Look to the future
You can do the same kind of analysis with stocks that you probably care about more than you do Alcoa.
McDonald's (MCD), for example, is scheduled to report on April 20. The stock is coming off its first comparable-store sales miss in months in February. Comparable sales climbed 7.5%, while Wall Street was looking for 8.3%. Analyst earnings estimates are rock-solid: At $1.23 a share for the first quarter, they haven't changed more than a penny in the past 90 days. But Wall Street is looking for just 6.84% year-on-year growth in the quarter. That would be a big drop from the 15% year-on-year growth recorded in the fourth quarter.
In the past couple of quarters McDonald's, has turned in a modest positive surprise -- 2 cents better than expected in the quarter ended in September and 3 cents better in the quarter ended in December. Anything less than a few cents above $1.23 a share might be considered a miss -- and confirmation that slow economies in Europe and Japan, and a slowing economy in China, are about to cut into the company's growth rate.
It won't be fair, but investors could also decide to sell if McDonald's shows a bit of weakness because longtime CEO Jim Skinner is retiring in June. His replacement is 22-year McDonald's veteran and current Chief Operating Officer Don Thompson. If McDonald's shows a bit of earnings weakness this quarter, some investors nervous about the CEO transition might sell. If I could buy McDonald's at $95 on any of this quarterly earnings noise, I would, with a 12-month target of $110.
You might also want to keep an eye on Arcos Dorados Holding (ARCO), the largest McDonald's franchise operator in Latin America, if McDonald's shares themselves dip. The stock is down 29% since I added it to my watch list on Aug. 16, 2011, but I see some signs that the price -- $18.48 at the close on April 6 -- might be starting to stabilize. The company itself doesn't report first-quarter earnings until May 5.
Or how about Schlumberger (SLB)? Wall Street analysts are looking for first-quarter earnings of 99 cents a share, a huge 39.7% jump from the first quarter of 2011. But the consensus conceals a high degree of worry. The trend in estimates has been decidedly negative over the past 90 days, going from $1.08 to 99 cents a share in that time. The worry is North America, where continued low natural gas prices have caused gas producers to shut wells and curtail exploration and drilling operations.
As I wrote in my March 28 post on Schlumberger, the company has acknowledged the slowdown in North America, the source of 33% of its revenues, and said that it won't be a one- or two-quarter problem. Investors will be waiting to hear, when Schlumberger reports earnings April 20, how big a problem the North American slowdown is. The company hasn't been a model of consistency recently, reporting an earnings miss for the third quarter and a positive surprise in the fourth. As I wrote in that post, I'd be a buyer on a pullback to $64 or $65 from the $68.42 close on April 6.
And finally, don't ignore the chance to add to positions in stocks you already own on unjustified weakness this quarter. (Or to sell if the weakness is justified.)
For example, Cummins (CMI), a Jubak's Pick, reports earnings on May 1. The stock has been volatile lately on news of an 11% drop in orders for Class 8 trucks, the big rigs, at North American manufacturers. This is the third consecutive month-to-month drop in Class 8 orders. The March numbers were 32% below the level of March 2011. Investors will want to find out from Cummins whether this is a sign that the truck cycle, which most of us believe still has upside ahead, is coming to an unexpected slowdown.
Cummins has already shocked investors in recent quarters with an earnings miss (granted, it was just 5 cents a share) in the quarter ended September 2011. The truck-engine maker came roaring back with a 15.8% positive surprise for the quarter that ended in December, but the $2.19 per share consensus projection conceals a high degree of disagreement with the top estimates at $2.42 and the bottom at $1.99. With 60% of Cummins sales coming from outside the United States, I think it's hard to predict what the slowdown in Europe and China will do to Cummins revenue. I'd look to add to positions on a drop in sales and earnings from those regions as long as the company convincingly testifies to the continuation of the truck cycle.
I'm sure you have your own list of stocks to watch this earnings season, but let me add one: Middleby (MIDD). This maker of cooking equipment for fast-food and casual-dining restaurants has been a member of Jubak's Picks before, and I'd be happy to return it to the portfolio if this earnings season gives me an opportunity. I'm adding it to my watch list (registration required) with this column.
Now, let the earnings season begin!
At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. The mutual fund he manages,Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Cummins and Schlumberger as of the end of December. Find a full list of the stocks in the fund as of the end of December here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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