4 Earnings Plays for Next Week

10/07/2011 8:00 am EST

Focus: STOCKS

These companies have earnings reports upcoming and seem to be effectively growing profitability, as gauged by an established fundamental measure.

Next week will see the kickoff to Q3 earnings season; do you have a watch list prepared? If not, we’re here to help.

For an interesting starting point, look to DuPont analysis of return on equity (ROE) profitability.

There is always more to a company’s story than their bottom line. Although the bottom line, or net income, is the headline number that analysts watch and journalists report, companies can earn these profits in different ways…some more preferred than others.

That is why it’s always a good idea to study the sources of profits for a company.

One way to analyze sources of profitability is with DuPont analysis of ROE profitability. ROE can be broken up into three components such that increases in ROE can be attributed to those components.

ROE
= (Net profit/Equity)
= (Net profit/Sales) x (Sales/Assets) x (Assets/Equity)
= (Net profit margin) x (Asset turnover) x (Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with increasing ROE along with characteristics like:

  • Decreasing leverage, i.e. decreasing asset-to-equity ratio
  • Improving asset-use efficiency (i.e. increasing sales-to-assets ratio) and improving net profit margin (i.e. increasing net income/sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

To illustrate this analysis, we ran DuPont on stocks reporting their Q3 earnings next week. The list is sorted by the change in ROE.

Valmont Industries, Inc. (VMI) produces and sells fabricated metal products, pole and tower structures, and mechanized irrigation systems in the United States and internationally. The company has a market cap of $1.96 billion and earnings are scheduled to be released on Thursday, October 13.

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Most recent quarter (MRQ) net profit margin increased to 6.85% from 3.55% year-over-year and the sales/assets ratio increased to 0.30 from 0.24, while assets/equity decreased to 2.18 from 2.59. It's been a volatile few weeks for the stock, with four down days followed by three up days.

NEXT: Alcoa (AA) Set to Kick off Earnings Season Next Week

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Alcoa, Inc. (AA) engages in the production and management of aluminum, fabricated aluminum, and alumina. It has a market cap of $9.47 billion and earnings are set to be released on Tuesday, October 11.

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MRQ net profit margin increased to 4.89% from 2.62% year-over-year, sales/assets increased to 0.16 from 0.14, while assets/equity decreased to 2.65 from 2.96. This is a risky stock that is significantly more volatile than the overall market (beta = 2.13).

It's been a rough run for the stock, with a steady trail down from mid-July. A few recent up days may signify some optimism about next week’s earnings announcement.

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. It has a market cap of $7.73 billion and earnings are scheduled to be released on Monday, October 10.

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MRQ net profit margin increased to 4.77% from 4.37% year-over-year, sales/assets increased to 0.56 from 0.55, while assets/equity decreased to 1.9565 from 1.9589.

Knoll Inc. (KNL) engages in the design, manufacture, and sale of workplace furnishings, textiles, and fine leathers for the workplace and home. It has a market cap of $617.83 million and earnings are set to be released on Monday, October 10.

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MRQ net profit margin increased to 5.43% from 4.51% year-over-year, sales/assets increased to 0.35 from 0.30, while assets/equity decreased to 4.35 from 6.70. The stock recently broke above its 50-day moving average.

By the Staff at Kapitall.com

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