Earnings Preview for Thursday, December 20

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Among the numerous companies reporting earnings on Thursday, December 20, I am most interested in pursuing long-term investment with CarMax (NYSE: KMX), Discover Financial (NYSE: DFS), and Nike (NYSE: NKE).

While these businesses may appear to have little in common, each company has developed a long-term competitive advantage within its respective industry. Shares of all three have handily outperformed the S&P 500 index over a 5-year period as evidenced by the below chart. Shaded area represents US recession.

<img src="http://media.ycharts.com/charts/079a5b67431409232de375958e41f300.png" />

CarMax, Inc. The used car retailer with a market capitalization of more than $8 billion will report third quarter fiscal 2013 earnings before the open on Thursday. The company currently operates 116 used car superstores in 58 markets, 9 of which were opened during 2012. Management recently reiterated its plans to open between 10 – 15 new stores in each of the next three fiscal years.

Although nothing prevents a competitor from copying CarMax’s business model, the company has a long track record of success and profitability, and in theory it is becoming more difficult for potential imitators to emulate as CarMax enters new territories across the US. The stock currently sells for 19 times consensus estimates for FY13, a reasonable valuation considering the company’s long-term growth rate. On October 18, CarMax’s board of directors authorized a $300 million stock buyback that will be completed before the end of 2013.

For the current quarter, analysts are expected $0.39 EPS on revenue of $2.46 billion. The characteristics exhibited by CarMax within the used car industry remind me of a typical Warren Buffett style business, and I would not be surprised if the company were acquired by Berkshire Hathaway or another suitor which recognizes the inherent value here.

Discover Financial. The bank holding and payment services company will report fourth quarter 2012 earnings before the open on Thursday. Analysts are expecting $1.12 EPS on revenue of $1.96 billion.

Discover is uniquely positioned to benefit from the growing mobile payments trend, as the company recently entered into a long-term agreement with PayPal. Citigroup has estimated that the PayPal deal could boost Discover’s revenue by more than 5 percent.

Unlike its larger competitors Visa and Mastercard, Discover Financial maintains credit risk, as it effectively extends loans to its cardholders. This closed-loop business model is also employed by American Express (NYSE: AXP). Credit quality for both DFS and AXP remains at historically high levels, having recovered from a period of write-offs and delinquencies that persisted during the credit crisis. Discover Financial trades for approximately 2.2x book value and has a 9x price/earnings ratio, while American Express trades for 3.3x book value and has a 13x price/earnings ratio. Although the market is awarding American Express with the higher premium due to its stronger franchise, I still like Discover as it is a consistent performer.

Shares of Discover Financial received a 2% boost on Tuesday, Dec. 18 when Meredith Whitney Advisory Group upgraded the stock in conjunction with Bank of America and Citigroup. Discover currently pays a minor $0.10 dividend per quarter, although the CEO recently stated at an industry conference that he would revisit the dividend amount at least annually.

Nike, Inc. The Beaverton, Oregon sports giant reports second quarter fiscal 2013 earnings after the market close on Thursday. Analysts are expecting $1.00 EPS on $5.99 billion in revenue.

Although the respective top- and bottom-line numbers are undoubtedly important, Nike has a history of trading based on future orders guidance. Specifically, investors will be listening for management commentary related to business in China, one of Nike’s most critical growth markets.

On November 15, Nike announced a 17% increase in quarterly dividend and a two-for-one stock split. The stock is expected to begin trading at the split-adjusted price on December 26. Considering the dividend hike and stock split, Nike will be paying $0.21 per quarter, giving the stock approximately a 1.7% annual yield.

Equity research analysts at HSBC upgraded Nike to overweight from neutral on November 29, and set a $112 price target for the shares. HSBC has a strong presence in China, and in reading between the lines, the bank may feel that Nike could re-establish positive sales trends within the world’s second-largest economy.

Other Earnings Reports

In addition to the above names, cruise line operator Carnival, Darden Restaurant Group (NYSE: DRI), homebuilder KB Home, open-source software provider Red Hat, and mobile technology giant Research in Motion are other notable companies reporting earnings on Thursday, December 20.

In particular, I am cautious on Darden, as management issued an early negative pre-announcement on December 6, stating that profit would come in significantly below expectations for the second quarter. The company stated that sales among its restaurant base would be down more than 3% on a comparable basis to the prior year.

Interestingly enough, McDonald’s reported a strong November sales figure for the same time period, with U.S. sales up 2.4% based on increased emphasis on the dollar menu. My initial perception is the American family has been trading down in recent weeks, and I will look for any commentary to confirm this view on Darden’s conference call.

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johnmacris has no positions in the stocks mentioned above. The Motley Fool owns shares of Darden Restaurants and Nike. Motley Fool newsletter services recommend American Express Company and Nike. 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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