Monday, April 25, 2011

Get Prepared for This Week's Earnings Reports


Earnings season is upon us, and the results so far have been encouraging enough to propel the markets to new recovery highs. Over the last two years, companies have reported earnings growth driven mostly by cost cuts including layoffs, shutting down unprofitable business units, etc. However, stocks will no longer be driven higher by positive earnings surprises alone.
As we enter the third year of the bull market, which began in March 2009, institutional investors are looking for top line revenue growth to meet or exceed expectations. Companies that report positive earnings surprises and beat revenue estimates should be rewarded with continued buying and make new highs. Companies such as Alcoa (AA), which report better than expected earnings but fall short, ever so slightly, on the revenue front will be punished.
Last week major companies such as Apple (AAPL), IBM (IBM) and Intel (INTC) all reported very positive earnings surprises, but also significantly beat analyst revenue estimates for the 1st quarter... look at the price performance of these three stocks to see the impact of both earnings and revenue growth.
The 10 companies listed below are due to report earnings this week. Look at the reported revenue numbers even before you analyze the earnings picture. If revenue disappoints lighten up or stay away. If, on the other hand, revenue exceeds expectations be prepared for upside fireworks.
Monday
Kimberly-Clark (KMB): $65.99
In 2010, KMB posted modest revenue growth of 3%, organic growth contributing 2%. The company expects to grow revenue by 3% to 4% contributing to operating profit growth of 3% to 5%. The board of directors has approved a 6% quarterly dividend increase and also approved a new 50M share repurchase. In 2011, the company expects to repurchase $1.5 billion shares. The 20-factor Power Gauge rating shows overall bearish numbers, but since the stock is in an uptrend, the PGR is neutral. However, an attractive dividend yield of 4.24%, consistent earnings, low P/E ratio on projected 2011 earnings and a high ROE make KMB a stock to watch. If revenue exceeds expectations, that could tip the scales to the upside.
Tuesday
3M (MMM): $93.88
In the 4th quarter of 2010, 3M's earnings declined by 1%, however revenue beat expectations by 2% while year-over-year revenue growth of about 10% was driven by gains in Latin America and Asia. For the full-year, earnings grew by 25% on 15% sales growth. The company has projected double-digit growth in 2011. The global conglomerate continues to experience organic growth as well as growth through acquisition, both locally and globally. Analysts have raised earnings estimates leading to a bullish Expert Opinions metric. Management announced a dividend payout increase in February and the board of directors authorized a $7 billion share repurchase program. Consistent Earnings, low P/E ratio on projected 2011 earnings and high ROE are bullish factors on the Power Gauge. Look for double-digit sales growth and improved profit margins as a clue to the next move in MMM.
Buffalo Wild Wings (BWLD): $60.10
Buffalo Wild Wings beat analyst expectations when it reported revenue growth of 13% and earnings growth of 22% in 4th quarter of 2010 as it continues to expand into the United States. Same stores sales - a key metric in the business - grew by about 4% for the first six weeks of 2011 showing signs of continued strength inspired by the launch of its 'Happy Hour' and increase in gift card sales. The company expects to grow earnings by 18% and meet its goal of 13% unit growth as it expands its presence in the United States and Canada. This consistent Earnings Growth contributes to a very bullish Earnings Performance metric on the Power Gauge. As the company reports Q1 earnings, watch for same-store sales as a key metric to help decide whether to buy stock in this growing company.
Hertz Global Holdings (HTZ): $17.06
Zipcar's IPO has been the talk of the town this week. However, another company, Zipcar's main competitor in the industry, may stand to benefit more than Zipcar itself. Hertz, the big giant rental company, has only 30,000 members in its car sharing program vs. Zipcar's more than 550,000 members. However, Hertz has announced that it will expand its car-sharing service including penetrating one of Zipcar's biggest market, New York City while slashing membership fees to compete. Time will tell how this battle pans out but this move provides a great growth opportunity for Hertz. The company reported improved results in 2010 as revenues increased by 6% and its net loss significantly narrowed. This earnings improvement has led to a bullish Earnings Performance metric on the Power Gauge.
Hertz management also provided a 5% revenue increase as guidance for 2011. With strong free cash flow as evidenced by a positive Business Value**, analysts have raised 2011 estimates further bolstering an already bullish Chaikin Power Gauge rating. Shares are at 52-week highs and positive Price Strength vs. its Industry and the Market along with strong Chaikin Money Flow activity and Chaikin Price Trend contribute to very bullish Price/Volume activity and confirm the current upside momentum.
Watch the earnings for stellar sales growth driven by the off-airport revenue increase that stands to be the company's growth engine and look to buy the stock on pullbacks.
Hershey (HSY): $56.73
Hershey is still 15% below its all-time highs reached in 2005 and the positive momentum indicated by bullish Chaikin Money Flow activity and Price Trend suggests that shares will continue this upward trend in 2011. In the 4th quarter of 2010, the 7% rise in Hershey's profits was driven by a 5.5% rise in its global sales, primarily growth in emerging markets. This growth is despite the soaring prices of chocolate and the increased advertising spending CEO David West authorized in 2008, reversing his predecessor's cuts. Management also announced a 7.8% quarterly dividend increase. Analysts have raised their estimates for 2011 leading to a very bullish Expert Opinions metric on the Power Gauge. Management has increased its positive guidance for 2011. A weighted average price increase of about 10% should help increase revenues and a slowdown in ad spending as it achieves solid presence and shifts focus on product innovation should cut costs. Together, these should result in increased earnings. Keep a close watch on first quarter sales growth and kiss the Hershey if management delivers another solid quarter driven by revenue growth.
