Tracking a Trio of Earnings Success Stories

 | May 01, 2012 | 11:30 AM EDT
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This earnings season got off to a strong start: More than 70% of S&P 500 companies that have already reported have beaten their estimates. Ultimately, better-than-expected earnings and outlooks should drive individual stocks higher.

Here are three stocks in varying sectors that not only have rock-solid businesses, but also reported first-quarter 2012 upside earnings surprises. In each case, the stock is poised to be a solid, if not spectacular, grower for the foreseeable future. All have better-than-market dividend yields, and will likely continue to produce nice dividend growth and provide some stability to a stock portfolio.

Microsoft (MSFT), the long-standing 900-pound gorilla in computer software, reported better than expected results for the quarter, led by strong Windows and Server & Tool growth, with core earnings coming in at $0.60 vs. the $0.58 estimate. As a result, analysts are raising their 2012 earnings-per-share (EPS) estimates by a few cents.

At its recent price of $32.01, Microsoft trades for 11.9x 2012's EPS of $2.70. Given new product launches such as Windows 8 and Lumina, a continued corporate upgrade cycle and respectable global growth, we believe Microsoft could earn above $3.30 EPS in the next two years. The firm has more than $6 in net cash per share and a 2.5% dividend yield. Microsoft has historically traded for more than 15x earnings. While investors continue to worry about smartphone and tablet cannibalization, the firm's dominant market share in personal computers, as well as growing market shares in corporate computing software and emerging market infrastructure buildouts, should translate into strong fundamental revenue and earnings growth over the next several years.

Honeywell International (HON) a major global manufacturer, reported strong operating results for the quarter of $1.04 versus an estimated $0.99. Results were led by strong international demand for aerospace products, process controls, and performance materials. Analysts are raising 2012 EPS estimates by $0.10.

At the recent price of $60.66, Honeywell trades for just 13.3x 2012's EPS of $4.55, as compared to its historical trading range of 14x to 15.5x earnings. We believe that the firm's strong business franchises in aerospace and process controls will see robust revenue and earnings growth over the next several years, as emerging markets continue to build out their basic infrastructures.

Kimberly-Clark (KMB), a leading global consumer products company, reported attractive operating results for the quarter of $1.24, beating the $1.17 estimate. KMB's success was spearheaded by strong international demand for personal care products (Huggies/Kotex diapers and wipes) and strong price increases in North America. Management also talked about moderating commodity prices potentially adding to further upside as the year unfolds; consequently, analysts have raised consensus 2012 EPS estimates by $0.11.

At its recent price of $78.47, Kimberly-Clark trades for just 15.1x 2012's EPS of $5.20 and has a healthy and growing 3.8% dividend yield. The firm looks to be entering a multi-year period of strong revenue and earnings growth led by strong market penetration of Huggies diapers and Scott Tissues in emerging markets.

While we are not expecting any of these stocks to shoot the lights out, all should provide solid returns for the upcoming year and also provide a portfolio with a favorable income stream and reasonable stability. The earnings beats should also serve as catalysts to move the stocks higher.

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