Solid Start to Earnings Season

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Published January 18, 2013

| FOXBusiness

We’re a little more than a week into earnings season and, so far, the picture looks good with 60% of companies reporting so far beating expectations, as of Friday morning. But before we take out the confetti we should note that only 8% of S&P 500 companies have reported so far, so despite the generally positive results we’ve seen so far there's a long way to go.

Over the last three months, growth estimates for almost all sectors have dropped dramatically. According to Thomson Reuters, earnings growth for the S&P 500 in the fourth quarter is now expected to come in at 2.6%, down from the previous estimate of 9.9% in October.  Of all the S&P sectors, financials are expected to post the best growth at 14%, while industrials are expected to post growth of -5.7%, the worst of all the sectors.

If you’re looking to play some individual names this earnings season, we talked to Thomson Reuters’ SmartEstimate team to get their predictions of some names that they’ve predicted could beat and some that could miss.

The research team is among the top on the Street -- last quarter, Thomson Reuters’ SmartEstimate team accurately predicted the direction of earnings surprises for 80% of their selections. 

Here are some of their estimates:

Negative Surprises

Advanced Micro Devices (AMD)
Report Date:              1/22
SmartEstimate:           $-0.23
Street Estimate:          $-0.20
Predicted Surprise:     -13.6%

Increased competition from the growing tablet market has been taking a toll on the personal computer industry and the trend could hit AMD especially hard. AMD’s primary source of revenue comes from servicing the PC industry. According to research firm Gartner, PC shipments in the fourth-quarter of 2012 fell 4.9% year-over-year. AMD is also suffering from inventory levels which have spiked in the last two quarters.

The company’s previous earnings release included a $100 million writedown on stale inventory; rising inventory could lead to further writedowns. Lastly, company still has a huge debt burden.  The stock is down more than 57% in the last year.

Avis Budget Group (CAR)
Report Date:              2/11
SmartEstimate            $-0.08
Mean                         $-0.07
Predicted Surprise %  -10.4%

The company’s European operations are flagging due to its lack of pricing power there. As a result margins are getting squeezed. Not only is Europe a drag but analysts have cited weakness in the truck rental business as a source of concern, which was most likely a drag in the fourth quarter.

Avis also has a large debt burden, with more than $10.8 billion in total debt. In the trailing quarter Avis paid out more than half of its operating income to repay interest on this debt. Despite the negativity the stock is up a whopping 62% over the last year

Spirit Airlines (SAVE)
Report Date:               2/11
SmartEstimate:           $0.14
Mean                          $0.20
Predicted Surprise %   -28.9%

Spirit’s fourth-quarter earnings will be weighed down heavily by Hurricane Sandy. About 136 flights were cancelled out of 200 daily flights. The company derives about 40% of their revenue from miscellaneous fees which has some analysts questioning customer loyalty for the carrier…an unhappy customer is a non-returning customer.

Whether it was fewer travelers in the wake of the hurricane or because of unhappy customers, Spirit saw a downturn in bookings in November and December. The company also faces a more challenging competitive environment amid the merger of AirTran and SouthWest. The stock is up more 31% over the last year.

Positive Surprise

Cinemark Holdings (CNK)
Report Date:               2/18
SmartEstimate             $1.644
Mean                          $1.615
Predicted Surprise %   +1.8%

Record numbers at the box office last year are expected to give Cinemark a boost for the fourth-quarter which saw The Hobbit, Skyfall and Twilight all hit theaters. International sales are also expected to drive growth as the company continues to expand into Latin America. It’s now the largest movie theater operator in the region. The company currently operates 461 theater and 5,207 screens in the U.S. and Latin America. Investors seem to have noticed the company’s expansive growth with the stock up almost 43% in the last year.

DirecTV (DTV)
Report Date:               2/15
SmartEstimate:            $1.18
Mean Estimate            $1.14
Predicted Surprise      +3.74%

The company has been able to successfully increase the pricing of its television packages over the last year and the price increases are expected to continue with the company announcing it will boost the cost of packages this year by 4.5%. Analysts believe the company’s ability to continue to increase pricing will help offset the high costs of acquiring new content and thus generate higher profits.

The company’s push to expand in Latin American with its strong cash flow is also expected to help boost fourth-quarter results. Thomson Reuters points out that even as the company’s P/E ratio has declined, DirecTV has reported strong cash flow from operations that has topped $1 billion in each of the last nine quarters. The stock is up more than 26% in the last year.

Smithfield Foods (SFD)
Report Date:               3/7
SmartEstimate             $0.54
Mean Estimate:           $0.52
Predicted Surprise:     +2.5%

Smithfield Foods usually gets a boost in the last quarter of the year as sales increase due to the holiday season. While commodity prices remain high, analysts believe the company is well positioned to ride out part of the price shock thanks to hedging strategies it put in place in 2011.

Those strategies are actually reducing the price that the company is paying. The company has successfully been able to pass any price increases to the consumer and SmithField has moved aggressively to address its balance sheet by refinancing its costly debt. Investors haven’t been too enthusiastic about the food company with the stock flat over the past year.

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