Via SeekingAlpha.com

As we enter one of the busiest earnings weeks of the season, we would like to highlight four stocks we recommend to own into the quarter. As we said in the past, it does not mean that shares of these names will see an immediate spike right after the print (it’s quite possible, though), but we do believe that, once some dust of active trading settles, these names will do well over next 3 months.

Below, we briefly discuss some tailwinds, as well as valuation.

Abbvie, Inc. (ABBV)

These days, it seems that Gilead and Johnson & Johnson are getting all the main attention when it comes to pharmaceutical companies. However, ABBV could actually be an overlooked stock at this point, as many pharma investors ignore solid research companies that are corona-focused. In the meantime, we ought not to forget that Abbvie stands at the forefront of virology, oncology research, Parkinson’s disease, and various autoimmune diseases, to name a few. Furthermore, ABBV offers numerous products that are critical to the hospital use, including anesthesia, which these days are as relevant as ever. We strongly recommend ABBV shares; the fact that they are currently trading approximately 20% below its 52-week high (essentially in the bear market) is an investor oversight, in our opinion.

1) Kaletra and other HIV drugs may not prove as effective as the company initially hoped (there were some reports of the drug’s efficacy in China, although drug trials are inconclusive). However, what’s more important, is a high degree of collaboration between the company’s scientists and CDC/FDA, which may lead to future drug development in the future. Furthermore, even current HIV studies should not be discounted. Any discussion of meaningful coronavirus research progress during earnings call could spur a rally.

2) Attractive dividend yield of 5.75% should fuel investor interest, as stable dividend companies with solid top-line growth are about to become a hotter commodity in 2020. With cash flows remaining abundant, we believe that the company’s capital return is safe in the months and quarters to come.

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3) We need more information about specific tailwinds that should arise with the acquisition of Allergan (AGN), due to be completed around July-August. To date, we heard only generic things but no specific details about the synergies breakdown; however, it is very important to learn how the research processes are going to be merged/integrated, if at all, and how this will affect the R&D pipeline.

Valuation: Our P/E multiple of 10.5x is more than reasonable, given the AGN prospects and the fact that the multiple conservatively doesn’t integrate any potential coronavirus tailwinds. When applied to our 2020 EPS estimate of $10.13, we get the target price of $106.

Clorox (CLX)

This stock obviously received a lot of coverage in the brave new world of coronavirus. Some believe that the pandemic boost may have already priced in much of the upside; in our view, the ~20% increase in CLX shares since February does not fully capture the company’s potential. Upcoming earnings represent an opportunity to truly shine and set the stage for a successful disinfectants-driven year.

1) Cleaning products lead the charge: we estimate that about 39%-41% of CLX revenue base comes from bathroom/cleaning products, such as wipes, bleach, and various cleaners. Needless to say, that’s exactly what America and the rest of the world is after today, as these products have become notable examples of shortages at pharmacies and supermarkets.

2) Prognosis for 2021 signals at least 8% Y/Y revenue growth, as top CDC and WHO experts are expecting coronavirus season to be mixed with flu season, hence, the winter season for 2020-21 is expected to be no less challenging. The so-called “hygiene renaissance”, in our opinion, will last much longer than the current pandemic, which is very significant from the point of forward-looking stock expectations.

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3) We expect meaningful growth in international segment in the next 1-2 years. While the non-US business has been at less than 20%-25% of total company revenues (see graph below), we believe that in the short run, CLX will make meaningful inroads with Canada and Latin America, and especially Western Europe, where revenue traction has been minimal to date.

4) Supply chain in solid shape: there have been incorrect reports about supply chain disruptions for Clorox, which led to some temporary pressures in CLX shares earlier this month. However, our channel checks indicate that as early as February Clorox has stabilized its supply chains, and while there are numerous instances of various shortages, they are largely driven by re-stocking delays from sellers and resellers.

Valuation: With CLX being one of the hottest coronavirus stocks, we are comfortably applying the rich P/E multiple of ~36x to our 2020 EPS estimate of $6.67, which results in the target price of $239. We reiterate that this momentum-driven stock may fuel even higher results in the short run. We strongly urge investors not to be deterred by expensive valuation.

Clorox: The Brands That Are on Everyone's Minds - GuruFocus.com

PepsiCo (PEP)

We expect PepsiCo to beat the revenue consensus of $13.1 billion, since the company’s diversified platform (see chart below) makes it an excellent at-home stock. We see the following three tailwinds:

1) Strong mid-single digit Y/Y revenue growth in the beverages section, particularly boosted by March sales. The North America market should be particularly strong, with acceleration as much as 110-140 bps.

2) Boost from Instacart and other delivery channels should contribute to traction across core demographics in the United States.

3) Margin expansion could be by as much as 60-85 bps, driven by solid revenue growth, though we expect the company to guide into a more aggressive expansion in the quarters to come, particularly as SG&A not related to employment expenses receives some cuts.

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Valuation: We estimate our 2020 EPS to be at $5.82, which at the multiple of ~28x translates into the target price of $161.

PepsiCo's Diversification Strategy in 2014

Starbucks (SBUX)

Starbucks is one of the few brands that continues to be physically available at many locations around the world. Furthermore, even if some are shut down, SBUX should be one of the first businesses to reopen.

1) China is a harbinger of things to come: Similar to what we have seen with Apple, Starbucks in China demonstrates what a reopening and reintegration could look like, once the virus situation improves. We expect most geographic locations around the world (see map below) to reopen in some capacity in May.

2) Drive-through and delivery model should substitute for about 85%-92% of lost in-store sales for March.

3) Instead of focusing on annual guidance, we believe the company will astutely focus on quarter-to-quarter traction, with the next update likely coming in the middle or toward the end of the second quarter. If SBUX management currently provides reassurances regarding its top line story for March, then investors could give it the benefit of the doubt until the next update.

Valuation: We are reducing our EPS by about 34 cents (equivalent to 12%), which takes us to the new EPS of $2.60. We apply the P/E multiple of ~35x, where much of the premium comes from the fact that Starbucks is able to stay operational, despite the ongoing coronavirus-related shutdown. Our resulting target price is $91.

SBUX Geographic Outreach

Source: Company data

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.