Tuesday, April 2, 2013

The Key Results To Look Out For This Week

Earnings season is winding down now, but there is no excuse for not continuing to work hard to find stocks with upside potential. Paradoxically, the fact that there are so few major companies reporting next week should give investors the opportunity to spend more time looking at stocks that might not ordinarily be on the radar. And there are plenty of interesting stocks to look at next week, particularly if you like the food and construction markets in the U.S.

I’m going to pick out a few that I know well, and give some pointers towards what to expect.

Monday

Cal-Maine Foods (NASDAQ: CALM) is the kind of stock that investors can integrate into their portfolios and not worry too much about market risk. I like such stocks, but they must be attractive in their own right. I've discussed the drivers of this stock's profitability at length in an article linked here.

In summary it is the largest single shell egg producer in the U.S., and has growth opportunities from consolidating the industry and growing its higher margin specialty eggs sales. I also like the stock as a play on rising protein prices. With that said, it is exposed to input prices (particularly corn) which tend to cause significant gross margin volatility. Cal-Maine tends to pay out a third of its income in dividends, so don’t buy this stock if you are looking for consistent and easily predictable dividends.

Longer term, I wouldn’t worry too much about rising feed costs, as they can create consolidation opportunities for Cal-Maine and also put smaller producers out of viable production. This is good news for Cal-Maine because, in reality, higher feed costs also lead to higher meat costs. In other words, eggs become more attractive as a cheap protein option. The upcoming results could present a decent buying opportunity if there is any disappointment with rising input prices and the stock sells off.

Tuesday

The food theme continues with McCormick (NYSE: MKC). This is one of those stocks that will torment investors. I like company and its long-term growth prospects. Food companies are pressured to use flavorings, thanks to increasingly diversified food consumer tastes and the need to innovate in order to retain market share in a weak economy.

Similarly, consumers are purchasing more flavorings as home eating becomes an economic necessity in a slow economy. In the long run, things look good, but over the short-term, McCormick has some headwinds and I think there is some risk here.

I outlined some the issues recently. The last results were disappointing, the stock sold off, and then the McCormick bulls came out and drove the stock higher. Investors need to hear that customers restocked in this quarter.

As much as I like the company, I’m not quite willing to pay nearly 24 times current earnings and an EV/EBITDA multiple of over 15 times for a company with only 5-6% EPS growth forecast for this year, and whose forecasts have been lowered over the last few months.

Wednesday

 More food on Wednesday with ConAgra Foods (NYSE: CAG) and Monsanto releasing results. ConAgra is an old favorite of mine. For much of 2012, it looked like a rare breed in the market -- a high yielding defensive growth stock at a very attractive valuation. Its mix of value brands offered exposure to the ‘trading down’ trend, and it managed its private label business much better than competitors like Treehouse.

The market woke up to the story, and as the valuation rose (and it continued to generate large amounts of cash), it found itself in a position to make the strategic acquisition of private label food company Ralcorp. While the deal makes perfect sense, there are elements of risk.

Private label sales continue to expand, but there have been significant disruptions in sales channels over the year and companies like Treehouse have had to make fundamental changes in their sales channels. Investors need to listen carefully to what ConAgra says about the integration.

Acuity Brands (NYSE: AYI) also releases results. I am somewhat a fan of this company and its long-term opportunity to benefit from an improving construction market in the U.S., alongside secular drivers of more LED lighting and controls sales. There is some discussion about the company’s prospects linked here.

The funny thing about this company is that it has missed estimates in three out of the last four quarters, even though the underlying market dynamics have tangibly improved. My best guess is that analysts are too aggressive in upgrading prospects on the back of better indicators, like the Architectural Billings Index. Lighting is relatively light cycle in a construction project, and sales leads times take time in this industry. No matter its results are worth watching closely for any opportunity.

Thursday

The last really interesting result of the week comes from RPM International (NYSE: RPM). Along with its industry peers, the stock has been a stand out performer over the last year. One area to focus on will be its roofing division, where operational improvements are expected following the exiting of international operations.

Aside from its cyclical exposure to the U.S. housing market, the stock has a decent current dividend yield of 2.8%, and is one of those select group of stocks that have increased dividend for the last 30 years. It’s not screaming value anymore, but the markets are in volatile mood right now and the results are worth following closely.