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2 Most Important Companies Reporting Earnings This Week

Robert Holmes|Analyst
Monday, 23 Jan 2012 | 2:44 PM ET

Gadgets and cars are two products that seem to be growing in every country of the world, making earnings reports from Apple and Ford Motor critical to watch in the coming week.

With more than 110 companies of the Standard & Poor's 500 , as well as nearly half of the Dow's 30 components, set to publish earnings over the next five days, it's the peak week for quarterly reports.

That makes it tough for investors to wade through the deluge of reports to get a handle on how businesses fared in the previous three months. The answer, so far, isn't that great.

John Butters, senior earnings analyst at FactSet Research, says the earnings beat rate — companies whose numbers exceed analysts' projections — trails the historical average, stoking fears that corporate profits are peaking.

"Of the 60 companies that have reported earnings to date, 62 percent have reported actual EPS above estimates and 38 percent have reported actual EPS below estimates," Butters says. "Over the past four quarters, 73 percent of companies have reported actual EPS above estimates, on average."

The problem is simple: It's all Europe's fault.

"As the debt crisis and economic weakness has persisted in Europe, companies have been commenting more frequently on their business conditions in Europe," Butters says.

Enter: Apple . The tech giant will give investors more than mere anecdotes on how its iPhones and iPods are selling. Apple is going to give important consumer trends for the U.S., Europe, Asia, and beyond.

"It gives you a tone for the whole business environment. Apple is in so many different areas, from tech to the consumer," says Bob Bacarella, manager of the Monetta Young Investor Fund, which owns shares of Apple. "You have to listen to what they say, where the growth is, everything. It even gives you an idea of tertiary plays."

Apple is set to report quarterly results after the close of trading Tuesday. Analysts polled by Thomson Reuters expect Apple to report earnings of $10.07 a share, on average, and revenue of $38.7 billion.

Bacarella, though, says investors need to look further than how profit and sales results match up against expectations.

"This is one where I pay a lot of attention to what management says," Bacarella says. "It really depends on what is going on. If there is a better tone and more conviction that the market is better, one of the first stocks that money will go into is Apple."

Investors don't want to take on too much risk, so Apple would be one of their first choices despite a high share price. In the past week, Apple shares hit an all-time high of $431.37. Buying at the high, especially before a key earnings report for the holiday quarter, seems like a dicey proposition.

Bacarella, though, says investors should still consider Apple.

"New highs do not mean it's overpriced. It means what management is doing is working," he says. "People don't seem to get that. You shouldn't be frightened by a new high."

That said, Bacarella is aware of concerns that Apple has grown so large that it may be tough to keep up a growth rate of 30 percent or more.

As Apple shares jumped to an all-time high, the company's market value topped $400 billion, making it one of the largest companies in the world. Based on analysts' price targets, though, the company should continue to grow to $500 billion this year.

"In investors' minds, they wonder how they can grow at this fast rate given their size," Bacarella says. "They can't maintain 30 percent forever. If they can't maintain the perceived growth expectations, people will be looking for reasons to sell Apple. But I don't get that feeling yet that people are looking for holes yet. For Google maybe, but not Apple."

While most market participants will be fixated on Apple and what the company's results mean for the global economy, Bacarella will also be turning to one of his most favorite holdings: Ford .

Ford is scheduled to post quarterly results on Friday before the start of trading, with analysts expecting earnings of 25 cents a share on sales of $32.3 billion, according to Thomson Reuters.

Given the importance of automobiles to the global economy, this will be a key earnings report to watch, Bacarella says, especially with General Motors expected to post financial results weeks away.

"It's tied to the underlying economic strength," he says. "When people are able to find employment or feel comfortable in their job, they look at homes and automobiles. We want to know which models are doing well, why they're doing well, and what we can expect going forward."

Bacarella isn't alone in believing Ford is an important report for investors to read this week. Gary Bradshaw, a portfolio manager with Hodges Capital Management in Dallas, will also keep a close eye on what Ford has to say.

"There's no question it's a good barometer for the economy," Bradshaw says. "Ford has definitely improved their position, primarily in the U.S. but also worldwide."

The weak link for Ford, like most other companies in the fourth quarter, was Europe. In the previous quarter, Ford lost about $300 million in Europe, and Bradshaw expects the euro zone again to be a drag on Ford's results.

That said, he's expecting Ford to be upbeat in its commentary on business.

"Car sales have been better than expected," Bradshaw says. "The U.S. economy is improving, so from that standpoint Ford will do well. Ford has been awful upbeat. They've done a good job at keeping costs down and margins up, and that will resonate through management's commentary."

But unlike Apple, which is trading near record highs, Ford's stock has floundered as investors avoided turnaround stories in favor of defensive stocks that pay dividends.

Bradshaw says Ford is a good long-term buy now as auto sales could ramp up back to historical levels after dropping off sharply during the financial crisis and recession.

"I could see the company, in a couple of years, with earnings of $3 (per share). At a multiple of eight, you get a double," Bradshaw says of Ford, which trades now around $12. "Ford has had the wind in its face during this whole turnaround. This economic cloud has been hanging over it. But we're bullish."

While Ford and Apple will probably tell investors the most about economic conditions around the globe, there two other consumer companies that bear watching in the coming week.

Before Tuesday's opening bell, McDonald's will open the books on its fourth quarter. Analysts are calling for earnings of $1.29 a share on sales of $6.8 billion.

Then, on Thursday, Starbucks is out with results, with analysts predicting a profit of 48 cents a share on sales of $3.3 billion.

Having a Dow component in the spotlight isn't a surprise. But McDonald's has been a powerhouse over the past year, rallying more than 37 percent while paying a dividend close to 3 percent.

With investors worried about the global economy and the potential for another recession , McDonald's has been a favorite hiding place. With operations around the globe, McDonald's will offer key insights into different markets, as well as the impacts of higher input costs.

The same holds true for Starbucks . Like McDonald's, Starbucks shares have rocketed higher over the past year, doubling over 12 months.

But unlike McDonald's, which has a reasonable forward price-to-earnings ratio of 17, Starbucks investors are paying a premium to buy shares at a multiple of more than 21.

"The growth expectations are big," says Monetta's Bacarella. "The price reflects that. It's a momentum name, really."

That growth could come from India, an emerging market where Starbucks is making a big push.

Bacarella will be watching management's comments for clues on the future.

"Starbucks could be a big play for India," Bacarella says. "It's a huge market that is 10 times the size of the U.S. Think of the possibilities if that takes hold."

Additional News: How the US Lost Out on iPhone Work

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Disclosures:

TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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