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Earnings Radar: POT, SBUX, PEP, ZNGA

While the macroeconomic situation both here and abroad is increasingly becoming a concern, corporate earnings are once again proving to be a pillar of support. A vast majority – reportedly over 80% -- of companies are beating the consensus estimates, which looks quite impressive on the surface.  On an absolute growth basis, however, the results aren’t nearly as awe-inspiring. To a large degree, the beats have been more a function of jumping a low hurdle. Furthermore, forward guidance has not been very strong, with few companies upping their expectations for FY12. Nonetheless, the better-than-expected earnings have been a bit of a crutch for the markets thus far, as the broader indices have held up pretty well. With investors and traders enamored with the upside Q1 reports, the markets should find further support this week with hundreds of companies on the calendar. In today’s report, we’ll take a look at a few of the companies expected to report results on Thursday, April 26.

Will POT Yield Upside Results?
Canadian-based fertilizer company Potash (NYSE: POT) is expected to issue its Q1 results before the market opens on April 26 with the Street forecasting EPS of $0.64 and revenue of $1.78 billion. An inline report would equate to a year/year EPS decline of 24% and revenue decline of 19%. It’s been a rough ride of late for fertilizer and potash stocks, and heading into its report, shares of POT have been sliding lower. Since the beginning of March, POT is down ~13%. The good news is, it appears the stock has found some support around the $50 level, and with sentiment and expectations muted, it won’t take a huge beat to get a pop out of the stock.

Another positive came in the way of the USDA report, issued in late March. The report showed a 4% year/year increase in expected corn pricing in addition to a bullish quarterly grain stocks report. The end result has been a spike in corn prices, which is of course a positive for POT’s farming customers.

Growth Perking Up at SBUX
Over the past couple of years, Starbucks (Nasdaq:SBUX) has impressively turned itself around and the stock has gone from value-trap status to an emerging large cap growth story. After closing many doors in the U.S. during, and following the recession, SBUX focused its expansion efforts in China, introduced new menu items, and more recently, entered into the high growth single-cup brewing system business. The moves have paid off handsomely with the stock near all-time highs.

With expectations high, SBUX will likely need to top the Q1 EPS and revenue estimates of $0.39 and $3.18 billion. An inline quarter would represent annual growth of 15% and 13%. Besides the headline numbers, investors and analysts will key in on its global comps figures, which came in at +7% a year ago, as well as its operating margin, and its FY12 guidance. With a pair of catalysts ahead, including the launch of its Verismo Single Cup System and its recently announced plans to enter more mid and small-sized Chinese cities, above consensus guidance could be in the cards for SBUX. With a P/E around 35x and P/S over 9, better-than-expected guidance may be needed to keep shares charging higher.

Will PEP Results Fall Flat
Pepsi
(NYSE: PEP), the beverage and snack food giant, is slated to issue Q1 figures before the market opens on April 26. The Street is looking for EPS of $0.67 and revenue of $12.4 billion. Heading into its report, the stock has been exhibiting some solid relative strength versus the broader market.  It is nearing a key resistance level at $67, but if its’ Q1 is a strong print, that could be the catalyst to push it through that zone.  We would point out that PEP has exceeded the top and bottom line estimates in each of the past three quarters. The conference call, which begins at 8:00 am ET, will also be of interest since the company is currently going through some structural changes. There had been some chatter that PEP may consider splitting the company, but thus far, PEP has only announced productivity programs to stimulate cost savings, a significant boost to N. American advertising efforts, and a strategy to improve its net return on invested capital by at least 50 bps annually.

Game On
Online game developer Zynga (Nasdaq: ZNGA) will provide its Q1 results after the close on April 26 with the recent IPO expected to report EPS of $0.05 and revenue of $311.1 million. After going public on December 16, 2011, this will be the company’s second quarterly report since its IPO. The stock has been in a total free-fall since early March, and is now trading below its IPO price of $10. One concern that has been pummeling shares was its announcement in mid-April that it will be looking for sizable acquisitions to bolster its growth. This has led to a belief that the company is not so confident in its ability to grow its business strongly through organic means, playing into concerns that its games are losing their luster. Another problem is that Facebook reported that its revenue from Zynga was only 11% in its 1Q11, which is down from the 15% in 2010. With the stock getting decimated, however, value investors may soon slowly start building positions in it, especially ahead of Facebook’s upcoming IPO in late May. Shares of ZNGA are trading with a P/S under 6x and P/E under 25x.

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