Earnings Surprises 7/20/10


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Positive surprises continue to outnumber negative ones by a wide margin. Maybe that should not be such a surprise when during 1Q2010 over 80% of companies showed a rising sales growth rate and nearly 70% recorded a profit margin improvement (according to GEARS research). Using technology developed by GEARS, I create an accurate and complete financial statement analysis that provides a detailed trace of how the company fundamentals change through time.

The positive surprise pattern is traced in fundamental data. Companies with rising sales growth, higher gross profit margins, lower fixed costs to sales, lower financing cost, and rising profitability are more likely to announce a positive surprise. The Earnings Surprise Model is created to exploit that pattern.

Companies that will report their earnings on July, 22 that have a positive surprise pattern in their 1Q2010 fundamentals are: 3M Co. (MMM), Advanced Energy Industries, Inc. (AEIS), Air Products & Chemicals Inc. (APD), Alaska Air Group, Inc. (ALK), Amazon.com Inc. (AMZN), American Express Company (AXP), Avid Technology Inc. (AVID), The Chubb Corporation (CB), Cabot Microelectronics Corp. (CCMP), Cash America International, Inc. (CSH), Caterpillar Inc. (CAT), Continental Airlines, Inc. (CAL), Cooper Industries plc (CBE), Cymer Inc. (CYMI), Cypress Semiconductor Corporation (CY), Danaher Corp. (DHR), Deluxe Corp. (DLX), Digi International Inc. (DGII), Electronics for Imaging, Inc. (EFII), EZCORP Inc. (EZPW), Forward Air Corp. (FWRD), Gentex Corp. (GNTX), HNI Corp. (HNI), Invacare Corporation (IVC), Lacrosse Footwear Inc. (BOOT), Lattice Semiconductor Corporation (LSCC), Leggett & Platt, Incorporated (LEG), Micrel Inc. (MCRL), Microsemi Corp. (MSCC) Microsoft Corporation (MSFT), Nucor Corporation (NUE), PMC-Sierra Inc. (PMCS), Rambus Inc. (RMBS), Reliance Steel & Aluminum Co. (RS), Ruby Tuesday, Inc. (RI), Sherwin-Williams Co. (SHW), Sigma-Aldrich Corporation (SIAL), Skyworks Solutions Inc. (SWKS), The Cheesecake Factory Incorporated (CAKE), Ultratech, Inc. (UTEK), Union Pacific Corporation (UNP), United Parcel Service, Inc. (UPS) and Vicor Corp. (VICR).

The negative surprise pattern is the inverse and companies with lower sales growth, gross margins falling, higher fixed costs to sales, higher interest costs, and lower profitability in the prior period are more likely to announce a negative earnings surprise. The more likely negative surprises on July, 22 are Badger Meter Inc. (BMI), Baxter International Inc. (BAX), Cabot Oil & Gas Corporation (COG), Compuware Corporation (CPWR), Diamond Offshore Drilling Inc. (DO), Federated Investors, Inc. (FII), FLIR Systems, Inc. (FLIR), Immucor Inc. (BLUD), Laboratory Corp. of America Holdings (LH), Lance, Inc. (LNCE), Nash Finch Co. (NAFC), Olin Corp. (OLN), Orbital Sciences Corp. (ORB), Penn National Gaming Inc. (PENN), Pool Corp (POOL), Precision Castparts Corp. (PCP), ProLogis (PLD) and USA Truck Inc. (USAK)

Three companies that are owned by the Earnings Surprise model will report on July, 21. During 1Q2010, BlackRock, Inc. (BLK) recorded an improvement is sales growth and profit margin, SG&A expenses to sales are high and falling. That is producing a leveraged acceleration in operating cash flow that the company further enhanced during 1Q2010 with an increase in debt and cash from a recent share offering apparently anticipating the cash needs of an acquisition.

Freeport-McMoRan Copper & Gold Inc. (FCX) has a very strong top line and lower costs during 1Q2010. SDG&A expenses to sales are low in the company record but still falling and interest costs are down. That is a leveraged acceleration that produces a strong increase in profitability at the company and better chance of a positive earnings surprise.

Finally I am anticipating a positive surprise on July, 21 from Western Digital Corp. (WDC) where during 1Q2010 a very strong top line and lower costs produced leveraged bottom line acceleration.

These three names were selected for the earnings surprise model portfolio because, as well as a positive surprise pattern, they are highly profitable companies where the stocks have been under pressure in recent weeks and the shares are depressed.

Author profile

Robert Gay
Robert Gay
Global Equity Analytics and Research Services LLC (GEARS), a proprietary learning-based electronic documentation interpretation software company, was founded by Robert Gay. Prior to founding GEARS, Robert was Vice President and Director of Quantitative Research at Donaldson, Lufkin and Jenrette in New York.

Robert was selected to Institutional Investor Magazine's All-American Research team each year from 1990 through 1995.