What to Watch on Day One of Earnings Season

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earnings season kicks off on Tuesday, Jan. 8 with a few major announcements.  This is significant not only for the companies reporting, but for the overall market too, as the start of earnings season can set the tone for the announcements to follow in the subsequent weeks.  Of the 11 earnings reports on the calendar for Tuesday, these are the three that will have the most impact on the market’s “mood” going into the busy weeks of earnings ahead:

1.)    Alcoa (NYSE: AA) – Alcoa has long been synonymous with the unofficial start of earnings season.  Alcoa has had a tough time over the past five years and has come a long way from its pre-financial crisis levels of above $40 per share.  As such, Alcoa currently trades at only 11 times forward earnings, a discount to its historic average (around 15 times earnings).  Global aluminum demand (and therefore production) is largely expected to increase in 2013 and 2014, and in fact consensus estimates call for Alcoa to earn $0.96 in 2014.  What the market will want to hear from Alcoa, aside from the earnings number itself, is whether or not the company’s outlook for its product demand is continuing to improve.  If analysts are correct about the earnings, based on a 14x P/E ratio, which is on the low end historically, Alcoa could easily hit $13.50 per share in 2014.

<img src="/media/images/user_14267/aa-chart_large.png" />

2.)    Monsanto Co. (NYSE: MON) – Monsanto produces leading seed brands and develops technologies to use in agricultural products.  The company also produces the Roundup brand of herbicides, which any homeowner who does his or her own yard work has seen in the local garden store.  Monsanto is by far the largest company to report on Tuesday with a market cap of $51.6 billion.  Monsanto has also struggled price-wise since the crisis (see chart below), albeit not to the extent that Alcoa has. 

Monsanto is expected to grow at an above-average rate over the next several years, due mostly to increased penetration into international markets, particularly South America.  As a result, the company trades at a significant premium, at 26.1 times fiscal year 2012 EPS of $3.70.  Earnings are expected to grow to $4.43, $5.05, and $5.58 in 2013, 2014, and 2015, respectively, which means earnings are expected to grow at a 3-year average of 14.7%.  If analysts are correct, Monsanto could very well be trading at $131 by the end of FY 2015 (in August 2014), using the historic average P/E of 23.5.  Look for any news on either their next-generation seed products or their South American growth plans, as these will be positive catalysts going forward.

<img src="/media/images/user_14267/mon-chart_large.png" />

3.)    RPM International (NYSE: RPM) – This producer of specialty paints, protective coatings, sealants, and adhesives is expected to grow its earnings over the next several years through both modest price increases on its products and increasing demand for its industrial products.  Both of these factors are generally attributed to the gradual recovery taking place in the housing market, so look for the company to address this during its conference call.  I believe that at current levels RPM is more than fairly valued, so I would need new positive news to become bullish on the stock.  Currently trading at 23 times TTM earnings, consensus estimates call for a 3-year average earnings growth rate of 11.8%, which I do not believe justifies the extremely high valuation.  In the absence of new positive news or a upside surprise in the earnings numbers, I think we will see a significant pullback in RPM, which has had the best 5-year performance among the three companies profiled here.

<img src="/media/images/user_14267/rpm-chart_large.png" />

KWMatt82 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Monsanto Company. 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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