Are These 4 Post-Earning Movers a Buy?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earnings season has officially begun, and there were several companies that either reported earnings or provided preliminary earnings, which created a significant amount of stock movement. In this piece, I am looking at the most volatile of stocks on Friday, determining if any are a post-earnings buy.
Solid Quarter, But Worthy of a Premium?
Wells Fargo (NYSE: WFC) has the largest market capitalization of any bank in the U.S., and after earnings, the stock ticked higher by 1.55%. The company’s quarter was solid, as it beat on both the top and bottom line with flat revenue and a 14% rise in its EPS year-over-year.
What stuck out most to me was a decline in charge-offs. This decline reflects an improving credit quality for the bank. However, with both Bank of America and Citigroup trading below their book value per share and JPMorgan creating double-digit revenue growth, it’s hard for me to pay a premium to invest in Wells Fargo.
Moreover, Wells Fargo is the mortgage leader, controlling 22% of the market. To many, this might be a positive. But with uncertainty surrounding rates, and the company heavily dependent on this business, I think the stock’s premium is too much in an industry that is quite cheap.
Business Volume on the Decline
United Parcel Service (NYSE: UPS) saw a decline of almost 6% on Friday after its preliminary earnings report. UPS essentially issued a warning, lowering EPS guidance for Q2 and for the full year by about 10%. The company didn’t really jump into specifics, but did mention that package volume growth is slowing.
To me, the EPS is irrelevant compared to package volume, as EPS is a measure of efficiency while package volume notes operational strength. Sure, the industrial economy has been weak, and we all knew it, but volume is a metric that everyone believed was beginning to stabilize. As a result, at 1.59 times sales and 16 times future earnings, UPS is slightly more expensive than the S&P 500. Thus, I’d seek value elsewhere.
Still Need More Proof?
WebMD (NASDAQ: WBMD) was the biggest gainer of the day, with a 25.63% pop after preliminary earnings. First, the company said it expects revenue between $124 and $125 million; the Street was expecting $115 million in Q2 sales. Then, WebMD disclosed that it would earn $0.05 per share, which shows a significant gain from last year’s $0.11 loss.
Here’s the bottom line: After a year of fundamental loss, WebMD is now growing and is improving its margins – Q2 guidance insinuates accelerated growth compared to Q1. At 2.75 times sales, WebMD is surprisingly cheap in a very expensive web-based industry. While WebMD does not produce the growth of a LinkedIn or Google, its room for operational efficiency makes it interesting. With that said, I don’t know if this is a one-hit wonder or a sign of things to come. Thus, I still want to wait one more quarter for further proof that these improvements are here to stay.
Cheap Currency Leads to Analyst Shock!
For the last four months, analysts have been citing continued weakness for Infosys (NYSE: INFY), and have all but guaranteed a cut in guidance from the outsourcing giant. To their surprise, Infosys beat earnings expectations with a 17.2% gain in revenue and net income growth of 3.7% year-over-year. Furthermore, the company reiterated full-year revenue growth of 6%-10%.
Infosys rallied almost 5% on its earnings beat, and although encouraging, I can’t help but to realize that a falling rupee was in part responsible for its performance. The rupee is the company’s primary currency, and its fall has lowered costs. This might explain the distinction between it and competitor Accenture’s recent revenue miss (and guidance cut).
Overall, I still think this is a challenging space, and if you were lucky enough to ride the stock 12% higher over the last week, then I believe it may be wise to take profits.
Well, Friday didn’t quite present the value I sought, but no fear, we still have six good weeks of earnings season remaining.
This last week was just the calm before the storm, as next week we will see significantly more earnings intensity, and what’s sure to be a significant amount of value presented.
As this earnings season progresses, I will use the Motley Fool’s CAPs to track my selections, just like last quarter, and hopefully we’ll be able to find value worthy of an investment.
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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends United Parcel Service and Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!