A Slew of Cheery Earnings

 | Nov 02, 2012 | 8:30 AM EDT
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We hope our Northeast readers are faring OK with Hurricane Sandy.

The storm has wreaked havoc in many ways. On the market side, one has been its disruption of news flow. So, to catch up a bit, here's a brief current earnings update on a number of our recommendations. Bottom line: They each did well, and we continue to recommend them all.

Harris (HRS): On Monday, Harris reported its fiscal first-quarter earnings. The per-share results came in a couple of pennies ahead of estimates as stronger margins more than offset revenue that was just very slightly below consensus.

It's important to note that the company maintained its guidance of flat-to-slightly-up revenue and earnings of $5.10 to 5.30 per share for the fiscal year ending June 2013. This was a strong quarter for contract wins: Book-to-bill of 1.09x and large assignments from the Federal Aviation Administration are boding well for the future. Battlefield radios will have tough comparisons this year from last, but growth elsewhere should roughly compensate.

The stock has come down in the last few weeks due to a small competitive radio award to General Dynamics (GD). However, that award also opens up the entire procurement to full and open bidding by mid-2013, and Harris expects to aggressively pursue its fair share.

We still like the case for Harris shares, which trade at about 9.3x earnings. The company has a strong balance sheet and good free cash flow, and it offers a growing dividend that's now more than 3.1% yield. Our target for the stock is well above $60. Shares closed Thursday at $47.66.

Archer Daniels Midland (ADM) reported earnings of $0.50 vs. the $0.45 consensus estimate. Management executed well during the quarter, achieving better-than-expected grain trading results, positive oilseed margins and better corn sweetener pricing and margins.

Ethanol was the weak link during the quarter, sustaining an operating loss of $26 million, compared with a $153 million profit last year. The next two quarters will be tough due to extreme drought-induced grain shortages. However, a normal planting season in 2013 should lead to better company fundamentals by next summer, including better ethanol margins, and an improving earnings outlook.

We continue to recommend ADM for its above-average dividend yield of 2.6%, its depressed valuation of 1x book value vs. an historical average of 1.3x and its relatively low price volatility. Shares closed Thursday at $27.10.

Teva Pharmaceutical (TEVA): The company's quarter mirrored that of many others this quarter -- a slight earnings beat and a slight revenue miss. Its flagship drug for multiple sclerosis, Copaxone, brought in surprisingly high revenue, while sales in most generics were slightly disappointing. The company demonstrated very strong expense control, especially in sales and marketing outlays, that drove the operating profit upside.

On a geographic basis, business in the U.S. was stronger than it was in Europe or in other global regions. Management affirmed its financial goals for the year and tightened its estimated earnings-per-share range for 2012, now pegging it at $5.32 to 5.38. Under its new CEO, Jeremy Levine, Teva is likely to focus more on profitability than sales growth. Its forward financial projections are set to be unveiled Dec. 11. We would rate the quarter as having turned out modestly better than in-line, and we continue to carry a target price of more than $70. The stock is too cheap, and we expect better things ahead for the stock price. The shares closed Thursday at $41.31.

MetLife (MET) reported better-than-expected earnings of a $1.32 vs. the $1.28 consensus. Management reaffirmed its earnings outlook for the year, which stands at some $5.30 in EPS. North America, Latin America and its annuities division were the brightest spots during the quarter, though all of the company's business units performed well. The company did take a $1.6 billion noncash goodwill impairment charge on its annuity business, which should be a non-event.

Regarding Hurricane Sandy, the property and casualty division is a small part of the business, and we do not expect it to have a meaningful impact on the company's financials in the upcoming quarter. We continue to recommend MetLife for its deeply discounted valuation level of 6.7x earnings (vs. its 10x historic average) and its 25% discount to book value. Shares closed Thursday at $35.48.

Kellogg (K) reported better-than-expected earnings of $0.82 vs. the $0.80 average analyst target. Management reiterated the earnings outlook for the year, and continues to expect earnings of between $3.18 and $3.30 per share. Organic revenue climbed 2.8%. The recent Pringles acquisition performed better than anticipated, and should add to greater-than-expected earnings accretion in 2012 and 2013.

We continue to recommend Kellogg for its above-average dividend yield of 3.3% and its below-normal valuation level of 14.8x the 2013 EPS estimates of $3.60, which comes against an historical average of 16x to 17x earnings. The stock also sports relatively low price volatility, and fundamentals have been improving.

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