What Big Earnings Reports Mean for These 3 Stocks

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

As the August heat beats down, a few companies always jolt us out of our summer stupor with big moves on earnings days. Here’s a look at a few companies that created a lot of buzz after reporting earnings, and whether their future growth warrants so much enthusiasm.

Feeding earnings

McDonald’s franchisee Arcos Dorados (NYSE: ARCO) missed EPS estimates by $.02 but scored big on revenue. Sales grew 9.4% overall and 16.9% organically, easing investor concerns about whether the growth-oriented stock could truly realize its market potential. Investors resoundingly cheered the news to the tune of a 7.76% sales jump post reporting. And in the midst of a great day, a slightly depressing bit of information offered the most promise of all: adjusted Earnings Before Interest, Taxes Depreciation and Amortization (EBITDA) didn’t budge compared to the year-ago quarter, but grew 18.2% excluding currency transactions and special items.

As the Brazilian economy continues to struggle, Arcos’ sales growth looks especially impressive. Even the pundits always acknowledged that, if Latin America experienced robust economic growth, Arcos Dorados would benefit. Continued revenue growth suggests that might not be necessary. The currency adjustments will (conceivably) end eventually; while they are a concern, their long-term impact is mitigated somewhat by the fact that the Brazilian inflation rate dropped sharply in July. It’s still a risk, but less persistent than the nagging economic stagnancy.

However, it appears that Arcos’ efforts are paying off. After another dour report on slow economic growth (estimates of 2.24% for 2013), the company still exploded sales, suggesting two positive trends. First, McDonald’s brand awareness is extremely powerful; second, a modestly-wealthy country can still demand McDonald’s products. Huge marketing expenditures for Arcos paid off, and what’s more, the company will steal a huge cost-saver after this year. Due to its agreement with McDonald’s, Arcos was required to reinvest significant funds into expanding in Latin America, an expensive but beneficial move that will come off the balance sheet after 2013. If Brazil’s economy continues to flag, enthusiasm over Arcos should waver a bit. However, the company has shown consistent ability to post profits in the face of poor economic conditions, which temper concerns about Arcos’ consumers and improve optimism for Arcos’ growth if the economy returns to form.

A healthy government industry

Shares of WellCare Health Centers (NYSE: WCG) soared 10% on Wednesday, after it trounced expectations across the board. Premium revenues popped 29%, boosting earnings 8.6% even as medical benefits expenses grew rapidly compared the year-ago quarter. The most encouraging news, however, came from the membership numbers, which leaped 11%.

The optimism that greeted WellCare’s report makes sense. Membership increasing for a company with limited exposure—WellCare only operates in 15 states, and generates a substantial portion of its revenues in a select few—indicates that WellCare operates a high-quality product; its growth is organic, not simply generated by geographical expansion. What’s more, WellCare operates as a healthcare manager for Medicare recipients, offering plans for individuals covered by Medicare. This means that payments stem primarily from multi-year contracts with state governments, and the CBO’s estimated 100% increase in Medicare spending by 2022 would greatly expand market size.

Unfortunately, the company’s future looks a bit gloomier. Experts debate the impact of the Affordable Care Act (ACA), but the uncertainty looms large over WellCare.Legislators hope that improved preventive care will lower health care costs, which would benefit WellCare in the long-term, since it negotiates contracts in advance and thus is subject to increased—and decreased—healthcare costs.

However, more immediately, pharmaceutical costs should rise along with demand, with a huge jump in the amount of people receiving coverage. Even in the company’s impressive Second Quarter (Q2), benefits expenses slightly outgrew revenues. Hopefully, the ACA will eventually offset those rising lower costs, but even still, it looks like most of the growth potential is already priced in.

Supplying growth

Albeit with a slightly-less-inspired performance than the previous two companies, Visteon Corporation (NYSE: VC) jumped 3.36% after reporting earnings on Thursday. Although earnings technically fell 13% compared to the year-ago quarter, they improved after accounting for one-time items. The company announced sales growth of 12% and, in a particularly cheering measure, adjusted guidance for EBITDA (minus special items) up 7%. 

The second quarter alleviates concerns about Visteon’s abilities to sustain an impressive first quarter after a lackadaisical 2012. That improvement, coupled with Visteon’s impressive forward P/E (9.8) make the auto supplier extremely attractive. What's more, because Visteon sells climate, electronic, and interior parts to auto manufacturers globally, recent reports about a healthy auto market portends strong demand for Visteon's products in the coming future.

Raising EBITDA guidance really improves confidence in that forward P/E, too. In 2012, earnings per share (EPS) sat at $1.89; for 2013, the company now expects that number to balloon to between $4.83 and $6.11. Its P/E against previous earnings (current P/E) is roughly twice the forward P/E, which looks at the stock price compared to expected earnings. A low forward P/E can help gauge whether a highly-priced company market value has already factored in its expected growth. For Visteon, the answer is "no."

The company’s risk continues to be the sustainability of that growth. For the second straight quarter, Visteon cited strong market demand as instrumental in impressive revenue growth. However, Ford and Hyundai account for more than 60% of Visteon’s sales. On the one hand, Hyundai has unleashed an aggressive growth plan that could sustain Visteon’s growth. Still, limited exposure increases risk and limits market share. In 2011, Hyundai and Ford accounted for 58% of Visteon’s sales, while the most recent quarterly report put the two companies at 64%. If that trend reverses, strong fundamentals will carry Visteon forward. If not, the company could still be a good play, but it’s a lot more risky as well.

What's the takeaway?

Buy Arcos Dorados, sell WellCare, and hold Visteon. Arcos' strong growth should only accelerate in the upcoming years, and while it's still a risk, shares are primed to jump well above the $13 range they currently inhabit. WellCare management expressed optimism about growth as well, but I'd bet a lot of that growth is priced into the stock; couple that with the uncertainty about to hit the healthcare industry, and reason for caution abounds. Finally, Visteon looks extremely promising, but its expanding reliance on Ford and Hyundai should make you pause. However, for the less risk-averse investors, it could be worth a speculative play.


Will Chavey owns shares of Ford and Arcos Dorados. The Motley Fool owns shares of Arcos Dorados. 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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