A Positive Quartet

 | Feb 19, 2013 | 11:00 AM EST
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This has been a good earnings quarter in aggregate and solid for many of our previously recommended stocks. In fact, most of them reported steady earnings in the fourth quarter of 2012 with positive tones and guidance for 2013. Several of these names, including Coca-Cola (KO), PepsiCo (PEP), Cisco (CSCO) and MetLife (MET), reported last week.

Here is a brief update on the earnings and outlook for each:

Coca-Cola reported better-than-expected earnings during the quarter of $0.45  vs. $0.44 for consensus, but was modestly below revenue expectations due to a weaker than expected Europe. The company continued to see steady volume growth of 3%. A key driver of KO's earnings growth has been 5% to 9% revenue growth from the emerging market economies of Asia, Latin America, and Africa/Middle East. North America was steady at +1% while Europe was a -5% drag. Commodity costs should moderate into 2013, helping the cost side of the business.

Management affirmed the long-term outlook of 5% revenue growth and 6% to 8% earnings growth in 2013 and beyond. For the very short term this outlook was modestly disappointing vs. some analyst forecasts and the stock has drifted lower post call. While the results were not as strong as Pepsico's were, (discussed below), they were solid. After a brief breather we expect the stock to start moving higher as the year progresses. Coca-Cola sells at a fair valuation of 17.4x earnings and has an attractive 2.7% dividend yield, which we expect to grow over time.

PepsiCo reported better-than-expected quarterly earnings of $1.09 vs. consensus of $1.04. The company has been reporting better numbers since management outlined a turnaround plan 18 months ago. During the quarter, PEP reported steady revenue growth of 5%, led by Frito-Lay chips and emerging markets growth. All areas of the company reported positive revenue growth including Europe, which was led by Russia.

PEP will be a major beneficiary of moderating commodity costs in 2013, since it is a major user of agricultural products for Frito-Lay chips. Management affirmed the long-term outlook of 5% revenue growth and 7% earnings growth over the upcoming years. PEP about fairly priced at 16.8x earnings and offers a healthy 2.9% dividend yield.

We expect more appreciation in 2013, thanks to earnings growth and a modest multiple expansion. PEP, like KO, should provide better than market stability during periods of stock market volatility.

Cisco reported better-than-expected earnings of $0.51, vs. expectations for $0.46, led by strong growth in emerging markets. Also helping the favorable picture were better-than-expected North America and Public Sector spending. Europe, however, continued to be a drag.  

Management provided a positive tone to business in the upcoming year and reaffirmed its 2013 earnings forecast. After the call, analysts raised their 2013 estimates to $1.99 vs. $1.96. CSCO continues to be very attractively valued at 10.5x 2013's earnings and a 2.7% dividend yield.  Because we expect to see a much improved stock price in six to 12 months from now, we are very comfortable buying CSCO at current levels.

MetLife reported much better-than-expected core earnings of $1.25 vs. $1.18 for consensus. Revenues were better than expected, but the impact was somewhat offset by margins that continued to contract due to spread compression from low interest rates. The quarter was also noisy, with a $752 million DAC (deferred acquisition cost) charge.

MET continues to be constrained in returning excess capital to shareholders due to regulatory restrictions. However, management reiterated its 2013 earnings outlook, including its expectation to eventually return several billion dollars of excess capital to shareholders in the coming years. In this regard, the company also announced that it had received much awaited approval to deregister as a bank holding company from the Fed and the FDIC, which should provide greater flexibility in getting their future capital plans approved.

MET is selling at a fire sale price of 6.9x 2013's earnings and a significant discount to its book value. We continue to recommend loading up on MET, as we project a much higher stock price over the next 12 months.

Earnings for all four companies will only get better as economic activity returns to normal. While earnings growth for many of these companies, as well as others that we have been recommending, have been helped significantly by emerging markets, North America, particularly the U.S., is also beginning to see improving fundamentals. This trend, along with a re-accelerating China, should provide a continuing tail wind for the stock market in 2013.

While KO had the weakest outlook of the four, we continue to be very comfortable with the name as we believe that it's a strong franchise that offers stability, a growing income stream and reasonable long term revenue and earnings growth.

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