Solid Corporate Numbers Should Drive the Market Higher

 | Feb 14, 2014 | 2:00 PM EST
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While the beats vs. misses of earnings season seem to have cooled in the last week, we continue to think fourth-quarter earnings and outlooks are setting the stage for better stock prices ahead.

As of yesterday, 67.8% of reported companies had upside surprises, while 20.8% missed consensus and 11.4% were in line. This is modestly below last quarter's beats. Still, 79.2% were at or above expectations, and we think this sets the stage for better stock prices in the upcoming months. 

While companies continue with their recently learned policies of providing modest guidance and setting a low bar for the future, on the qualitative side we are hearing more and more CEOs talk with increasing confidence about the U.S. and global economies than we have heard in years. Throughout 2013, we heard "guardedly" or "cautiously optimistic" followed by four or five "significant caveats" in terms of the economic outlook during company presentations. 

Of late, we are regularly hearing "optimistic" and the "caveats" are no longer a meaningful part of the discussion.  In most industries, outside of retail, companies are feeling good about the U.S. economy.  Europe is surprisingly on the mend.  Additionally, we are hearing a number of upbeat comments about activity in China. Interestingly, the Eaton (ETN) CEO Alexander Cutler commented that he thought China's reported economic data was more reliable today vs. the past, and a 7% growth estimate today is a lot more positive than a 7% number reported 12 months ago. So, even though the data might be modestly below where they been the past few years, this is a more meaningful number and Cutler feels good about China.

With that in mind, here are four companies that we like coming out of earnings season.

DuPont (DD) reported better-than-expected numbers for the quarter -- $0.59 per share vs. the $0.55 consensus expectations -- led by the better-than-expected agriculture and electronics-and-communications products. The company is benefiting from an improved mix shift to more higher-value-added products. Furthermore, management announced an additional $5 billion share-buyback program to boost shareholder value. We expect continued progress from DuPont in the upcoming year. The shares are reasonably priced at 14 times earnings.

Eaton, meanwhile, reported a mixed quarter. Earnings were a bit ahead of estimates but investors were disappointed with the revenues, margins and quality of earnings which caused a $2 selloff in the stock on the day of the announcement. Nevertheless, management gave solid 3%-to-4% order and revenue guidance for the upcoming year and said things are improving. Eaton will see further earnings benefits from its recent Cooper acquisition. Earnings are expected to grow from $4.13 in 2013 to this year's expected $4.80, and onward to $5.55 in 2015. The improving earnings and mix profile should result in a higher share price and valuation multiple in the upcoming year. The shares are reasonably priced at 14.8x earnings.

Schlumberger (SLB) reported better-than-expected numbers for the quarter at $1.35, $0.03 higher than the consensus expectations. Management said business is expected to grow at a healthy 5% to 6% for 2014, led by broad-based North American and international drilling programs. Many naysayers expected growth to slow. However, with $100-per-barrel oil prices and strong market-share gains in offshore drilling, Schlumberger should have a lot of momentum in the upcoming year. The shares are reasonably priced at 15.8x earnings.

TE Connectivity (TEL) reported better-than-expected numbers for the quarter at $0.82 against the $0.77 expectations. Management also guided up the numbers for the upcoming year due to better-than-anticipated trends in the auto and truck transportation segment, and hinted that other units are beginning to see a broader pick-up in activity. The improving fundamentals combined with strong cost controls should lead to upside performance at TE Connectivity in 2014. The shares are reasonably priced at 15.2x earnings.   

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