The Five Stocks to Watch this Week
Today’s Daily Angle comes from Jason Simpkins of Wikinvest Wire members MoneyMorning.com. You can read the full article on the Money Morning blog.
Flash Player 9 or higher is required to view the chart Click here to download Flash Player nowThe earnings season that began yesterday (Tuesday) is shaping up to be an important one, as it could have a significant impact on a struggling stock market rally.
Since the stock market rally reached a pinnacle nearly two weeks ago, the Dow Jones Industrial Average has lost about 3.3% while the Standard & Poor’s 500 Index has fallen about 3.7%. And if this week’s earnings report come in below expectations, the rally that helped stock prices surge more than 50% could come to an abrupt end.
Fortunately, many of the companies set to report earnings this week are traditionally strong performers and for the most part, companies that have weathered the financial crisis. But not all of them have met Wall Street’s expectations.
The quarterly results for five companies in particular – Yum! Brands Inc. (NYSE: YUM), Alcoa Inc. (NYSE: AA), Costco Wholesale Corp. (Nasdaq: COST), Monsanto Corp. (NYSE: MON) and PepsiCo Inc. (NYSE: PEP) – will be of particular interest to investors.
Yum! Brands Inc.
The Louisville, Ky.-based Yum! will be one of the first companies to report its quarterly take (in fact, by the time this is published they should have issued their press release).
As owner of the Taco Bell, Kentucky Fried Chicken (KFC) and Pizza Hut brands, Yum! is the world’s largest restaurantcompany. Even more impressive, the company has beaten the market’s consensus forecast in the last four quarterly reporting periods.
Analysts’ estimates for the quarter ending September 2009 range from a low of 52 cents a share to a high of 63 cents a share, with a consensus of $0.59 a share. Yum will lean heavily on its international business if it’s going to continue its trend of topping analysts’ estimates.
Yum! is a well balanced company with about 41% of its 2008 operating profit coming from the United States and the rest from overseas – particularly China.
By 2013, China will account for 40% of Yum’s operating profit – up from 28% in 2008 – while the United States and the rest of the world will each account for a 30% share, according to company projections.
KFC, in particular, has long seen its most robust growth coming from China, with less than 10% of its franchises on the mainland accounting for more than a quarter of the company’s earnings.
Yum! added 328 new restaurants in the second quarter, including 118 in Mainland China.
“Yum!’s global growth potential, consistent performance and track record of generating strong free cash flow give us the confidence and ability to return significant cash to our shareholders even in these challenging economic times,” said Yum! Chief Executive Officer David Novak.
An analyst with Credit Suisse Group AG (NYSE ADR: CS) earlier this week told Barron’s that Yum! shares deserve a better premium because of its large international footprint and ongoing reallocation of capital.
Yum! shares should trade at a premium to their peer group and could climb nearly 25%, the analyst said.
Read Money Morning’s Breakdown of the other four stocks on the Money Morning Blog.
