Looking For A True Surprise
Profit surprises have become so common that the word "surprise" has lost some of its meaning on Wall Street. In the June quarter, 66% of S&P 500 Index companies posted better-than-expected earnings, matching the March-quarter level and exceeding the norm of 64% since 2000. In each of the last 54 quarters, more than 50% of S&P 500 stocks have topped consensus estimates.
A true upside surprise will generate a positive share-price reaction. A wealth of research shows stocks that rally on strong earnings reports tend to continue to outperform the market in subsequent months. We also like to consider the trend in profit estimates, as companies that top rising estimates often have legitimate earnings momentum.
The table below lists five recommendations that posted above-consensus earnings in each of the last four quarters and enjoy favorable revision trends for estimated current-year and next-year earnings. All five earn Quadrix Earnings Estimates scores above 90, ranking them near the top 10% of U.S. stocks.
In at least three of the last four quarters, all five stocks rallied on the first trading day after announcing earnings, suggesting investors considered the results genuine surprises.
B/E Aerospace's ($73; BEAV) Earnings Estimates score of 96 ranks near the top 4% of U.S. stocks. Indeed, analysts have ratcheted per-share profit estimates meaningfully higher over the past year. The consensus for 2013 stands at $3.56, up from the consensus of $3.35 a year ago and implying 26% growth. The 2014 consensus of $4.30 is $0.37 higher than a year ago. Estimates could prove conservative — per-share earnings have outstripped the consensus in 28 straight quarters, by an average of nearly 10%.
Leveraged to the aerospace industry, B/E is a leading provider of cabin interior products and fasteners. The company is particularly well positioned in an improving commercial-plane market. Aerospace giants Boeing ($119; BA) and Airbus combined to account for 14% of sales in fiscal 2012. Recently, Boeing unveiled a new version of the 787 Dreamliner that the company hopes will accelerate production and sidestep the delays and glitches of earlier 787s. B/E Aerospace is a Buy and a Long-Term Buy.
Shares of Cigna ($78; CI) are up 47% this year, and rising analysts estimates could help propel the stock higher. The giant health insurer is benefiting from market-share gains, favorable cost trends, and healthy membership growth. Wall Street projects profits of $6.63 per share in 2013, up 11%. The estimate was $6.49 three months ago. For 2014, the consensus is $7.24, up from $7.05 in June. Cigna earns an Overall score of 81, paced by a 95 in Earnings Estimates.
Cigna is not without risk. Patients who have foregone health care in recent years are expected to return to the doctor's office, raising costs for managed-care providers. And the pending launch of national health exchanges to accommodate uninsured Americans adds uncertainty. Cigna, which offers exchange plans in fewer than half a dozen states, is taking a wait-and-see approach with the new health plans. Across all insurers, the exchanges are expected to enroll an estimated 7 million people in the first year. Cigna is a Long-Term Buy.