Sorting Through the Mixed Bag of Earnings

 | Apr 25, 2013 | 12:00 PM EDT
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The mixed earnings season continues. Earnings reports are coming fast and furious. So far, results are showing a significant divergence between earnings and revenue. Some 70% of companies reporting so far have beaten consensus earnings expectations, but only slightly more than 40% are doing so on the revenue side.

Guidance has been cautious overall as well. This tells me that companies continue to be very effective or creative in delivering on earnings results. It also tells me that end demand remains slack, and as a result, job growth in the coming quarter or quarters is likely to be tepid.

The divergence is occurring in all sectors of the market. The parade of companies beating on the earnings side while disappointing on the revenue side continued Wednesday. Panera Bread (PNRA), AT&T (T), Morningstar (MORN), O'Reilly Auto (ORLY), Flowserve (FLS) and Stryker (SYK) were among the slew of companies reporting yesterday that delivered on earnings but missed on revenue.

Proctor & Gamble (PG) lost more than 6% on Tuesday as the company beat on earnings but came in slightly under revenue expectations and offered cautious guidance. I have been dubious on the prospects for consumer staples stocks for a few weeks, given that this was a leading sector in the rally over the last five months. These stocks are now also trading at a nice premium to the overall market and are near the top of their five-year valuation range, according to a variety of metrics. In Procter & Gamble's case, an investor was paying 18x forward earnings for a company that is growing revenue at around 2% a year with a yield of less than 3%.

Unilever (UL) reported earnings this morning, and its sales also missed expectations while showing significant weakness in Europe and North America. The stock was selling off at midday.

I would not be surprised if we get some sort of rotation from consumer staples into the technology sector over the next few months. Techs have underperformed the overall market all year. They also have much lower valuations, have higher longer-term growth rates and in some cases provide higher dividend yields. In addition, earnings reports in the sector have been quite strong overall so far. Fusion-io (FIO), Teradyne (TER) and AVG Technologies (AVG) have easily beat on the top and the bottom lines in the last 24 hours.

There are a few large tech names I would happily add to on any dips in the overall market. Microsoft (MSFT) has been a rock as the market has grown more volatile in the last few weeks. The company is still growing revenue by 6% to 7% a year, despite the weakness in PCs. Its cloud offering, Microsoft 360, is making good progress and has already achieved a $1 billion annual run rate. Next month, the company will release a new Xbox console. The shares yield 3%, and the company will probably announce another dividend hike before the end of summer. It has about $70 billion of net cash and marketable securities on the balance sheet, and the stock sells at just over 10x forward earnings.

Qualcomm (QCOM) just reported earnings and revenue that beat expectations. However, guidance was a little light, and the shares pulled back 5% as of midday. I would consider Qualcomm at $61-$62 a share to be a gift, and I will add shares if it gets to those levels. This arms merchant supplies Apple (AAPL), Samsung and Nokia (NOK) among other manufacturers.

Despite the light guidance, Qualcomm increased revenue 24% year over year in the recently completed quarter. The stock sells at just over 13x 2014's projected earnings. Analysts expect over 25% sales increases this fiscal year and more than 10% in fiscal 2014.

Finally, speaking of Apple, I will add to my core holdings on any overall selloffs in equities. The stock is a second-half story. However, after the recent announcement of a dividend hike, the shares yield 3%. The company also intends to remove around 15% from its current float over the next couple years at the current stock price through the biggest stock-repurchase plan in history. This should offset any erosion in margins. After subtracting the company's approximate $145 billion cash hoard, Apple is dirt cheap at around 6x earnings.

Happy hunting.



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