Earnings season: So far, so good

5/5/2008


Anyone who plays golf has some insight on the stock market.

They say you drive for show and putt for dough. Big moves in the middle of the quarter are like long tee shots — they attract plenty of attention and cause investors to puff out their chests. But the real test comes on the green, during earnings season.

As of April 29, 285 of the S&P 500 Index companies had reported earnings for the February or March quarters. More than 66% have topped consensus estimates, slightly above the average of 61% since 1994. Based on a blend of actual earnings and consensus estimates for companies that have not yet declared, earnings for the S&P 500 Index are expected to be down 14% from the year-earlier quarter.

While the profit number sounds ugly, it isn’t all bad. Excluding the troubled financial sector, the index’s per-share profits should be up nearly 9%. So far, the market has reacted fairly well to earnings. Since Alcoa ($35; NYSE: AA) unofficially kicked off the March-quarter earnings season April 7, the S&P 500 is up 1.3%, while the Dow Jones Industrial Average has risen 1.7%.

In the following paragraphs, we review two stocks that exceeded expectations, both topping the consensus estimate and rising on the earnings news.

March-quarter earnings for Energen ($68; NYSE: EGN) beat expectations, and the company increased guidance for both 2008 and 2009. Per-share earnings rose 13% to $1.62, aided by a $6.4 million asset sale and a 3% increase in production. Higher realized prices for oil (up 16%) and natural-gas liquids (up 30%) also contributed to profit growth.

Energen now expects per-share earnings of $4.15 to $4.55 for 2008 and $4.65 to $5.05 for 2009. The stock seems reasonably valued at 16 times the midpoint of the 2008 range.

In an effort to boost growth over the next several years, Energen has raised the stakes in its efforts to recover gas from the Alabama shales. The company added 10% to its acreage since early March and boosted its planned 2008 exploration-and-production spending by $20 million, to $330 million. Three test wells have been dug, but the company has not yet released any data on their production. Energen is a Long-Term Buy.


IBM’s ($123; NYSE: IBM) March-quarter results encouraged investors. The stock has risen 5% since the earnings announcement. Per-share earnings rose 36% to $1.65, handily exceeding the $1.45 consensus. The company has topped consensus profit estimates in seven of the last eight quarters.

Sales rose across the board, but the biggest surprise was in the U.S. Following 2% growth in the December quarter, the company said U.S. revenue increased 6% in the March quarter. Europe also showed solid 4% sales growth, while revenue in the Asia-Pacific region excluding Japan grew 18%, or 10% at constant currency. Services revenue rose 17%, with software revenue up 14%.

Following the strong quarter, IBM raised its 2008 per-share-earnings target to $8.50, up from $8.25. Consensus estimates have since risen to $8.54 per share, representing 20% growth. On April 29, IBM raised its quarterly dividend 25% to $0.50 per share, payable June 10. In the wake of the dividend hike, IBM’s yield rises to 1.6%. IBM is a Buy and a Long-Term Buy.


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