Panera Bread (PNRA): $122.10
When Panera Bread reported 4th quarter and full year 2010 earnings and raised its 2011 forecast in February, its stock surged 15% within a day. The 23% increase in its net income was driven by a 17% increase in revenue as customer volume increased and same-store sales grew by 5.2%.
This strong revenue growth and an equally strong forecast are the primary reasons for such a phenomenal rise in the stock price. Analysts like what they see and have raised their 2011 earnings estimates as the company continues to benefit from the cautious spending that is driving consumers away from fancy restaurants and towards relatively inexpensive chains without sacrificing quality. Consistent Earnings Growth has led to a bullish Earnings Performance metric on the Power Gauge. The company's strong cash flows with very little debt position it well for further penetration within the U.S. markets as well as to tap into the international growth opportunity.
Current Price Strength vs. its Industry and the broader markets suggest that PNRA should capitalize on its upward momentum and continue to make higher all time highs. Watch for an EPS of $1.08 on strong sales growth and see whether the Power Gauge which is currently neutral turns bullish.
Coca-Cola (KO): $67.86
After starting 2010 on the wrong foot, KO corrected itself in the 2nd half rallying 34% since June and closing at 5 year highs. In the 4th quarter last year, the company grew its earnings driven by solid volume and revenue growth across the globe. The company said that 40% of its sales growth in 2010 was attributed to growth in Brazil, Russia, India and China. Within the US, The CCE transaction played a major role in the revenue growth. This Earnings Growth contributes to a bullish Earnings Performance metric.
The company expects to continue to grow worldwide and has partnered with Heinz to provide the ketchup-maker its bottles in a "green initiative" that would also help the environment. It recently completed its final transaction to own all of Honest Tea as it continues to penetrate the organic foods markets. Strong analyst sentiment leads to a very bullish Expert Opinions metric. Management recently approved a 7% quarterly dividend increase. Although it is still about 20% off its all-time highs made in 1998, positive Chaikin Money Flow activity and a strong Chaikin Price Trend suggest the current rally may have legs and the stock should continue its upward rise towards the all-time highs. Watch for improved margins, international growth and contained costs to see if our neutral Power Gauge rating turns bullish.
McGraw-Hill (MHP): $39.80
MHP reported a decline in its 4th quarter 2010 net income, primarily attributed to an increase in its operating expenses. This negative performance contributes to a bearish Earnings Performance metric on the Power Gauge. However, during the same quarter, sales grew by 4% driven by strong growth in its financial services segment. Although sales in the Education segment decreased by 4.6% in the 4th quarter, the company reported a full year increase of 2% in Education. Shares have recovered after an initial sell-off reacting to a weak earnings report. A positive Chaikin Money Flow activity, bullish Chaikin Price Trend and a strong Volume Trend suggest that the recovery is real and if the McGraw-Hill management is able to contain its operating costs and improve sales in its Education segment, this rally could continue taking shares to higher 52-week highs. MHP also provides a healthy dividend so keep a close watch on this week's earnings report.
Wednesday
Baidu Inc (BIDU): $148.61
The Google of China had a phenomenal 4th quarter in 2010 as it experienced revenue growth of 94%. The company also saw its cost to acquire traffic decline, which is a very important metric to monitor in this business. Management has raised its Q1 2011 outlook with revenue expected to be between $360M and $371M. Analysts were very bullish on the company going into 2011 and have raised their estimates leading to a very bullish Expert Opinions metric. Strong Price/Volume activity suggests momentum is currently on the right side of Baidu and should help the stock price continue to make higher highs. The stock is up 50% YTD so any revenue short fall has the potential to incur heavy punishment. Pay close attention to the numbers if you own or plan to own this giant search engine of China.
Thursday
Pepsico Inc (PEP): $67.38
Pepsico Inc has been trading in a $60-$70 range since the beginning of 2010, and has lagged the overall markets significantly. Interest in PEP shares seems to have petered out as reflected in a bearish Price/Volume activity metric on the Power Gauge. The company reported weaker 4th quarter earnings driven by commodity cost increases. However, revenues grew by 37% over the same period neutralizing the Earnings Performance metric. Management enhanced shareholder value in 2010 by providing healthy dividends and authorizing stock buyback programs. The biggest concern with Pepsico is its forward looking guidance. Management has cut its outlook for 2011 due to tough competition, high ingredient costs and a challenging economy. However, CEO Indra Nooyi believes that the acquisition of two of its bottlers and a strong push in emerging markets should strengthen the company's business.
If the revenue growth continues in 2011 and is supported by cost containment, as Pepsi's aggressive investment strategy starts to pay off, our neutral Power Gauge rating could improve. Although the outlook is guardedly conservative, shares may move beyond $70 if Pepsico is able to beat its conservative guidance. Watch the 1st quarter earnings report carefully looking particularly at the top-line as you consider PEP.
* The Chaikin Power Gauge rating is based on a 20-factor model incorporating Financial Metrics, Earnings Performance, Price/Volume activity and Expert Opinions to determine a stock's potential over the next 3-6 months.
** Business Value - the most heavily weighted factor in the 20 factor Chaikin Power Gauge rating, Business Value measures free cash flow per share on a relative basis vs. 3000 stocks and is similar to EV/FCF calculations.

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