Friday, May 3, 2013

The Key Earnings of The Week

It’s another big week for earnings and by now investors will have formulated a thesis on the first quarter. That thesis will be put to the test this week. In my view there are some clear signs that there was a bit of caution over discretionary spending among corporations. Will it continue?

As the weeks go by, let's recall that companies will get a bit more data on current trading conditions. If there was some temporary weakness due to the sequester, then we should start to see that correct itself in company trading updates.

Monday

It’s rare that a Monday is so interesting. Riverbed Technology will report alongside industrial plays like Eaton and Cognex. I like Cognex’s exposure to the increase in industrial automation and think it has strong long term growth prospects. However, it is very difficult to know what it will report this time around. Semiconductors and consumer electronics are major markets for Cognex, and they were not strong this quarter.  Small business services company Insperity will give an update on how that market is faring and crucially will gauge employment conditions. The Herbalife circus will likely continue when it gives results, although, as discussed previously, investors would be better advised by staying away from spending their hard earned money in these types of situations.

My highlight of the day is Masco Corporation (NYSE: MAS). Its share price reads as a barometer for sentiment on the housing market. There was a severe crash in 2009 and then a couple of false dawns leading into two significant dips. But since the start of 2012 it has been one way traffic. Indeed, analysts have been raising estimates already in 2013. Masco is interesting because it is more a play on new house building than many of other housing related plays, as such, you should expect it to be higher beta.The question for investors will be similar to that facing Whirlpool recently. The stock has had a great run up, so will it deliver enough to keep the short term momentum going?

Tuesday

The industrial theme continues with Cummins and Regal Beloit giving numbers. The former competes in some difficult markets right now, but things are starting to look a little brighter for Regal Beloit’s construction end markets.  A few interesting tech companies will be reporting, with Sonus Networks (whose rival Acme Packet was taken over by Oracle recently) giving numbers. Fortinet has already pre-announced and disappointed, but I think it could come back strong, particularly if it starts to talk of some normalization in orders.

It’s also a big day for pharmaceuticals. Vertex Pharmaceuticals is a company that has had a lot of success in clinical trials over the last few years but the big news today will come with Pfizer’s (NYSE: PFE) results. The company has continued its long term plan to focus more on core activities by spinning off its animal health care business Zoetis and restructuring other divisions. The key now is to ramp up sales of its new pipeline of drugs. Xeljanz (tofacitinib) has been approved for rheumatoid arthritis and threatens to become a blockbuster (especially if it can get it approved for other indications), and Pfizer has high hopes for blood thinner Eliquis to also reach blockbuster status. The market will obviously focus on how Pfizer’s plans for these drugs are progressing. This sort of thing is critical to the share price because the restructuring and divestitures of recent years were intended to drive growth in its more focused pipeline.

Wednesday

Today is Facebook (NASDAQ: FB) day. The stock is obviously high profile and will attract a huge amount of attention. I confess I’m not a fan of either the website or its long term prospects. Granted it did very well in generating revenues from mobile, but at what cost to its users?

Moreover, investors need to appreciate that the value in this company is largely generated by user-created content. As Facebook usage shifts to mobile, might the content created change to reflect that? I suspect it will and we will see more memes created (by other entities) whose sole purpose is to generate data that can then be sold. How long can people keep calling this fun? The key question for Facebook holders is to try and ascertain whether its mobile advertising initiatives are starting to negatively effect the user experience or not.

One company that I think has rather more reliable long term prospects is Allergan (NYSE: AGN). I like its mix of Botox, specialist eye care products and medical device solutions. However, I think it is fairly priced right now. While investors should be willing to pay a premium for a company with high quality of earnings, in truth there is no stock that doesn’t contain an element of risk. Allergan may lead the neuromodulator market but Merz Pharma is now re-commercializing Xeomin and Valeant Pharmaceuticals has purchased Medicis partly in order integrate Dysport (Botox’s chief rival) into its dermatology. More competition is coming even as Allergan tries to expand Botox sales in areas like spasticity. Any sign of weakness and the market will start talking about these issues.

Thursday

Church & Dwight is a great favorite among conservative investors, thanks to its recession-resistant properties. The Estee Lauder Companies stockholders will want to hear how its strategic management initiative is progressing. Healthcare is represented by Beckton Dickinson, Mylan Labs, Inctye Pharma, Sanofi and the above mentioned Valeant Pharmaceuticals. I’m a former holder of this company and I like its expanding dermatology franchise while its branded generics have good growth prospects in emerging markets. Obviously the market will focus on the integration of Medicis, but it has elements of a research and development pipeline that could boost its prospects this year. Efinaconazole (toenail fungal infection) and Luliconazole (fungal infection) have FDA actions due this year. And finally, look out for two big food companies reporting when Kraft and Kellogg give numbers.

The Bottom Line

In conclusion, it is quite a big week for all the defensives, particularly pharmaceuticals and food, that the market has been in love with recently. Will there be enough in the results to take the market higher or will any failure to beat estimates be used as an excuse to take profits? For the patient investor the latter could create some buying opportunities; hopefully this article has given you some ideas.