Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Third-quarter Earnings Season—Definitely Something to Look Forward to

Thursday, September 29th, 2011
By for Profit Confidential

We’re in a market that’s conflicted by all the uncertainty in the world and the mixed data we keep getting on the economy. It’s refreshing, however, to see corporations that are able to increase their prices and not affect demand for their products. This is a trend that’s been going on for several quarters now and it makes third-quarter earnings season something to look forward to.One of the stock market’s darling large-cap stocks has been Caterpillar Inc. (NYSE/CAT), up until recently. The stock hit a new record high of $116.55 around May of this year, retreated to the $95.00 per share level and fought its way back to $110.00. The stock then fell off a cliff in mid-July and is now trading between $75.00 and $80.00 a share.

This is a stock that in my view should be trading for a much higher price. It likely would be if it weren’t for all the confidence problems in Europe and talk of a global recession. Right now, Caterpillar is very well valued and Street analysts are increasing their forecasts for 2012. No doubt, good timing is everything in equity investing. I think Caterpillar is a stock to keep an eye on here; it’s due for some advancement now.

One stock market leader that continues to be a force for the Dow Jones Industrial Average is IBM Corporation (NYSE/IBM). Here is a stock that’s only trading a few points away from its all-time high and the company is trading at a very fair valuation. IBM has always been a strong benchmark stock and the company’s business is doing great internationally.

Another Dow component that’s been outperforming since the beginning of the year is Kraft Foods Inc. (NYSE/KFT). Kraft had a very successful second-quarter performance and management’s recent decision to split the company into two separate entities was very well received by Wall Street.

According to the company, its second-quarter revenues grew to $13.9 billion, representing a gain of 13.3%, which is quite impressive for such a mature business. The company’s organic revenues grew 7.1% during the quarter driven by growth in all geographic markets. Kraft has also been able to institute price increases without affecting demand. This contributed to higher operating income in the second quarter and an increase to its 2011 total outlook.

Kraft plans to create two independent public companies before year-end 2012. This will include a new global snacks business with estimated revenues of approximately $32.0 billion, and a separate North American grocery business with estimated revenues of approximately $16.0 billion. The two new companies should be created through a tax-free spin-off of the North American grocery business to Kraft Foods shareholders. Investors normally love these kinds of corporate actions, because they usually create wealth for stockholders that wouldn’t be as recognized by the marketplace if the company stayed whole.

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We’re in a market that’s conflicted by all the uncertainty in the world and the mixed data we keep getting on the economy. It’s refreshing, however, to see corporations that are able to increase their prices and not affect demand for their products. This is a trend that’s been going on for several quarters now and it makes third-quarter earnings season something to look forward to.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles