There is no crystal ball that will show what a company is going to earn next quarter, let alone over longer time periods. However, the job of an analyst is to make an educated guess at what might take place based on known information. Value Line analysts use information like company reports and presentations to create estimates for the next two years, and longer-term projections over a 3- to 5-year period. The estimates and projections are identified with bold lettering on the Value Line reports, with the projections located to the far right of the Historical Array.
The long-term projections are so named because Value Line is keenly aware of the difficulty of making such an extended call on earnings. This is also why Value Line analysts create a price range around the earnings projections instead of making specific share-price calls. To expose the “wizard behind the screen,” an analyst’s 3- to 5-year earnings projection is multiplied by the projected Price to Earnings ratio to come up with a specific share-price figure. That figure is then multiplied by a high and a low ratio based on each company’s Safety Rank to determine the expected target price range. The high and low are then used to calculate a projected annualized total return by taking into account share price-appreciation potential and the projected dividends over the 3- to 5-year period.
Each week in the Index of The Value Line Investment Survey, there is a screen of the 100 companies with the highest annual total return projections. (Subscribers can click here to view the entire screen.) The screen often turns up companies that are fast growing, but can also include enterprises that are out of favor for some reason, but that have turnaround potential. The most recent list of companies included such notable names as AMR Corp. (AMR), Monsanto (MON), and Intel (INTC – Free Analyst Report).
AMR Corp. owns American Airlines and American Eagle. The company acquired TWA in 2001. Major American Airlines’ hubs are at the Dallas/Fort Worth, Chicago, San Juan, and Miami airports. The company’s air-transportation revenue mix is 87% passenger, and 13% cargo and other. Labor costs make up 26% of the company’s total expenses, while fuel makes up 15%.
AMR Corp. continues to lag the industry with regard to profit levels. Indeed, the airline lost $0.03 a share in the June quarter, reflecting the company's expanding labor costs. Still, the showing represented a strong improvement from the March period and year-earlier results. Management has revenue-enhancement and cost-saving initiatives that it plans to implement over the next two to three years. Based on these initiatives, we expect expanding revenues and widening margins over the longer term.
Monsanto Company is a global provider of technology-based solutions and agricultural products for growers. The company's products are also heavily used by grain processors, food companies, and individual consumers. Monsanto operates through two segments: seeds and genomics (62% of 2009 sales), which is biotechnology-oriented and geared toward helping growers produce higher-yielding crops, and agricultural productivity (38% of sales), which focuses on feed products to support livestock farming and crop protection products, including its flagship Roundup brand.
The global agricultural biotechnology company endured difficult top-line comparisons over the first three quarters of fiscal 2010. This was mainly due to weaker demand for its agricultural productivity products. Fierce demand in the herbicides market has created more obstacles, with price wars and lagging inventory levels taking a toll. In response to the recent difficulties, management is taking steps to restructure the company's business model. Cost-cutting initiatives, corporate revamping, and strategic investment in research and development should pay off over the longer term. Indeed, the company's R&D pipeline is the factor that provides it a competitive edge, which will likely fuel upside opportunity for the business expansion over the longer term.
Intel is a leading manufacturer of integrated circuits. In addition to primarily supplying manufacturers of personal computers, the company serves a multitude of other global markets, including communications, industrial automation, military, and other electronic equipment. Intel’s product line consists of microprocessors, with the Pentium series being the most notable. It also manufactures microcontrollers and memory chips. The company also sells computer modules and boards, and network products.
Intel reported strong results for the third quarter of 2010. In all, the company earned $0.52 a share on sales of just over $11.1 billion for the interim, which compared favorably to last year's figures of $9.4 billion and $0.33 a share, respectively. The result was also a little better than what we had estimated.
Microprocessor unit sales hit a record for the quarter, thanks to healthy demand on the Enterprise (corporate) side, along with increased demand in emerging markets. The Enterprise group remained strong, as corporations continued to replenish their IT-related needs. These factors helped to offset sluggish results on the consumer side.
The news is fairly positive for the December quarter as well. Management believes that revenues will be $11.4 billion (plus or minus $400 million), which equates to a sequential improvement of about 3%. However, the consumer segment will likely remain soft due, in part, to the anticipation of the Sandy Bridge (Intel’s next-generation chip that combines central processing and graphical functions) launch in the first quarter of 2011.
Looking further out, we expect earnings to rise at a double-digit annual clip over the pull to 2013-2015, reflecting the company's immense size and strong pipeline of new products.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.