Monday, February 11, 2013

This Week's Key Earnings

It’s another big week for earnings, and there are some interesting stocks reporting. So far this earnings season has been okay. The markets have been in benevolent mode, and even companies that missed estimates and guidance have seen recovery after an initial sell off. I can’t help thinking that a catalyst will come along and remind speculators that the glass might well be half empty after all. It's inevitable at some point because markets don’t go up in straight lines like this forever.


It’s quiet Monday, but I think Healthcare supplier Owens & Minor is worth a look. However, my main focus will be on Cognex (NASDAQ: CGNX). I’m a bit of a fan of this company and its visual information capture machinery. It’s a good play on increased robotics and automation in manufacturing plants, and particularly within emerging markets. Indeed, I’ve covered it in more detail in an article linked here.

Longer term I think the company will do very well, but short term who knows? For example, China’s export orientated industries have seen slowing growth, so will they cut back on automation?  In addition, conditions still don’t look great in semiconductors and solar, so Cognex could see further weakness there. I’m watching closely because any hiccup could make the stock very interesting. Another thing to look out for is its key automotive vertical; will Chinese growth offset slower growth in the US in the way that Alcoa hopes it will?


A couple of unsung emerging market plays give results on Tuesday when Avon Products and Western Union report earnings. Quidel has already served notice that it will be a beneficiary of a nasty flu season, so the price action after the results will be fascinating.

My highlight for the day will be Rackspace Hosting (NYSE: RAX). The market has been a bit jittery on the cloud computing sector ever since VMware disappointed the marketplace, and consequently Rackspace has been a little weak of late. I could argue that this is also due to concerns about its evaluation, but those issues seem to have been long forgotten with this stock. It trades on an EV/EBITDA multiple of nearly 28x, but in my opinion the company hasn’t yet demonstrated that it can generate growth and decisively reduce its CapEx/revenue requirements (it needs to buy a lot of gear to service customer contracts) and, until it does, free cash flow will be held back. The market may not care about this, but I do, so I am not buying.


The big news today is all about Cisco. I’m going to cover it in an earnings preview, but for now here is a review of last quarter’s results.  Funnily enough another tech company that fits the bill of ‘you can’t really love it but it’s worth a look because it’s so cheap' will also report. NetApp Inc is having its difficulties, but I still think it is a genuine takeover target. Don’t be surprised if it happens.
Deere & Company will update on the state of agricultural markets, and Henry Schein is an interesting defensive growth play with distribution activities in dental products and animal health care amongst others.

My highlights for the day are two vastly different companies; data canter owner Equinix (NASDAQ: EQIX) and Whole Foods Market (NASDAQ: WFM). Data center spending has been one of the strongest sectors of tech investing in 2012, and investors need to keep a close eye on what Equinix says about its future capital expenditure plans. In addition, its gross margins should be watched closely. Every data center stock that I follow has increased its investment plans over the last year, and naturally the concern is that there may be overcapacity at some point. It hasn’t happened yet, but that doesn’t mean you shouldn’t look out for it.

Whole Foods Market fascinates me. I’ve discussed it in more detail here and my view remains the same. Competition is coming, so WFM can expect some pressure in the future, but I think its market will expand anyway. I’m amazed by how concentrated its selling tends to be. It previously argued that 20% of its customers contributed nearly 80% of its revenue. This implies that there is a hard core of wealthy shoppers who are driving this business forward. If so then it’s entirely feasible that WFM has plenty more room to expand as it converts more of these potential ‘uber customers’ to its offering.


Thursday sees a couple of interesting health care plays in DaVits and VCA Antech give numbers, but the big earnings will come from PepsiCo (NYSE: PEP). The stock has been doing fine, but I think the strategy lacks some coherence. I’m not really a value-based investor so this is not my forte, but I think PepsiCo has some hugely powerful brands that the company is not taking advantage of. Moreover, over 70% of its operating profits come from the Americas, and it remains a distinct second to Coca-Cola in international soft drink sales. This suggests a split would do it good. And lastly, I note that its recent revenue growth has come more from pricing than from volumes. Is this the right policy for a company geared to generate synergies from scale?


It’s a lot more interesting than usual on Friday with Abercrombie & Fitch reporting, and the food theme for the week is kept going when Campbell Soup and Burger King give numbers. Campbell is one of those companies that doesn’t report good earnings yet keeps going up nonetheless. I suspect this is on account of its high yield.

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