January 3, 2013

StarMine’s Q3 Earnings Surprise Report Card — 80% for Accuracy — and Update

by Alpha Now Research Team

StarMine models accurately predicted the direction of third-quarter earnings surprises for 80% of its selections.

As always, toward the end of the third quarter, the StarMine research team at Thomson Reuters sat down to peruse corporate earnings forecasts in search of companies that it believes are most likely to report a big surprise (either positive or negative) when they announce their results for the quarter. Using StarMine SmartEstimate and Predicted Surprise data, we highlighted ten companies that we believed had a high probability of recording an earnings surprise in the third quarter; five of them that we believed were likely to beat the analysts’ consensus estimate and another five whose reported earnings were likely to fall short of that consensus.

In the case of these ten selections — each of which was the subject of an article on AlphaNow in the days and weeks leading up to their earnings announcement –80% of the forecasts were directionally correct, as outlined in the table below.


With most companies having closed the books on their fourth quarter, will these companies continue to surprise the market, delivering either unexpectedly bearish or bullish earnings news? Our data indicates that all five of the companies that we predicted would report positive surprises in the third quarter appear likely to do so for the fourth quarter: once again, in every case the SmartEstimate is higher than the I/B/E/S consensus forecast.

For instance, in the wake of the positive earnings surprise announced by Boeing (BA.N) in October, analysts boosted their estimates for the company’s fourth quarter profits to $1.18 a share from $1.16 previously. The SmartEstimate remains higher still, at $1.20 a share, a signal that the company may beat that consensus estimate again this quarter.

The outlook also remains robust for Louisiana Pacific (LPX.N), which easily beat estimates in the second quarter thanks to the strong housing market. With the housing market continuing to gain ground, analysts have further boosted their estimates for Louisiana Pacific; the consensus estimate now stands at 16 cents per share, up from 12 cents per share at the time the company reported its third-quarter results. In another bullish sign, most of the more recent estimates for Louisiana Pacific published by analysts are far above that consensus. These include one Bold Estimate, a forecast published by one of the analysts with the strongest track records in the industry (as measured by StarMine) that is significantly outside the consensus (and in this case, far above it.)

Gap Inc. (GPS.N) reported earnings that were significantly higher than all but the most bullish analysts had been expecting for the third quarter. But analysts have been more cautious in their fourth-quarter predictions; although they are projecting slightly higher earnings than they had been previously, overall, there hasn’t been a significant change to fourth-quarter estimates since the company reported its third-quarter results.

Two of the companies that we predicted would beat analysts’ estimates delivered results that fell short of our expectations: Tesoro (TSO.N) and Apple (AAPL.O). However, since reporting its third-quarter results, analysts have boosted their consensus forecast for Tesoro’s fourth-quarter profits from $1.28 to $1.60, hinting that the earnings miss in the last quarter didn’t worry analysts. The company continues to have a large positive Predicted Surprise – it currently stands at 6% — and scores 100 on the StarMine Analyst Revisions Model (ARM), the highest possible score – an indication that analysts remain bullish and the outlook favors a positive surprise.

Apple, on the other hand, remains a conundrum. Analysts have slashed their fourth-quarter earnings estimates since the company reported an earnings “miss” in the third-quarter, and the consensus now stands at only $13.33 a share, down from $15.07. Analysts cite increased competition from the Samsung Galaxy series of phones for their increased bearishness. While the company still has a positive Predicted Surprise, and may beat the consensus estimates, it’s worth keeping in mind the fact that these estimates have been lowered significantly since the company reported its latest earnings.

Each of the five companies that the StarMine research team predicted would report results that fell short of the consensus estimate ended up announcing results that were well below those forecasts. And in each case, analysts have responded by cutting their earnings estimates for the fourth quarter. One of these five companies, NYSE Euronext (NYX.N) agreed to an $8.2 billion deal to be acquired by the Intercontinental Exchange (ICE.N).

History has demonstrated that being able to correctly predict the direction of future earnings revisions and whether a company is likely to report a positive or negative earnings surprise is one way that investor can gauge the probability of an upward or downward move in its share price. Therefore, AlphaNow will continue to draw on analysis by the StarMine research team in the coming quarters to highlight companies that models suggest are likely to outperform or disappoint, beginning with a series of ten company-specific reports on likely hits and misses for the final quarter of 2012.

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