You Should Be Concerned With These 4 Post-Earnings Stocks

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Earnings can change the outlook for a company, good or bad, and they can also validate an opinion that you already may have. In the case of these four companies, earnings on Wednesday showcased significant concerns, and you should be careful before buying.

Strong Presence, What About the Future?

Eli Lilly (NYSE: LLY) traded higher by more than 3% after significantly beating Q2 earnings expectations. The company posted a 6% year-over-year rise in revenue at $5.93 billion and beat EPS expectations by $0.15 with $1.16. This strength was attributed to strong sales in Cymbalta and Cialis, which grew 22% and 13% respectively. Lastly, the company slightly raised full-year revenue and EPS guidance above the consensus.

Looks like a home run, right? Sure, the company’s quarter and 2013 guidance was strong. However, the concerns surrounding Eli Lilly are in regards to next year, not this year. In 2014, Eli Lilly will lose patent protection on the blockbuster Evista and its $5 billion a year drug Cymbalta, which led to the company’s large beat on Wednesday.

Due to the company’s questionable pipeline, and the massive fundamental losses expected next year, I urge investors to think past the present and look further down the road. Most likely, you won’t like what you see.

Fundamentals Falling Fast

Seagate Technology (NASDAQ: STX) began Wednesday’s session with losses of almost 9% following its report, but then recovered to post losses of just 2.67%. There are many who might view this performance as a good sign, seeing as how Seagate did meet expectations. However, I am not buying it.

First off, the company’s historically high gross margins fell 560 basis points year-over-year to 28%. Secondly, PC shipments for the hard disk drive maker fell 25% year-over-year. Lastly, only $42 million was spent on share buybacks, down from $102 million last quarter.

The lack of buybacks is most striking to me, as the upside for this company has always been that it is the most shareholder-friendly tech company in the market. However, with operating cash flow dropping to $394 million from $1.4 billion in the prior year, I am not sure how the company can make good on its new $2.5 billion buyback program. Therefore, with the company’s fundamentals falling fast, I would seek value elsewhere.

Something Has to Give

Reynolds American (NYSE: RAI) lost almost 1% of its valuation after reporting earnings that met expectations. The company’s revenue was near flat year-over-year, which has led many to speculate that it could present a good opportunity in an industry that is seeing fewer and fewer smokers.

Reynolds American is the manufacturer of Camel cigarettes and now Vuse e-cigarettes among other brands. The company’s most popular brand is its Camel menthol cigarettes, which could face pressure after the FDA issued guidance on the dangers of menthol cigs relative to other flavors.

Right now, there are a lot of questions surrounding the future of e-cigs and there’s a good chance that large tobacco companies are going face significant modifications to their products. With Reynolds American paying out 87% of its earnings in dividends, I see them having a tough time in maintaining their high dividend and making any costly changes. Therefore, I wouldn’t buy on any hint of optimism, as something will have to give.

The Unknowns Suggest Caution

Lastly is Caterpillar (NYSE: CAT), which fell 2.43% on Wednesday. This is a tough one for me, because at 10.5 times next year’s earnings the stock does not appear expensive. However, the company continues to face headwind after headwind.

We already knew that growth in China was slowing and that mining had been an issue for the company. However, the rate at which dealer machinery is declining is a bit alarming, and unexpected.

With $14.62 billion in revenue for this quarter, Caterpillar lost $2.75 billion year-over-year. Roughly $1 billion of that loss came from reductions in dealer inventory, and the company expects further decelerations of $1.5-$2 billion in the second half of this year. Therefore, with questions in mining and China still present, I can’t justify investing in a company with so many unknowns.

Final Thoughts

It is easy to get excited about a company’s earnings, and make irrational decisions. But as I explain in my book, the key is to assess the quarter from all angles -- reading the report and listening to the call -- before making any decisions. Then, make an opinion based on the facts, not the stock performance. With that said, looking at the facts and considering the future, I don’t see much excitement for these four stocks. 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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