6 Stocks Whose Earnings Are Expected to Increase Sharply

by: NakedValue

Companies with strong improvement in P/E as measured by comparing trailing P/E vs forward P/E can offer opportunity. If the market is excessively discounting future earnings growth because it is biased by poor trailing earnings, the stock could be undervalued.

Here are some stocks that investors should take a closer look at:

Merck & Co (NYSE:MRK)
Trailing P/E: 122.05
Forward P/E: 8.97

The drug and healthcare company generates revenue from a broad range of products. Like other branded pharmaceuticals, the company faces headwinds from drug patent expirations. Singulair, the company's highest grossing drug at $4.99 billion in 2010 expires in 2012. Crixivan, Maxalt, Cancidas and Propecia also expire by 2013. The drugs expiring in 2012 and 2013 contributed $6.8 billion of the company's $45.98 billion in 2010 sales. Despite the expirations, the company sports a strong pipeline of drugs in Phase II, Phase III and under FDA review. The drugs address a wide array of problems including allergy, asthma, cervical cancer, diabetes, fertility, migraine, osteoporosis and Parkinson's Disease.

Going forward, in addition to the strong pipeline, the company still has synergy opportunities following the Schering Plough acquisition. Pre-tax restructuring costs in 2010 were $985 million. Once the company gets past the restructuring costs, the company's net income will improve dramatically. The company sports a healthy 4.5% dividend yield. The stock is a reasonably priced investment for investors who want exposure to branded pharmaceuticals.

Valero Energy Corp (NYSE:VLO)
Trailing P/E: 50.60
Forward P/E: 8.08

The oil refinery business is not a glamourous business. Capital expenditures can be high and margins are generally slim, but the company faces a sweet spot with consolidation in the refinery business and an ability to pass on higher energy costs to the end users. Because of the company's leverage, modest changes in operating margins can have outsized effects.

For example, in 2010, income from continuing operations were $923, or a 1.12% net margin. In 2007, net margins were 4.97% and in 2006 net margins were 6.22%. While we don't think the company will return to the 2006/2007 margins that were largely related to reduced refining capacity because of Katrina, if the company had 4.97% on 2010 revenues, the company would trade with a trailing P/E of around 4. Valero could be an interesting stock for investors who think energy prices will remain elevated for the near future.

International Coal Group (NYSE:ICO)
Trailing P/E: 71.53
Forward P/E: 9.41

The Appalachian based coal company, founded in 2004 by famed investor Wilbur Ross, has long been mentioned as an acquisition target. The company is increasing its exposure to metallurgical coal. Between strong demand from Asia and Australian supply issues related to the recent floods, spot price for metallurgical coal is likely to remain strong.

International Coal has 1.1 billion tones of proven reserves. According to their 10-K, the company has an average cost of around $56 per ton in the Appalachian mines. This makes it a low cost provider which should benefit from rising coal prices regardless of whether it is acquired or remains a standalone company. This company could be an attractive stock for investors who are bullish of coal prices.

Trailing P/E: 41.46
Forward P/E: 7.09

The financial guarantee and asset management company has had a long and bumpy road since the financial crisis, but analysts are expecting a turnaround at MBIA. While the company has suffered because of the massive losses it suffered during 2007 and 2008, the company is probably stronger than most would assume. In 2010, the company earned $594 million in premiums compared to $850 peak premiums in 2008. The drop is severe but it may be less than expected for a firm that seemed close to insolvency. Going forward, the company appears cheap as it trades below the book value of $14, but investors should watch from the sidelines and wait for premiums earned to stabilize.

Tata Motors (NYSE:TTM)
Trailing P/E: 27.71
Forward P/E: 8.22

The Indian based automobile manufacturer could see better days ahead. The company has seen rapid growth. From 2008 to 2009, the company's sales doubled. From 2009 to 2010, sales increased 29%. Results in 2010 were hurt by losses related to losses on a sale of subsidiary and losses from foreign exchange fluctuations. Excluding these effects going forward, the company's net income should improve if we hold other things constant.

The company has truly developed into a global automotive brand with percentage of sales in India shrinking from 80.6% in 2008 to 41.1% in 2010. Going forward, investors who are looking for a reasonably priced auto manufacturer should give Tata Motors a closer look. While Tata is a global brand, the company's greatest opportunities could be at home where the Indian car market is around a sixth the size of China's.

Dendreon Corp (NASDAQ:DNDN)
Trailing P/E: n/a
Forward P/E: 134.28

Analysts expect the biotechnology company to finally break into the black. If analysts are right, this company will clearly have the most upside of any of the stocks on this list especially since the company has a short ratio of 4.30. But profitability is uncertain. In 2010, revenues were $48 million, but management expects 2011 revenues of between $350 and $400 million. Among other reasons for optimism are the company's highly anticipated prostate cancer treatment Provenge which is expected to be a $1 billion drug by 2012.

Provenge is so highly regarded that Dendreon is considered a potential acquisition target, but we urge investors to be cautious. The company's future appears bright but at current valuations, investors do not have margin of safety. Investors should follow developments closely.

Disclosure: I own ICO and may initiate a long position in MRK, TTM over the next 72 hours.