June 25, 2012

StarMine’s Q1 Earnings Surprise Report Card — 100% ! — and Update

by Sridharan Raman

StarMine models accurately predict earnings surprises for all ten first-quarter candidates.

Toward the end of each quarter, the StarMine research team at Thomson Reuters scrutinizes earnings forecasts in search of companies that it believes are most likely to beat the consensus forecast for earnings for the period — or that are likely to fall short of those expectations. Using StarMine SmartEstimates® and Predicted Surprises, we highlight ten companies that we believe have a high probability of recording an earnings surprise; five of them positive and another five negative.

As you can see from the chart below, in the case of all of those ten selections for the first quarter of 2012 — each of which was the subject of an article on AlphaNow in the days and weeks leading up to their earnings announcement — those forecasts were accurate.

What do the prospects for these companies look like today, as the second quarter approaches its end? Of the five companies we predicted would report positive surprises, our data suggest that in at least four cases the pattern could repeat itself. After Western Digital’s (WDC.N) big positive surprise in April, analysts boosted their estimates for its second-quarter earnings, and now are calling for it to report a profit of $2.56 a share, up from a previous consensus of $2.35 a share. Although rumors of a takeover of Monster Beverages (MNST.O)  by Coca-Cola (KO.N) have died down since early spring, the company’s earnings estimates continue to climb. Both the consensus and the StarMine SmartEstimate (the SmartEstimate is a weighted reformulation of analyst estimates that emphasizes the recent forecasts by the top-ranked analysts) have risen by 5 cents a share to 61 cents a share. At Old Dominion Freight Lines (ODFL.O), the SmartEstimate is still above the consensus (although estimates have remained flat since the company reported its results) and two five-star analysts have published above-consensus estimates. Lower fuel costs is one reason for the continued bullishness about both Old Dominion and WestJet Airlines (WJAFF.PK); analysts have been raising their forecasts for the latter’s second-quarter earnings. As a result, WestJet has a large Predicted Surprise of 17.6% for this quarter. (The Predicted Surprise is a measure of the percentage difference between the SmartEstimate and the consensus estimate; when the Predicted Surprise is significantly large, our research shows that it is a good predictor of the direction of future earnings revisions, getting that right 70% of the time.) So at this point, in the wake of upward earnings revisions during June and in the context of the large Predicted Surprise, it seems as if WestJet is poised to beat forecasts yet again during this quarter’s earnings season. Only at Kinder Morgan (KMI.N) does the outlook look less impressive: analysts have cut their estimates by a penny since the company reported its earnings back in April, to 26 cents a share.

The second quarter outlook for the five companies that delivered negative surprises to investors during first-quarter earnings season (as we had forecast they would do) remains downbeat, with all of them still having negative Predicted Surprises or having had analysts cut their expectations for their second-quarter results. At Hasbro (HAS.O), Nokia (NOK.N) and Genworth (GNW.N), analysts have cut their estimates and all three companies have a negative Predicted Surprise (in the case of Nokia, it’s an astonishing -28%), signaling that another disappointing quarter likely lies ahead. Analysts also have cut their forecasts for second-quarter earnings at Clear Channel Outdoor (CCO.N) and Sina Corp. (SINA.O), although they now are in line with the SmartEstimate at both companies. Analysts now expect Clear Channel Outdoor to earn only 1 cent a share (down from a forecast of 4 cents a share 90 days ago). At Sina, only one of the 12 analysts who have changed their estimates has raised his forecast, but the current consensus is that Sina will lose 2 cents a share, compared to a forecast 90 days ago that it could expect to earn 15 cents a share.

History shows that correctly predicting the direction of future earnings revisions and earnings surprises gives investors a good chance of predicting the direction of changes in the stock price, as the market reacts to the flow of earnings news. Indeed, that correlation between stock price movements and earnings news has become so well understood that it’s no longer profitable for investors to wait until after the surprise is reported. Instead, one has to anticipate them. That’s why, every quarter, the StarMine research team produces these ten reports identifying companies of particular interest that we expect to beat or miss analysts’ earnings forecasts for that quarter.

The report on the first company that we have identified as likely to post a big earnings surprise in the second quarter — Yahoo! (YHOO.O) — will be published later today.


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