3 strong performers from earnings season: Are they still a buy?

Earnings season always leads to some major shifts in share prices as companies’ full year results are digested, and investors re-evaluate their expectations for the future.

Sometimes the re-evaluation period can be rough. Shares in A2 Milk Company Ltd (Australia) (ASX: A2M) are down nearly 20% in the past 9 days as investors were disappointed at the company’s results – or perhaps more accurately, disappointed that there weren’t further earnings upgrades after a year of multiple upgrades. The announcement of higher spending on brand development and research should only be a positive for the long term, even though it might have a short term impact on the company’s profitability.

Shares only look brighter for the recent falls, and indeed A2 would be one of my top buys now, if I didn’t already have enough shares.

Unlike A2, Carsales.Com Ltd (ASX: CAR) rose 10% on a relatively modest result, hitting a new all-time high of $13.63. Yet the new highs might have seemed a bit rich for a company that is growing earnings in the high-single-digits per year. I like Carsales and its management team a lot, and it is one of my larger holdings, but there’s no need to chase the share price higher given the slow burn of its underlying growth. The international opportunity is significant, but appears as though it will take several years to come to fruition.

Although shares are back around $12.80, I wouldn’t feel the need to rush out and buy Carsales today.

Retail Food Group Limited (ASX: RFG) leapt 17% after reporting a strong year of growing profits and expanding its outlet footprint. With its capital-light operating model and taste for acquisitions (funded through new share issues) Retail Food Group can continue to expand relatively rapidly. Certainly, its international opportunity is large and that’s partly why shares are up from under $5 a year ago.

Retail Foods may not be suitable for more conservative investors, as it uses higher levels of debt (gearing of 40% to 60%) to drive its expansion, while ongoing new share issues raise the risk of dilution over time. Yet at today’s prices, Retail Food looks significantly cheaper than A2 or Carsales, above.

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Motley Fool contributor Sean O'Neill owns shares of A2 Milk, Limited, and Retail Food Group Limited. The Motley Fool Australia owns shares of A2 Milk and Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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