Overview
It seems we only received a one quarter reprieve from high volatility accentuated by abrupt daily swings based on macro-economic data. The first quarter of 2012 was smooth sailing, nevertheless, the summer swoon arrived on schedule despite the record setting first quarter rally. Just as I stated for most of last year, use weakness in the market as a buying opportunity to pick up shares in out of favor stocks. I have selected five companies reporting earnings next week to review. I believe three are poised to move higher while two will most likely disappoint.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Friday's performance for the stocks.
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Bank of America Corporation (BAC) & Citigroup, Inc. (C)
The money center bank stocks are up significantly on the heels of two great earnings reports JPMorgan (JPM) and Wells Fargo (WFC). These were buy the news events as the doom and gloomers have recently taken control of market sentiment sending it to the bottom of the barrel.
The fact of the matter is U.S. banks are in great shape. How soon we forget last quarter's earnings reports from the banks were positive. The U.S. bank have been through the Fed's stress tests, downgraded by Moody's and had their earnings expectations lowered significantly. I see both Citigroup and BAC beating expectations and moving higher. Please review the following fundamental and technical analysis of the two stocks.
Bank of America Corporation
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BAC is trading well below its consensus estimates and its 52 week high. The company is trading 24% below its 52 week high and has 33% upside based on the analysts' consensus mean target price of $10.36 for the company. BAC was trading Friday for $7.79, up over 4% for the day.
Fundamentally, BAC has several positives. The company has a forward PE of 7.63. BAC is trading for 1.69 times free cash flow and approximately one third of book value. EPS next year is expected to rise by 75%. Insider ownership is up 93% over the past six months.
BAC is in a solid uptrend posting higher highs and higher lows since mid-May. The stock has been under accumulation as is poised to break out to the upside based on a positive earnings report. The U.S. housing market is on its way to recovery and should underpin BAC's results. I like the stock here.
Citigroup, Inc.
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Citigroup is trading well below its consensus estimates and its 52 week high. The company is trading 34% below its 52 week high and has 52% upside based on the analysts' consensus mean target price of $40.39 for the company. Citigroup was trading Friday for $26.66, up over 5% for the day.
Fundamentally, Citigroup has several positives. The company has a forward P/E of 5.54. Citigroup is trading for 1.54 times free cash flow and less than half of book value. EPS next year is expected to rise by 14.86%. Insider ownership is up 30% over the past six months and the company pays a dividend with a yield of .16% and has a PEG ratio of 0.82.
Citigroup's stock is flat on the year. The stock recently bounced off the $25 level for the third time in the last 12 months effectively putting in a triple bottom. The 200 day sma is leveling off at the $30 mark. I see the bank up significantly within a year's time. I expect Citigroup to break above $30 in short order and hit $50 within the next 18 months. I'm a buyer here.
eBay Inc. (EBAY)
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eBay is trading below its consensus estimates and its 52 week high. The company is trading 9% below its 52 week high and has 10% upside based on the analysts' consensus mean target price of $44.12 for the company. eBay was trading Friday at $39.97, up almost 2% for the day.
The company has many fundamental positives. eBay has a net profit margin of 26.84%. eBay has a forward PE of 14.40, a PEG ratio of 1.18 and a return on equity of 19.18%. Quarter over quarter sales and EPS growth are 28.73% and 20.90% respectively.
PayPal's mobile payments service is the key to eBay's growth. eBay's mobile payment business has exploded from a few hundred million dollar business in 2009 to a $7 billion business in 2012. Only a small percentage of smart phone users currently use the service today, I predict that will soon change and eBay's mobile payments exponential growth rate support my thesis. eBay's PayPal exemplifies the exponential growth potential for mobile payments. eBay recently reported revenue for the first quarter ended March 31, 2012, which increased 29% to $3.3 billion, compared to the same period of 2011.
eBay is in a well-defined uptrend. The stock is currently resting at the bottom of the upward trend channel. I see the stock rising into earnings due out on July 18th. I like the stock here.
Intel Corporation (INTC) & The Coca-Cola Company (KO)
I am not bullish on Intel and Coke. The headwinds I see for second quarter are two-fold. The two headwinds are the strong dollar and investors piling into these stocks as a safe haven dividend plays recently.
These two stocks are multinationals that derive a significant amount of revenue from outside the U.S. The dollar is up 10% year to date and poses a major threat to profits. The upswing in the dollar means these companies have to be up by 10% on foreign operations simply to break even and make up for the currency exchange rate. That is a tough road to hoe.
Moreover, many investors piled in to these stocks looking for dividend yielding safe haven plays due to the summer's volatility and uncertainty. These stocks are near the top of their 5 year trading ranges and close to 52 week highs and consensus estimates. They are priced for perfection as it were. I see them adjusting guidance downward and missing on the top and bottom lines. Please review the following fundamental and technical analysis of these stocks.
Intel Corporation
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Intel is trading slightly below its consensus estimates and its 52 week high. The company is trading 13% below its 52 week high and has 16% upside based on the analysts' consensus mean target price of $29.41 for the company. Intel was trading Friday at $25.30, up over 2% for the day.
Intel has several fundamental positives. Intel has a forward PE of 9.27 and a PEG ratio of .98. Intel pays a dividend with a yield of 3.40%. The company has a ROE of 26.61%.
The stock has been in a downtrend since the start of May posting lower highs and lower lows over the past few months. I would need to see a reversal in the chart prior to starting a position. The risk/reward ratio for the stock at this level is unfavorable. If you own the stock, just hang on tight and ride it out, but I would avoid starting a position prior to earnings.
The Coca-Cola Company
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KO is trading on par with its consensus estimates and its 52 week high. The company is trading 3% below its 52 week high and has 4% upside based on the analysts' consensus mean target price of $80.50 for the company. KO was trading Friday at $77.28, up almost 1% for the day.
KO has some fundamental positives. KO pays a dividend with a yield of 2.66%. The company has a ROE of 26.81%. KO has a forward P/E of 17.22.
The issue is KO is priced for perfection. The stock has been in a solid uptrend for the past year. Certain fundamentals are signaling the stock is richly valued. The company is trading for 55.60 times free cash flow and has a PEG ratio of 2.59. KO trading for over 5 times book value.
Don't get me wrong, I love KO, just not right now. I would get out of the way of this one. I see the stock taking a big hit to second quarter earnings. This will also be catalyst for traders to take profits in the stock. Avoid owning this stock into earnings.
Conclusion
The banks have been put through the grinder since 2008. They have cleaned up their balance sheets and are firing on all cylinders. The U.S. housing market and weakness in Europe are catalysts for growth for BAC and Citigroup. eBay is a leader in the mobile payment revolution. PayPal should provide the profits to keep eBay soaring higher.
KO and Intel are the multinationals who unfortunately are in the cross hairs of a strong dollar and gloomy global outlook. I believe Bernanke and company will eventually remedy the situation, but I fear second quarter profits are at risk.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in at least 10% at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss if you wish to minimize losses even further.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC, C, EBAY over the next 72 hours.
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