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Alcoa Inc (AA): Three Earnings Plays to Watch This Week

Last Friday, the better than expected jobs report caused the market to stage an end of week rally. The Bureau of Labor Statistics reported that the U.S. economy added 195,000 new jobs during the month of June, a positive sign for investors as we approach the earnings season.

A second benefit for investors is the July 4 announcement by the Obama administration to delay a critical part of the Affordable Care Act. The White House announced that businesses with 50 or more employees will not be required to provide health insurance to their employees until 2015, a year later than originally expected.

Alcoa Inc (NYSE:AA)

The delay of the health care law could spur employers to create new jobs in the near-term, boosting job growth for July, August, and September. The timing of the jobs report and Affordable Care Act delay comes at a time when the market is looking for a fresh catalyst, following investor fatigue over the Federal Reserve’s $85/billion-a-month bond buying program.

All in all, the market has a resurgent attitude heading into the first week of earnings season, when aluminum producer Alcoa Inc (NYSE:AA) begins proceedings on July 8. Here are three stocks I’m monitoring for the opening week of earnings:

Global financial services firm

Friday, July 12 before market open; EPS $1.43 / Revenue $24.75 billion

New York-based JPMorgan Chase & Co. (NYSE:JPM) emerged as a leader from the financial crisis, and the bank continues to grow its blue chip franchise.

Chief executive Jamie Dimon spoke at a financial services conference in early June, providing numerous takeaways for investors. Dimon stated his belief the 10-year Treasury yield is heading towards 4%-5% in coming years, with even higher rates a possibility. JPMorgan Chase & Co. (NYSE:JPM)’s net interest income fell to $10.9 billion in Q1 2013, compared to $11.7 billion during Q1 2012 as a result of the low interest rate environment.

Dimon hopes to reverse the NII trend in coming quarters, cautioning that upcoming results will likely be affected by the persistent low rates.

Ahead of Friday’s earnings report, analysts at St. Petersburg, FL-based Raymond James upgraded JPMorgan Chase & Co. (NYSE:JPM) to a “strong buy” from a previous “outperform” rating. The investment firm raised its price target to $64 from the previous $55.

In other news, JPMorgan Chase & Co. (NYSE:JPM) is the latest financial institution to grow its presence in Iraq. Western banks are hoping to capitalize on the Middle Eastern country’s oil economy as it recovers from the U.S. conflict which ended in December 2011. Citigroup Inc. (NYSE:C) has also made plans to enter Iraq.

Home mortgage leader

Friday, July 12 before market open; EPS $0.92 / Revenue $21.20 billion

Wells Fargo & Co (NYSE:WFC) is one of the largest mortgage originators in the country.

A number of Wall Street firms have downgraded the San Francisco, CA-based lender ahead of Friday’s earnings report. The main drivers for the downgrades include a fair valuation and slowing earnings growth. Let’s consider the rationale for each before reaching a conclusion.

First, the valuation. Shares of Wells Fargo & Co (NYSE:WFC) have posted a 23% gain so far this year, handily outpacing the 14% return of the S&P 500. The stock carries a 12x price-to-earnings multiple, less than the 14x industry average for commercial banks.

Second, the earnings forecast. The bank should earn $3.71 for full year 2013, with profits set to rise 5% to $3.91 for the 2014 fiscal year. Next year’s earnings forecast gives the stock a 10.5x forward multiple.

Earnings growth appears to be a greater concern than valuation. However, I believe Wells Fargo & Co (NYSE:WFC)’s 2014 forecast has the potential for upward revision. Interest rates are beginning to rise, which should help drive earnings growth at major U.S. banks, even in the face of declining mortgage originations.

I don’t see a need to act on Wells Fargo & Co (NYSE:WFC) ahead of the earnings release, however I’d consider buying on any pullback if the market provides an opportunity.

International restaurant operator

Thursday, July 11 before market open; EPS $0.54 / Revenue $2.93 billion

A former staple for emerging market investors, Yum! Brands, Inc. (NYSE:YUM) has lost its luster in recent months based on numerous setbacks in China. Yum!’s KFC brand is the number one quick-service restaurant brand in the world’s most populous country, with more than 4,200 restaurants in 850 cities.

Concerns over Yum! China began during the fourth quarter 2012 when the Shanghai FDA launched an investigation into Yum!’s poultry supply management. News of the investigation was further aggravated by a feature broadcast on China’s national TV station, CCTV. These events caused Chinese customers to avoid KFC chicken, sparking a sales decline that has persisted till now.

In early 2013, the China situation became even worse over concerns with the Avian bird flu. Same-store sales in China fell a massive 29% in April 2013 compared to the prior year. And in May, Yum! China posted another 19% sales decline based on further health worries.

Despite the obvious concerns, it appears that most Yum! investors are staying the course. Shares of Yum! have staged an 8% rally year-to-date ahead of Thursday’s earnings call. And on June 11, management stated it expects China sales to turn positive by the end of the year.

In my opinion, there is little urgency to buy Yum! Brands ahead of Q2 earnings based on the limited visibility. The situation in China has proven to be largely outside management’s control, and I do not anticipate the company will provide new material information on Thursday.

Foolish takeaway

Whether you are a long-term investor or trader, earnings season will help determine if your portfolio is making the grade. It’s important to identify any factors that can affect your holdings ahead of time, so you can be proactive rather than reactive after the news is released.

While Citigroup Inc. (NYSE:C) remains my favorite large-cap bank, readers might consider JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) based on the steepening yield curve. Earnings should rise at the major banks as the Federal Reserve winds down its dovish monetary policy.

Visibility remains limited at Yum! Brands ahead of Thursday’s earnings report, and I’m unable to recommend the stock for this reason. If you are truly a long-term investor, the market will provide an opportunity to buy as Yum! China begins to stabilize. Patient investors will be rewarded, and there’s no need to jump in here.

Thanks for reading, and consider subscribing to my posts for more Foolish ideas on outperforming the market.

The article 3 Earnings Plays to Watch This Week originally appeared on Fool.com and is written by John Macris.

John Macris has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM). and Wells Fargo. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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