Buy, sell, hold: 4 companies heading in 3 directions

Third-quarter earnings point the way for Alcoa, Intel, Infosys, and Johnson & Johnson.

By TheStreet Staff Oct 15, 2012 1:17PM

thestreet.com logoStock market copyright ComstockBy Richard Saintvilus

 

Aside from M&A speculation, nothing gets Wall Street more anxious than earnings season.

 

This is a time when investors receive confirmation or denial that they have placed the right bets.

 

As we go through earnings season, we are going to look at a few companies that are heading in three separate directions.

 
Buy Alcoa

The recent earnings of aluminum giant Alcoa (AA) demonstrate not only how undervalued the stock is, but also just how overly cautious investors have been.

 

Alcoa reported a loss from continuing operations of $143 million, or 13 cents a share. This included a payout related to an environmental lawsuit totaling $175 million. Excluding one-time items, the company earned $32 million, or 3 cents a share.

 

For the quarter, Alcoa reported revenue of $5.8 billion, better than analysts' estimates of $5.54 billion. The prolonged weakness in the price of aluminum, which has declined by 5% from the previous quarter and by 17% annually, has hurt Alcoa's revenue growth.

 

However, Alcoa beat both top- and bottom-line estimates, showing that it continues to make the best of a bad situation despite significant market turmoil.

 

The company continues to turn in one solid performance after another while reminding investors of just how committed it is to reviving its fortunes and returning value to shareholders. Though the market may wish to discount the shares, investors should take this as an opportunity to get in on a good company facing some headwinds but with a solid history of performance.

 
Buy Intel

Although I don't currently own the stock, I've become somewhat of an apologist for chip giant Intel (INTC). Nonetheless, it's for good reason. I'll grant that Intel underestimated the transition to smartphones and tablets to the extent that Apple (APPL) and Google (GOOG) have contributed immensely to growth of several of Intel's rivals, namely ARM Holdings (ARMH) and Qualcomm (QCOM).

 

But that does not mean Intel is a lost cause.

 

The company has all of the makings of a successful turnaround story. It earned $2.83 billion in its most recent quarter and beat analysts' estimates while meeting its revenue goals.

 

What's more, not only did Intel log sequential revenue growth arriving at 5%, but remarkably its PC revenue rose a respectable 4%. Although I will not suggest that the company is free and clear from any struggles, there are positives to consider.

 

Intel will be reporting its third-quarter earnings on Tuesday after the market closes, and analysts are expecting EPS of 50 cents on revenue of $13.2 billion. These would represent annual declines of 23% and 7%, respectively.

 

The stock is currently trading near its 52-week low of $21.48 -- almost 40% below some analysts' price targets, which have been as high as $29.71. As the stock continues to trade at what I believe to be a considerable discount with a price-to-earnings ratio of 9, there is the possibility that Intel can see the $25 level by year's end. If you are a value investor looking for a safe investment in technology and one that pays a respectable dividend, you should consider Intel.

 
Sell Infosys

Infosys (INFY) disappointed investors last week by reporting results that fell short of analysts' expectations. The company reported earnings of 75 cents a share on revenue of $1.8 billion, missing estimates for EPS of 77 cents and revenue of $1.9 billion. Making matters worse, the company cut its forecasts for net income through the first quarter of 2013 from $3.03 per share to $2.97 due to changes in currency values.

 

There continue to be growing concerns that Infosys is unable to execute effectively as it faces headwinds stemming from weak IT spending. Consequently, it is had no choice but to offer an outlook that is weaker than many analysts' predictions. The quarter yielded the smallest number of new customers (39) in more than a year, suggesting that the company is having a difficult time growing revenues, a challenge that may last through the second quarter of 2013.

 

I would sell the stock at this point and look for a re-entry when it trades for less than $40. The company needs to demonstrate that it can put together two consecutive quarters of revenue and EPS growth before the stock can show any signs of life.

 
Hold Johnson & Johnson

Johnson & Johnson (JNJ) continues to be misunderstood. Even so, its stock continues to perform adequately despite execution problems including product recalls. What has hurt JNJ of late is the perception that it is "too big to succeed."

 

Unlike several of its rivals, namely Pfizer (PFE) Novartis (NVS) and Covidien(COV), which now appear more nimble and adaptable, JNJ comes across as incredibly stubborn.

 

Its insistence on remaining one entity has hurt it. It would have seen positive results if it had opted to separate its businesses. JNJ has yet to prove that it can make a solid turnaround as long as it remains too big and lacking in agility.

 

The company plans to report third-quarter earnings on Tuesday, and analysts are looking for net income of $1.21 per share, representing a decline of 2.4% from the same period one year ago. In the second quarter, however, profits fell almost 50% to $1.41 billion from the $2.78 billion that it reported a year ago. As a result, the Street has grown more pessimistic about the company's prospects, and I think investors should as well.

 

The fact that the stock is yet near its 52-week high is impressive and suggests that the company still has a good reputation in some quarters.

 

Nonetheless, analysts at Goldman Sachs have issued a sell rating on the stock, even though they also set a price target of $72, which is higher than where the stock currently trades. I'm not bullish on JNJ at this point, but its track record of solid performances suggests that it deserves time to be proven right. For now it's a hold.

 
Bottom line

Earnings season can be both an exciting time as well as one that brings a lot of anxiety for companies and investors. It's called the reporting period for more than one reason as companies are essentially sharing their quarterly report cards -- where getting a passing or failing grade often depends on the expectations that were set.

 

More from TheStreet.com

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

133
133 rated 1
286
286 rated 2
441
441 rated 3
737
737 rated 4
614
614 rated 5
606
606 rated 6
621
621 rated 7
441
441 rated 8
317
317 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
VZVERIZON COMMUNICATIONS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.