by James Brumley | October 22, 2012 7:15 am
We’re now officially in the heart of earnings season — when things get volatile and tricky. Overall, earnings news has been less than compelling, but we have still seen pockets of earnings strength.
That doesn’t mean those stocks responded favorably to good news, however. Indeed, investors have already been forced to deal with a few “buy the rumor, sell the news” scenarios — even ones that made no sense. That pullback risk is magnified when the stock in question has been soaring, as a handful of important names have been.
In other words, shedding or holding an overbought stock that’s about to release Q3 results is more than a little tricky right now.
To that end, with Eagle Materials (NYSE:EXP), Expedia (NASDAQ:EXPE) and Regions Financial (NYSE:RF), all up more than triple-digits over the course of the past few weeks, each may require some special handling. Let’s take a look:
Eagle Materials isn’t exactly a household name but after its 66% run-up from May lows and its 212% rally from last September, it’s certainly at least on a few more radars.
The company makes building materials like concrete and drywall. With a decent rebound in the construction market, investors presumed — correctly — that if homebuilders were building more houses, then they must be buying the materials somewhere. Eagle Materials is that “somewhere.”
Truth be told, it’s not a bad premise. The market — and analysts — may have overshot with EXP, however. The trailing P/E of 71 is more than a tad frothy, and while the forward P/E of 21 is relatively more palatable, that’s still tough to justify. Worse, to actually earn the expected $2.37 per share next year, Eagle Materials will need to ramp up 2012’s likely top line by 18%.
What’s that got to do with third quarter earnings? In simplest terms, the company is already pushing its luck with an aggressive outlook, which leaves no room for error.
Eagle Materials will report Q3 numbers on Oct. 29. Analysts expect a profit of 47 cents per share. There’s little room for more upside as it is and if Eagle should even fall just a little short, this already-overbought stock could become vulnerable in a hurry.
For allegedly being in the throes of a global recession that’s on the verge of worsening, a lot of people sure are traveling. Expedia has managed to profitably grow the top line for the past couple of quarters, not to mention the last couple of years. But can the company’s growth justify the stock’s 82% year-to-date advance — even with the 10% dip over the past four weeks?
Most of the time, the market’s consensus opinion doesn’t matter a great deal and is subject to change with or without notice. Expedia is an exception. It’s one of those “story stocks” where even bad news is somehow seen as good news, and good news is seen as great news. Nearly everybody loves this stock and, collectively, traders are looking for reasons to buy more of it. It doesn’t hurt that Credit Suisse recently issued a price target of $60 on its shares.
Point being, though technically overbought, EXPE is a situation where the hype is long-lasting and can be ridden through earnings announcements. Sure, we may see a small dose of profit-taking, but the undertow is a widely optimistic one.
Expedia will post last quarter’s numbers on Thursday, Oct. 25. Estimates now stand at $1.26 per share, which is down from last year’s Q3 figure of $1.28.
Last but certainly not least, Regions Financial will announce its third quarter numbers on Tuesday, Oct. 23. The latest consensus estimate was for a profit of 21 cents per share, versus income of only 12 cents per share for the same quarter a year earlier. Revenue is expected to fall by 25% for the quarter year-over-year. It will be the first quarter the top line has fallen.
So how does a company that’s bleeding sales get its share price to improve by 111% since this point in time a year ago? Two ways: (1) In spite of the shrinking top line, the bottom line is getting bigger, and (2) stocks trade based on a company’s plausible future much more so than its past.
If Regions Financial can actually earn the expected 21 cents per share, it will be the ninth straight improvement in the company’s bottom line and the seventh straight profitable one, making it pretty clear that the bank is moving away from the headaches and losses that were nagging at it in 2009 and 2010. It also cements the fact that the bank is on the right growth track … another all-American turnaround story.
More importantly, despite the big year-long rally, shares aren’t overbought (or overpriced) and vulnerable to a wave of post-earnings profit-taking. The projected P/E of 9 is a fair price and most investors are looking farther down the road than just one quarter.
As of this writing, James Brumley did not own a position in any of the aforementioned securities.
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