIR, JNJ, MCD, XLNX, YUM
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday October 15.

Johnson & Johnson (NYSE:JNJ)

Beating earnings estimates is not a guarantee that a stock is worth buying. Cramer discussed Johnson & Johnson, which exceeded estimates by 7 cents a share. This was primarily due to lower tax rates and budget cuts, which involved slashing funds for research and development. The company's sales declined 8% in the U.S, and its pharmaceutical division dropped 14%. The worst sign was management's prediction of more down times ahead, given the slow economy. However, JNJ is the kind of stock that is supposed to do well in a weak economy. Cramer said those statements made the gap between the multiple of 13 and the growth rate of 7% seem even wider.

Yum Foods (NYSE:YUM), McDonald's (NYSE:MCD)

Yum Brands beat by 12 cents, but this wasn't thanks to sales, which Cramer said were "downright awful" in the U.S. and flat overseas. Lower commodity prices, cost cutting and a lower tax rate created the illusion of success on the company's earnings beat. Management said the fourth quarter will be "a low point in the year," its stock buyback program was "working against" the company and competition is fierce. So Cramer would buy the competition, McDonald's rather than Yum Foods.

FLIR Systems (NASDAQ:FLIR)

Thermal imaging systems seem like a science fiction fantasy, but these devices are real and are used by the military, drug enforcement officials and for infrastructure protection. Infrared cameras and night-vision systems equipped with thermal sensors can effectively track enemies or suspicious activity. Cramer says FLIR is "the best player in the thermal imaging game" and controls 22% of the market. The number of units shipped by FLIR has grown 90% since 2005, but costs have dropped 30%. FLIR is constantly looking for ways to make equipment more affordable, and is producing an infrared camera that sells for only $500 compared to the $3,000 cameras currently on the market.

FLIR owns 40% of the infrastructure protection market, and with more infrastructure projects needed in the U.S,, demand is expected to grow. Its clients are both public and private, and 38% of FLIR's revenues are generated overseas. While FLIR is involved in an intellectual property case, the judge has already dismissed some of Raytheon's claims against FLIR. The stock trades at 18.8 times earnings and has a 19% growth rate; Cramer thinks the stock is cheap and would buy after its earnings on October 21 and prior to its analyst day November 2.

Advice a Year After the Warning

Cramer commemorated the first anniversary of his famous appearance on the Today Show when he urged investors to get out of the market and to keep all of the funds they needed for the next five years in cash. He noted the stock market declined 38% from then until March when the Dow began its upward climb from 6,500 to its current level of 10,000. Cramer claimed those who listened to him “sidestepped a horrible decline,” and then profited from “one of the greatest bull-market rallies in history.” Cramer advised those who have seen big gains to take profits and those who missed the latest rally to look at long-term themes such as natural gas, the mobile internet tsunami and security stocks.

CEO Interview, CEO Moshe Gavrielov, Xilinx (NASDAQ:XLNX)

Xilinx, in the hot spot of the mobile internet tsunami, beat its earnings estimates and is up 22% since March. However, phase three of China's stimulus is coming to a close and there are worries that this could be bad for Xilinx. But management says the potential revenues haven't been realized yet in the company's backlog and the coming quarter may be huge. Gavrielov says wireless demand is driving Xilinx higher, and added shorter lead times for new products are due to increased production rather than falling demand.

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