4 Stocks To Buy, 1 To Avoid In 2012

By Christopher French - February 17, 2012 | Tickers: CSCO, CVS, RAI, S, V | 0 Comments

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I have identified five interesting stocks on a valuation basis that just reported earnings. While Sprint Nextel (NYSE: S) reported a significant loss, Cisco Systems (NASDAQ: CSCO), Visa (NYSE: V), CVS Caremark (NYSE: CVS), and Reynolds American (NYSE: RAI) fared better. Let's see what's been happening with these five stocks:

Cisco Systems, Inc. reported adjusted earnings per share of 47 cents and revenue of $11.5 billion for the previous quarter. Both of those numbers beat analyst estimates, and Cisco was also optimistic about the future. The company expects 5 to 7 percent revenue growth in the current quarter, surprising considering many of Cisco's biggest competitors are far more concerned about the state of the global economy. Meanwhile, Cisco's cost-cutting initiatives, which many people were originally skeptical about, appear to be doing quite well. Here's what CEO John Chambers had to say: "We achieved our goal of $1 billion expense reductions measured from a quarterly run rate perspective in the second quarter one quarter earlier than our stated goals." Cisco shares have actually pulled back a bit since the earnings report, though, since some investors are unsure about the company's ambitious plans for mergers and acquisitions. In my opinion, that has created a prime opportunity for buying shares. In fact, trading just over $20 at the time of this writing, Cisco shares are very cheap right now. As the U.S. economy continues to recover, I predict that Cisco will see immense growth in its ability to sell communications equipment. I also foresee Cisco's services revenue continuing to experience strong growth.

Visa, Inc. reported adjusted earnings of $1.49 per share and revenue of $2.55 billion. Those numbers were better than analysts were expecting, and a 10% increase in U.S. credit card use was one important reason Visa was able to do so well. On the other hand, Visa is becoming subject to some new laws, and it'll be interesting to see how those affect the company. One law limits the amount that Visa can charge merchants that accept their cards, and another law allows merchants to pick which network is used for their transactions. With data processing revenue and international transactions on the rise, I think Visa stock is well positioned for future price appreciation. The only major headwinds for this stock going forward are the laws that seek to make the industry more competitive, and there are a number of factors why Visa should do well going forward. For instance, Visa still has a lot of room to grow internationally. In fact, those new territories often have lenient sets of regulation, which will allow Visa to make some serious profit. Here in the U.S., Visa's operations will also benefit from the economy recovery. In fact, Visa has said that the country's most affluent consumers seem to be recovering the fastest, which is certainly a good sign.

CVS Caremark Corporation reported adjusted earnings of $0.89 per share and revenue of $28.32 billion. While the adjusted earnings were in line with expectations, revenue was a bit of a surprise. It appears that CVS is already benefitting from customers switching over from Walgreens (WAG) due to that company's dispute with Express Scripts (ESRX). Caremark is doing well too, and the pharmacy benefits manager has been helped by a new contract with Aetna (AET) as well as a key acquisition from Universal American (UAM). Overall, I think CVS Caremark is a pretty attractive stock right now. Currently trading below $45, the stock's price is low considering how much it will benefit from future increases in healthcare spending. Simple statistics like same-store sales and same-pharmacy sales are working in CVS's favor right now as well. Investors should also keep an eye on MinuteClinic. In fact, these nifty clinics could be a good way for CVS Caremark to bring in additional revenue while it also offers flu shots in its traditional stores. As for recent news, CVS has been involved in some controversy in Florida. With two CVS stores being accused of filling illegitimate prescriptions for painkillers, CVS is now trying to get a restraining order so that these stores can keep selling these substances for the time being.

Reynolds American Inc. reported adjusted earnings per share of $0.72 and revenue of $2.08 billion. While the earnings were a bit of surprise, the revenue was a bit of a disappointment. Based on what was said in the earnings transcript, though, I think Reynolds American will be able to keep up its 5.6% dividend yield with ease. Not all of Reynolds American's cigarettes are doing well, but Camel and Pall Mall appear to be important exceptions. Indeed, those brands saw both their market share and volume increase in the fourth quarter. An interesting new product called Camel SNUS is also making big waves. This spit-free, smoke-free alternative has 75% share of its market and could see future growth. Specifically, Camel SNUS appeals to many adults who view it as a safer way to enjoy tobacco. A look at the statement of cash flows also reveals some things working in Reynolds' American favor. With just under $800 million of free cash flow in 2010 and just under $700 million of free cash flow in the first three quarters of 2011, Reynolds American has the cash to keep dividends going strong. Personally, I wouldn't be surprised if a dividend increase is on the way soon.

Sprint Nextel Corp. reported an adjusted loss of 35 cents per share, which was slightly less than analysts were expecting. Regardless, Sprint is suffering a number of interesting issues. Most importantly, the company is doling out a significant amount of money to subsidize Apple (AAPL) iPhones and stay competitive with AT&T (T) and Verizon (VZ). While this strategy could work if subscribers pay significant amounts in monthly fees, it remains to be seen whether this will be the case, especially because Sprint offers its customers unlimited data. With Sprint still working on upgrading to 4G, I find it hard to recommend this stock. The company would actually be more valuable if AT&T or Verizon could buy it, but that will obviously never happen due to antitrust issues. In the meantime, Sprint simply doesn't have enough customers to take advantage of economies of scale. Sprint CFO Joe Euteneuer also said this: "We expect that 2012 will be an aggressive investment year with regard to capital expenditures as we pursue a rapid and efficient execution of Network Vision." I don't know if that's a great plan for Sprint, and I think the company may wish to find more cost-effective ways to run a small network.

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