Value Investors: 5 Earnings Reports To Watch

by: Vince Martin

Week 2 of earnings season commences Monday, with market leaders including Boeing (NYSE:BA), Procter & Gamble (NYSE:PG), and Caterpillar (NYSE:CAT) reporting, among many others. Below I've highlighted five stocks with strong fundamentals that will also report this week. These stocks should be of interest to value investors, and solid earnings reports this week could strengthen their case to be added to one's portfolio -- or to be removed from the watch list.

Veeco Instruments (NASDAQ:VECO)

I covered VECO in my piece on the LED semiconductor industry, rating it a compelling buy. The company currently offers $14.65 per share in net cash and investments, yet is forecasting 2011 guidance of $5.25 per share or better in non-GAAP earnings, giving a forward enterprise P/E just above 2. Yes, the LED industry has shown signs of oversupply, and there will be pricing pressure; but VECO's valuation, with over half of its market cap in cash and investments and solid profitability in 2010 and 2011, seems to have priced in the deepest market worries -- and then some.

Indeed, at Friday's close of $25.44, VECO looks to be an absolute bargain. The company's exposure to the Korean and Chinese markets in the lighting segment -- the fastest-growing LEG market -- should provide cushion against economic fears in the West, and the strong balance sheet can give value investors some downside protection. Strength in Monday's earnings (after the close) may reboot a stock that has been halved from its highs in early June.

Xerox (NYSE:XRX)

I covered the bull case for Xerox last month, recommending a purchase at $7.82 per share; I will not be so arrogant as to take credit for its subsequent rise over the next five weeks to Friday's close at $7.83.

In all seriousness, the bull case for Xerox still holds. Its 2009 purchase of Affiliated Computer Services added business process outsourcing (BPO) to the company's portfolio, and services revenue now outpace the legacy copier business in sales.

Most notably, the company has generated solid free cash flow. Here is a table reproduced from my original piece on Xerox:

XRX Levered Cash Flow, 2009-2012

Year Levered Cash Flow % of Market Cap
2009 $1.48 billion 13.5%
2010 $1.62 billion 14.7%
2011 $0.95 billion1 8.6%
2012 $1.70 billion2 15.5%
1 Estimate based on guidance of $2 billion in operating cash flow, $500 million in capital expenditures, and interest expense below 2010 figure of $586 billion.

2 Estimate based on midpoint of guidance of $2.6-$2.9 billion in operating cash flow, $500 million in capital expenditures, and interest expense below that of 2010.

In four years, if the company can meet guidance, Xerox will have generated over one-half of its market capitalization in levered cash flow. Another solid quarter on Tuesday (before the bell), with guidance reiterated (or, hopefully for XRX shareholders, raised) may give investors some confidence in Xerox' ability to reinvent itself. The high debt load (long-term debt and pension liabilities, net of cash, are roughly equal to market capitalization) may make some investors wary; but another solid quarter amidst a difficult economic situation should boost the stock. Analysts are expecting earnings of 25 cents per share on $5.59 billion in revenue; given that Xerox has beaten earnings (slightly) the last four quarters, investors may have some confidence in their ability to do so again. Long-term investors seeing stability in Xerox' business might be interested in the stock as a turnaround play.

Corning Inc. (NYSE:GLW)

Corning seems to be everybody's favorite stock -- just look at the glowing coverage here on Seeking Alpha alone. The numbers alone seem to speak for themselves: trailing and forward P/Es around 7 (and lower on an enterprise basis, backing out the company's $1.15 in net cash), an operating margin near 25%, and a company goal of $10 billion in sales by 2014, representing 11% annual revenue growth.

There are worries about a slowdown in electronics harming the company's Gorilla Glass business, but the diversification of the business, its solid margins and low valuation seem to make a GLW a long-term winner. Add in a 2.18% yield thanks to a recent dividend raise and all the stock seems to need is a catalyst.

Could Wednesday's earnings before the bell spark a rally? Analysts are expecting 42 cents a share on $2.02 billion in revenue; those earnings would seem to be a touch below Corning's guidance for a sequential decline in the "upper single digits." Based on second-quarter earnings of 47 cents (48 excluding single items), guidance would seem to be somewhere in the 43-44 cent range. If the company can show solid results, and better forecasting for display glass demand than it did a quarter ago, perhaps the value that so many individual investors seem to see in Corning can finally be unleashed.

Raytheon (NYSE:RTN)

Raytheon reports on Thursday before the market open, with the stock closing Friday at $43.97, after bouncing off a multiple low in the $39 range over the past few weeks. With earnings of $4.90 forecast for 2011, the stock trades at just less than 9 times earnings, and its annual dividend of $1.72 gives a 3.91% yield at current levels.

Analysts are looking for $1.33 per share in earnings, on $6.8 billion in sales, but the numbers may be less important than management's take on the future. Fears of cutbacks in government spending -- which provide substantially all of Raytheon's revenues -- have knocked down Raytheon stock from a comfortable range in the high 40's earlier this year. In particular, investors seem to worry that the so-called debt reduction "supercommittee" will hack away at defense programs should Congress fail to compromise on spending cuts in domestic programs.

But once again, these fears seem priced in; given the US' extensive overseas involvement, and the never-ending "war on terror," Raytheon should survive, if not prosper, in the current defense environment. The country's current emphasis on unmanned drone attacks and extensive reliance on technology in overseas conflicts should continue to drive earnings at Raytheon. In the meantime, the nearly 4% yield should comfort investors waiting for more clarity on government spending.

Oplink Communications (NASDAQ:OPLK)

I covered OPLK in my very first article for Seeking Alpha, and still tout the stock despite a 15% fall in the following months. The optical networking supplier offers a solid play on the needed upgrade of telecommunications systems in the wake of new smartphones, tablets, and e-readers. Broad economic fears have raised questions about the pace of such rollouts, however, harming not only OPLK but competitors such as Oclaro (NASDAQ:OCLR) and Finisar (NASDAQ:FNSR). As a result, the stock has struggled for most of 2011 since hitting early year highs around $28 per share.

At Friday's close of $15.76, however, such fears look more than priced in. The company offers $8.72/share in net cash, over half of market capitalization, and trades at just 5.6 times trailing earnings of $1.26 per share (excluding a large tax benefit in the previous quarter), with trailing cash flow representing over 17% of the company's enterprise value.

The company has guided earnings (reported Thursday after the bell) of 4 to 10 cents on a GAAP basis (12 to 18 cents non-GAAP) on sales of $41 to $44 million, with analysts appearing to expect results on the higher side of those ranges, according to Yahoo! Finance. The company has had success of late, meeting or beating estimates for four consecutive quarters, and a similar beat Thursday could shake the stock from its recent range. Investors should be looking for hints that the global networking market is picking up, which should put Oplink on a path to growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.