The market continues to grind higher, if quietly so. The S&P 500 hit another record high on Thursday, but gains of late have been modest and volume has been low.
Clearly investors are looking for news — but there simply hasn’t been much on that front. Regulatory and tax policy movements in Washington still look stalled out. Earnings season remains three weeks away. Investors simply seem to be playing the waiting game.
But there are a few big earnings reports this week — and from big names. While none of the reports likely will move the market on their own, the size of these three companies alone makes them of interest. And in all three cases, nimble investors might have an opportunity to buy a well-known company on the cheap.
Earnings Reports to Watch: Monsanto (MON)
Monsanto Company (NYSE:MON) reports earnings before the bell on Wednesday. But fiscal-fourth-quarter earnings won’t be the focus of investor attention.
Rather, the market will be looking for an update on the planned takeover of the company by Bayer AG (ADR) (OTCMKTS:BAYRY). Monsanto management has been rather open about the process on recent calls, and continues to argue that the acquisition will close by the end of the year.
With approval in Europe still up in the air, Street analysts surely will be listening closely for any change in management sentiment on the post-earnings call. MON stock trades just off an all-time high below $120 — but still at a discount to Bayer’s offer price of $128. A positive outlook from management on the Bayer deal could further narrow the gap.
Because of the Bayer agreement, Q4 numbers aren’t relevant to the investment case here … but fiscal 2018 guidance for sales and earnings will be. Those numbers will give a better idea of what Monsanto is worth on its own — and thus, what the downside in MON stock is if the Bayer deal does fall through.
All told, most investors can skip Monsanto’s earnings release. But traders and investors alike might want to listen very closely to the company’s post-earnings conference call.
Earnings Reports to Watch: PepsiCo (PEP)
PepsiCo, Inc. (NYSE:PEP) stock has weakened into its fiscal Q3 release on Wednesday morning. That could be a warning from the market — or an opportunity for contrarian investors.
Indeed, PEP has pulled back 6.5% from all-time highs reached in mid-August. Peers The Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple Group Inc. (NYSE:DPS) have fallen as well. Investors appear concerned about the impact of recent hurricanes on supply — and demand. And with valuations across the sector a bit high, the stocks may have needed a breather.
For PEP, the decline sets up a post-earnings bounce. Expectations are down, and so is the valuation. PepsiCo stock trades at just 20x Street estimates for fiscal 2018. And while the share price has come down the past few weeks, those estimates haven’t. The Street, anyway, sees the recent moves as mostly noise.
Even if PEP does decline after earnings, that might simply create a better long-term opportunity. At $107, PepsiCo stock would offer a 3% dividend yield. That hasn’t been on offer since early 2013 – and a 3% yield should bring in support.
With Frito-Lay performing well and PepsiCo management expecting 3% organic revenue growth this year, PEP looks cheap. That provides an opportunity for traders looking for a bounce — and long-term investors looking for a solid entry point.
Earnings Reports to Watch: Costco (COST)
It has been quite the roller-coaster ride for Costco Wholesale Corporation (NASDAQ:COST). COST stock was cruising through early June. Strong fiscal Q3 earnings in late May pushed the stock to all-time highs.
But weak guidance from Kroger Co (NYSE:KR) and the acquisition of Whole Foods Market by Amazon.com, Inc. (NASDAQ:AMZN) the next day gave a one-two punch to Costco stock. Amazon jitters would hit the stock again in late August, sending COST down over 5% in a single session.
Since then, however, Costco has been on a roll. It has gained 9% since bouncing off support around $150. And the stock looks set up well for its fiscal Q4 earnings report on Thursday afternoon. Costco already has reported sales for the quarter, and the numbers look strong, with August figures already driving COST higher. Given Costco’s traditional ability to drive margin expansion, that bodes well for fourth-quarter profits.
Meanwhile, COST’s lower valuation has given it a more reasonable 26x forward earnings multiple. That seems a good number to pay for one of the best retailers in the world. Deflation and pricing pressure in the grocery space both represents risks for Costco. But the rewards in the stock are ample, and I fully expect third-quarter numbers to show why.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
