Seek Safety In Serial Surprisers

10/27/2014


Earnings season is in full swing, and investors have little sympathy for companies missing sales and profit estimates. Just ask shareholders of IBM ($162; IBM), which tumbled 7% on the day it reported disappointing results and rescinded its 2015 guidance.

As usual, most companies have announced results that surpassed expectations. Only 18% of the S&P 500 Index had announced third-quarter results as of Oct. 21. Of those 88 companies, 56 (64%) posted a positive profit surprise, versus an average of 67% over the prior eight quarters. About 56% delivered a positive sales surprise, versus an average of 54%.

Because companies have learned to manage analysts' sales and profit expectations, a negative surprise is that much more of a catastrophe. And because analysts rely heavily on dialogue from companies to form their forecasts, investors often view companies that fall short of their own spoon-fed guidance as really in trouble.

One way to avoid being torpedoed is to focus on stocks that regularly beat estimates. Such companies have done a good job of both managing expectations and delivering results. The table below lists nine stocks that posted sales and earnings above both year-earlier levels and the consensus in each of the last four quarters. In addition, all nine saw their shares rise on the day they announced results in at least two of the four quarters, suggesting investors viewed the results as genuinely better than expected.

Three serial surprisers are profiled in the following paragraphs:

Foot Locker ($55; FL) scores in the top 40% of our research universe for all six Quadrix categories, contributing to an Overall rank of 98. The stock enjoys robust operating momentum, with sales growing 9% and cash from operations 32% in the 12 months ended June. Free cash flow surged 71% to $338 million in the past year, boosting net cash to $820 million, or roughly 10% of the share price.

With several barriers protecting the business from internet competition, Foot Locker, unlike many retailers, is experiencing higher store traffic. The company enjoys an inherent advantage of the shoe business — shoppers' desire to test shoes in person to ensure a comfortable fit. Its stores also offer exclusive patterns and colors. Even more importantly, Nike ($90; NKE) does not offer its top-tier shoes on Amazon.com ($313; AMZN).

Foot Locker is up 34% this year, while the S&P 1500 Index is up less than 4%. Despite some jitters over the health of the U.S. and European economies, Foot Locker's estimates for the October quarter have held up. The consensus projects 16% higher earnings per share on 6% revenue growth. Management has topped the consensus profit estimate in four straight quarters and in 16 of the past 18. Foot Locker is a Focus List Buy and a Long-Term Buy.


Gilead Sciences ($106; GILD) is scheduled to report results Oct. 28. Analyst estimates have climbed in the past month, with the consensus now projecting per-share profits of $1.92, up from $0.52 in the year-ago quarter. Sales are expected to surge 118%. Gilead has topped consensus profit estimates in four consecutive quarters; the last two quarters it beat by more than 30%.

Company guidance will be crucial. Key factors include the adoption rate of hepatitis C drug Sovaldi in Europe and expectations for Harvoni, Gilead's newest pill for treating the disease. Management will also likely give commentary on recent moves made by the U.S. to clamp down on companies using tax shelters in foreign countries. Gilead is headquartered in the U.S. but has intellectual property domiciled in Ireland. Gilead shares initially fell when the U.S. outlined stricter rules, but have since recovered. Gilead, earning a maximum Momentum rank of 100 and Overall rank of 97, is a Long-Term Buy.


Lam Research ($72; LRCX), a maker of semiconductor equipment, earned $0.96 per share in the September quarter, up 19%, to top the consensus estimate of $0.93. Revenue rose 13% to $1.15 billion, marginally ahead of the consensus. Lam has now produced double-digit sales growth in nine straight quarters. Cash from operations surged 172% to $141 million. The midpoint of Lam's December-quarter guidance fell short of consensus estimates but still represents some growth. Lam expects per-share profits of $1.12, up 2%, compared to the consensus of $1.16 at the time of the announcement. Sales are projected to rise 10% to $1.23 billion, slightly below the consensus of $1.25 billion.

Lam earns a Quadrix Performance score of 92 and Momentum rank of 97. Amid the market's recent turmoil, Lam roughly flat since the end of August, compared to the S&P 500's 4% slump. Shares still seem reasonably valued at 16 times trailing earnings, 23% below their five-year average and 21% below the median for S&P 1500 semiconductor-equipment stocks. Lam is a Buy and a Long-Term Buy.

SERIAL SURPRISERS AND GROWERS
Only nine of our A-rated (above average) and B-rated (average) stocks both grew sales and profits and topped the sales and profit consensus in each of the last four quarters — while rising on the news in at least two of those quarters. All nine should grow sales and profits this year and next year. Stocks on our buy lists are in bold.
----------------------- Surprise Versus Wall Street Consensus -----------------------
Recent
----- Quarter -----
Prior
----- Quarter -----
3 Quarters
------- Ago -------
4 Quarters
------- Ago -------
Est. Current-
-- Year Growth --
Est. Next-
-- Year Growth --
Company (Price; Ticker)
Sales
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Ameriprise Financial
($115; AMP)
5.2
3.5
5.4
8.5
5.4
3.3
0.1
10.4
7
17
8
14
Disney ($87; DIS)
2.5
9.4
3.9
15.6
0.3
13.0
1.0
1.3
8
27
6
9
Foot Locker ($55; FL)
4.7
18.5
4.7
4.7
0.9
7.9
2.3
3.0
10
20
5
11
Gilead Sciences
($106; GILD)
13.1
31.8
36.0
62.6
9.3
10.0
1.6
8.3
117
294
15
20
Johnson & Johnson
($101; JNJ)
3.4
7.1
0.7
4.1
2.4
3.3
1.2
3.0
5
8
2
4
Lam Research
($72; LRCX)
0.1
3.2
0.7
1.6
0.4
7.7
1.3
6.8
9
5
6
14
Magna Int'l ($93; MGA)
1.0
6.8
0.9
0.5
3.2
51.3
0.9
14.2
5
19
4
15
Skyworks Solutions
($54; SWKS)
3.0
3.7
2.3
5.1
1.0
1.5
1.0
3.2
28
45
24
27
United Rentals
($105; URI)
3.0
13.0
0.8
26.8
0.5
8.2
0.2
1.9
14
39
10
20

 


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