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Earnings Takeaway: Three Stocks to Buy

Wednesday - 5/8/2013, 3:21pm  ET

Earnings season is a great time for investors to reevaluate their investments. These three companies didn’t necessarily have good quarters, or impressive years so far, but have substantial upside based on a changing macro-economic environment or corporate structure. As such, these companies should be added to investors' portfolios, or at the very least to their radars.

Lower inflation, $1 billion share buyback are boons

Kellogg reported Q1 revenue of just under $3.9 billion, which fell short of consensus estimates of $3.9 billion. The results were hurt by high-cost inflation, but that problem should abate and then some as the year progresses. After dealing with less inflation in the second quarter, the company will get the benefit of net-cost deflation in the second half of 2013. Investors should pay attention on how the company deals with those spoils, and two options include (1) flow to the bottom line, or (2) be used toward lower prices and promotions to improve overall sales.

Full year guidance was reaffirmed during the conference call with a 2013 EPS outlook of $3.82 to $3.91, higher than the $3.87 consensus. In addition, the company announced a $1 billion repurchase plan which expires April 2014.

Client increases capex by 46%

Fusion-io is a computer hardware and software-systems company that designs a new memory tier based on NAND flash-memory technology. Fusion-io derives 20% of its revenue from its largest client, Facebook. While presenting quarterly earnings, Facebook announced that its capital expenditure was down 25% in the quarter, but later went on to say that the company will be increasing its full-year capital expenditure by 46%. Long story short, Facebook has a ton of money left to spend in the year, with Fusion-io being a very likely recipient.

Fusion-io also announced the appointment of Dr. Pankaj Mehra, a two-year industry veteran, a move to restore investor confidence moving forward. Prior to this appointment, the company purchased NexGen, a hybrid flash-disk array vendor for a cool $119 million.

Restructuring management

Starbucks has many positive catalysts for investors to cheer. The coffee giant that we all love has demonstrated to shareholders its plans moving forward. The company reported strong Q1 results, and believes its guidance for mid single-digit comp growth in FY 2013 is conservative.

John Culver, president of the China and Asia Pacific region, will now take on the company’s global channel development and emerging-brands portfolio, which became a billion-dollar business last year. Starbucks' retail channels and emerging brands saw substantially smaller growth in the latest quarter at 6.8%, compared to 50% in the same quarter 2012.

To regain momentum, Starbucks is expanding its retail business to China, which should re-accelerate growth over time in what will likely become over several years  its largest market. Culver will oversee an ambitious presence in the grocery channel in China, similar to what has successfully been done in the U.S.

Analysts were pleased with the company’s revamped multi-channel strategy, with Argus Research leading the way with a buy rating and a $70 price target, around 15% upside.

Conclusion

With the exception of Starbucks, the companies mentioned did not have very good quarterly earnings, but I believe all three have very positive outlooks that can begin paying off in a few months. Investors need to understand that one bad quarter (or even one bad year) is not indicative of doom. In fact, a bad quarter can provide a great entry point at a reduced price for the long term. 

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This article was originally published as Earnings Takeaway: Three Stocks to Buyon Fool.com

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